You can’t afford to ignore sub-prime

The sub-prime sector is now recognised as a legitimate and thriving part of the mortgage market. And social trends such as rising consumer credit and more divorces mean that the potential for this market is enormous.

Yet there are still IFAs and brokers who ignore the opportunities in helping credit-impaired customers. As volumes grow, these advisers are likely to find that they cannot afford to continue missing out.

Recent announcements on rising bankruptcies – which are up by 66% on a year ago – might have seemed like bad news for the mortgage market at first glance. But this opens up further opportunities within the sub-prime sector.

It is predicted that over 100,000 people will go bankrupt in 2006, driven by rising credit card debt and the easier bankruptcy terms of individual voluntary arrangements. Once these people regain their financial footing they will be looking for mortgages. The rise in interest rates will push some over the edge into the sub-prime sector.

Other trends point towards higher demand too. There has been a rise in life changing events such as divorce that dramatically alter individuals’ financial positions and lead them to seek sub-prime mortgages. There may be a time lag of a year or two but demand for credit-impaired mortgages seems certain to rise.

This all suggests that the sub-prime market has the potential to comfortably overtake the buy-to-let market in terms of size and possibly even catch up with the self-cert sector. It would be no surprise to see it grow to 30bn over the next 10 years.

Despite this size and potential a number of IFAs and brokers continue to avoid the sector. Some perceive it as being too complicated or time-consuming while in some organisations there has been an element of snobbery – not wanting to deal with a lower class of person in case it hurts their brand image.

But the rapid improvement in lenders’ service means that there is no longer an excuse for brokers to ignore credit-impaired customers. Gone are the days when dealing with a sub-prime customer was a difficult and frustrating process with the necessity of going through a packager. With improving technology and service, the process has become far more streamlined and hassle-free, with the choice of using a packager or going direct.

And it won’t be long before instant and binding offers become a reality. Increased competition among lenders with new arrivals in the market will soon mean that it is just as easy to deal with a sub-prime borrower as with a buy-to-let or self-cert one. Put simply, brokers are soon going to find they can’t afford to turn away sub-prime business.