Simply mentioning the words ‘subprime mortgage products” is enough to incite painful memories of the 2007 financial crisis. Prior to 2007, many mortgage lenders in both the United Kingdom and the United States were underwriting loans with minimal checks and, as such, agreeing loans for a wide range of applicants, some of which were completely inappropriate.
The poor underwriting standards initially arrived in the US but were soon implemented in the UK and many other countries as the majority of US lenders expanded around the globe.
It was this excessively risky approach to lending that was credited with fuelling the resulting crash; however, in the years that followed, regulators and mortgage lenders implemented new policies and procedures to prevent history from repeating itself.
The result is a much stricter lending approach and more regimented underwriting processes, making it increasingly difficult for borrowers with imperfect credit to obtain mortgages.
An unexpected turnaround
The 2007 financial crash had no real impact on the number of people looking to purchase homes, so those with imperfect credit were left stranded as the subprime lenders responsible for the irresponsible lending practices quickly exited the market in 2007. The remaining void is being gradually filled by a growing number of specialist UK-based lenders, and now, even if you were declared bankrupt just one year ago, you could still qualify for a mortgage today.
As competition grows among subprime mortgage lenders, interest rates and borrowing costs are also falling. A few past missed mortgage payments are no longer guaranteed to prevent you from gaining access to the mortgage market, and neither is the presence of CCJs on your credit file.
Subprime mortgages: A brief definition
The term ‘subprime’ is a relatively broad term that generally refers to anyone with a credit history considered below acceptable norms. Specifics vary significantly from one lender to the next, but a subprime borrower is always characterised as an applicant who would not qualify for a mainstream mortgage.
Some banks refer to subprime borrowers as ‘adverse or bad credit’ applicants, but the meaning remains unchanged.
One of the few areas where most banks now agree relates to the somewhat outdated nature of the terminology. The UK mortgage market has changed exponentially since 2007 and continues to evolve at a rapid rate. As credit scores become increasingly involved in the decision-making process, the more forward-thinking banks are looking to see the entire category reclassified to the term “specialist lending’. Rather than penalising anyone with an imperfect credit history, they would like to see more factors taken into consideration. Work out how much a mortgage would cost you using our mortgage calculator. UK
Learning from mistakes
The fact that subprime mortgages are once again available does not indicate that the market is again out of control. In fact, quite the opposite. Most lenders continue to impose robust and extensive checks when assessing eligibility for all mortgage products.
What makes today’s lending landscape different from 2007 is the way in which credit history is only one of the deciding factors used by the UK’s specialist lenders.
Regulation imposed by the Financial Conduct Authority and the Prudential Regulation Authority since the financial crash has made it all but impossible for banks and lenders to irresponsibly underwrite. Some products that were widely available before the crash, such as self-certified mortgages, have now been completely erased from the market.
Mortgage lenders are increasingly focusing on proof of provable income, existing debts, and monthly outgoings. They have also provided a general stress test in order to approve applicants (or otherwise) for home loans. As a result, borrowers with a poor credit history who are nonetheless in a strong financial position at the time of application are not automatically discounted from mortgage borrowing.
Is a disaster waiting to happen?
Critics argue that the resurgence of the subprime mortgage market represents a disaster waiting to happen. They claim that any approach to subprime lending flies in the face of responsibility on the part of British banks and lenders. They also believe that what is happening now has echoes of the years leading up to the 2007 financial crash.
Arguments like these entirely overlook the fact that the mortgage lending sector in the United Kingdom is more restricted today than it has ever been. Even if the UK’s biggest banks wanted to engage in risky mortgage lending activity, they’d be prohibited on a legislative level.
“The mortgage industry has successfully implemented regulatory and other safeguards to guarantee that their customers borrow only what they can afford to repay,” read a recent statement from the trade association UK Finance.
“2014’s Mortgage Market Review banned self-certification mortgages, tightened the rules around interest-only mortgages, and required affordability to be checked more stringently.”
For the time being, therefore, there is no direct evidence to suggest that another ‘subprime’ lending crisis is on the horizon. If anything, it remains disproportionately difficult for consumers with an imperfect credit history to qualify for a mortgage, and in the eyes of most major banks and high-street ‘lenders, ‘subprime’ borrowers continue to represent a risky investment that they will not accommodate.
A small victory for common sense
Consumers with imperfect credit have always argued that credit scores provide a flawed overview of a person’s financial status and activities. You could have a terrible credit score yet be sitting on a personal fortune of millions.
You could also have made a few minor mistakes years ago, but you have conducted your finances in an exemplary manner since.
Blemishes on your credit report currently remain visible for six years. Irrespective of your financial status and subsequent responsibility, it is evident for that period. Thankfully, some of the UK’s more dynamic lenders accept these flaws in your credit rating, provided other areas of your finances are being handled correctly.
Most lenders are still afraid to use the term subprime mortgage but readily accept applications from those with ‘imperfect’ credit or borrowers looking to improve their credit score.
The largest and most established UK mortgage lenders, however, are still, for the time being, steering clear of subprime lending entirely.
A market of growing relevance
The market for subprime mortgages in the UK currently exists as a strictly ‘not on the High Street’ lending channel. You cannot simply walk into a branch of a major lender with poor credit and expect to be offered a mortgage deal. They would be unlikely to offer you any kind of credit facility, so major loans and mortgages would definitely be out of the question.
UK subprime lenders continue to operate primarily in the specialist lending sector and are typically accessed through a specialist broker. Subprime products and services are tailored to meet the unique requirements of the individual borrower.
Even with a heavily damaged credit score, all applications are considered on merit. Imperfect credit often equates to higher overall borrowing costs, but it is still perfectly possible to access a competitive deal. With some consumers struggling to maintain perfect credit scores, subprime mortgages are becoming increasingly relevant in the UK. Working with a specialist mortgage broker means gaining access to an extensive ‘alternative’ loan market that is not generally available on the high street.