Choice and competition in the market for adverse credit mortgages is greater than at any point since the financial crisis, which is good news for borrowers who have experienced a financial bump in the road.
Research by Moneyfacts in June last year showed that almost 700 adverse credit mortgage products were available, up by 167 in the quarter before.
And business is brisk. Brokers report increasing numbers of clients with bad credit, reflecting the growth in county court judgments: up 24 per cent in England and Wales in the third quarter of 2017, compared with the same period for 2016.
Even so, high street lenders continue to turn away borrowers with adverse credit. As a result, intermediaries are naturally guiding their clients to specialist lenders instead, as the firms are ready, willing and able to lend to a much broader group of borrowers. Some of these lenders, however, are also offering these borrowers the chance to fix their credit rating and secure a prime mortgage later.
These products are increasingly being marketed by intermediaries as ‘credit repair’ mortgages. The offer is compelling: Borrowers not only get access to finance they otherwise wouldn’t, but – if they keep up with their repayments – they can also restore their credit rating and switch to one of the mainstream providers with a cheaper deal. Pay a little extra now, borrowers are promised, and you could soon be getting the deals you see at the top of the ‘best buys’ tables. Unfortunately, it does not always work out that way.
The vast majority of ‘credit repair’ mortgages are poorly named. Put simply, many of these products don’t deliver on their promise, and advisers making these claims should be cautious of how they manage their customers’ expectations.
Of course, meeting repayments on time over a period will not do a borrower’s credit record any harm. Lenders doing a credit check will see a developing pattern of consistent payments. As that record builds up, that will clearly work in the borrower’s favour.
But lenders checking the credit file will still see any missed payments, defaults, bankruptcies or CCJs within the last six years. A credit repair mortgage does nothing to get rid of these; nothing can. They remain on record for a six-year duration, after which they drop off the file, regardless.
Crucially, that means the promise of a credit repair mortgage – that it will deliver you back to the high street with a clear record if you keep up repayments for a couple of years – is empty. These products can’t make that guarantee – and nor were they created to. To do so would require predicting the lending decisions of the big mainstream lenders a couple of years down the line. History suggests that is not such an easy task.
What we do know, though, is how much the lender will charge for the borrowing right now. And that should give advisers pause for thought before recommending these products, because the rates charged remain high throughout the loan.
Without a doubt, brokers should be supporting borrowers by offering solutions that will help them restore their credit – but that will require more than just optimistic promises.
We are all warned about reading the terms and conditions in the small print, but the majority of us still ignore these cautions.
Brokers, however, need to be careful in the advice they are giving to clients signing up to the biggest financial commitment of their life, which will require both awareness and scrutiny of the supposed credit repair products available on the market.
Of course we should welcome the wide range of products in the market for those who, through bad luck or misjudgement, find they have credit problems. However, advisers need to be clear in their own minds and with clients about what these products can offer and what impaired credit mortgages can deliver.
What they do not want to do is promise a result that doesn’t materialise. If they do, they will almost certainly find that time will tell.
Steve Seal is director of sales and distribution at Bluestone Mortgages