Bad credit has become an everyday reality for millions of individuals and households across the UK.
As a result, bad credit mortgage borrowing (aka subprime borrowing) activity has seen a significant uptick over recent years. Although accessing competitive deals with a poor credit report has never been easy, but more people than ever before are finding themselves with little choice but to try.
Unfortunately, it seems fewer lenders are willing to consider subprime mortgage borrowing than in years gone by. At least on the High Street, access to subprime mortgages remains a constant challenge. The somewhat modest silver lining is that where bad credit mortgage borrowing products are available, overall borrowing costs are steadily decreasing.
Fewer Subprime Products Available
The scale of the decline in subprime lending over the past decade has been quite remarkable. Back in August 2007, poor credit borrowers had access to approximately 5,000 different subprime mortgage products on the UK market. By the end of 2018, this number had plummeted to approximately 850.
Today, it’s estimated that no more than 600 subprime mortgage products are available for UK borrowers. This, despite the fact that financial experts and economists alike agree that credit reports alone are insufficient to establish the eligibility of an applicant for a mortgage product.
The reluctance of UK lenders to consider poor credit applications reflects the industry’s concerns regarding the ‘risk level’ of borrowers with poor credit reports. Consequently, logic would dictate that such concerns would translate to elevated interest rates and higher overall borrowing costs. But while the availability of subprime mortgage products is decreasing, so too are average interest rates on these types of mortgages.
For example, a recent study found that the average rate of interest on a two-year fixed-rate subprime mortgage currently stands at 4.36%. In October last year, the average interest rate for the same type of mortgage came out at 4.49%. It’s a similar story with three-year subprime mortgages too – average interest rates having fallen from 4.51% to 4.21%.
Speaking on behalf of Moneyfacts, finance expert Darren Cook stated that despite these modest decreases, subprime borrowers are still looking at significantly elevated borrowing costs compared to their stronger credit counterparts. In addition, he also advised prospective borrowers not to necessarily count on further interest rate falls in the subprime sector.
“Borrowers who are looking to apply for a credit-impaired mortgage and lock their fixed rate in for a little longer may notice rates increasing,” said Darren Cook.
Darren also stated that “The credit-impaired mortgage market is considered a specialist lending sector. It’s no surprise then that, according to Moneyfacts research, 91% of the total number of credit-impaired mortgage products are only available through a mortgage broker,”
“It is clear that any borrower seeking a credit-impaired mortgage would be wise to speak to a mortgage broker first, regardless of whether or not it is required.”
Away from the UK High Street, Britain’s specialist lending sector is thriving. With a growing number of lenders specialising in subprime products for commercial and private applicants alike, poor credit loans in general are still widely available. Alternative solutions such as bridging loans for short-term financing are one of the many options on the table for applicants with sufficient collateral to cover the cost of the loan.
For the most part, the issue primarily concerns individuals with poor credit who intend to purchase a property for the first time. With no viable equity and an imperfect credit score, the likelihood of qualifying for a mortgage remains low. Prior to submitting an application for a subprime loan of any kind, seeking independent financial advice should be considered mandatory.
Article by iConquer