The last decade has seen the ‘rebirth’ of the specialist sector. The current specialist lenders are more conservative than in the past and are governed by tighter legislation, such as increased capital requirements, making them less vulnerable in the event of a downturn. There have been various reasons for this, with more customers struggling to meet the strict lending criteria of high-street banks. Specialist lenders are able to deal with more complex applications that would normally fall outside the main stream lender’s criteria, for example, someone who doesn’t have a regular stream of income, has recently moved jobs, or is purchasing a right to buy or shared ownership property.
Furthermore, self-employment and contracting are growing. Unusual income patterns have become common, such as those of freelancers or people with varying incomes, etc. Lenders who use credit scoring will often turn these clients away. Specialist lenders build themselves around specific customer groups and are therefore able to help these clients. Also, specialist lenders will help clients who have had a small blip in their credit history, which can usually be easily explained, or due to personal circumstances such as bereavement or unemployment. These individuals are not repeat offenders and have a good history before and after such an event. Unfortunately, the mainstream lender will not see it this way.
The mainstream lender has shown no interest in winning business that falls outside their automated underwriting and is designed to help the conventional borrower. This means that the margins for the specialist sector should remain higher or keep growing.
Richard Tugwell at Together says, ‘In many ways, the specialist market acts as a complement to the mainstream lenders and ensures that the customers have a choice. I think that the challenge for the specialist market is ensuring more consumers are aware of this offering, and that’s something that the lenders and brokers need to work together on.’
Specialist lending is now more regulated, and we should see less volatility than before as the focus is on affordability. This type of lending is set up to cater to complexity, not poor quality or irresponsible lending. Brokers who keep a closed mind to this sector are losing out on a big share of the growing specialist/subprime sector.
Specialised lenders are more suited to adapting to changing criteria compared to high-street lenders. Mainstream lenders take longer to change their criteria due to the legacy systems. Mainstream lenders need to adopt a manual underwriting approach instead of credit scoring. Brokers need to ask or determine what type of lender the client needs. Brokers need to do their own research to get an understanding of this market and take advantage of these opportunities so that they can help every single customer find the best solution for them, whatever their circumstances.
Research has also suggested that people are not fully aware of the options available to them. As traditionally, the market has focused on mortgages for house purchases or cash. It is important that the buyers are made aware of all the options available to them in the market so that they can make informed choices.