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Refused credit mortgages set to “grow and grow”
14/08/2006 16:25:00
The sub-prime and near-prime mortgage market is tipped to grow and grow following new research.

A survey commissioned by Alliance & Leicester indicates greater demand for refused credit mortgages could be forthcoming, with four in five brokers expecting the market to grow.

The top reasons for borrowers to seek out a sub-prime or near-prime market are defaulting on debts or credit cards payments or simply having a bad credit rating, the research found.

Figures indicate that Britons are increasingly struggling to manager existing debts, suggesting that the potential market for sub-prime mortgages could swell.

Around two lenders in five report that the typical sub-prime customer is likely to be struggling financially, with many on a low income.

More than 85 per cent of brokers also report that customers are now realising that a sub or near prime mortgage can help rebuild a poor credit score.

Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester, said: This market is becoming increasingly competitive with more lenders offering these specialised mortgages.

It is encouraging to see that brokers say their clients know the value of these type of mortgages and that it is a good way of getting potential buyers on the housing ladder while enabling them to repair their credit history by maintaining regular payments on their financial commitments.

Datamonitor estimates that 9.1 million people were refused credit by mainstream lenders in 2005, further indicative of potential growth in the refused credit mortgage market.

Personal debt has already crossed the £1 trillion barrier and the rising insolvency rate suggests that borrowers are struggling to cope, indicating a growing demand for refused-credit mortgages in the future.

As traditional lenders were tightening their criteria, the refused credit market could prove ever more attractive and other high street lenders were also likely to start catering for those with a ’slightly lower credit profile’.

As more lenders capitalise on this growing market, the increased competition could see better deals for mortgage holders.

If you look at the most stressful events in a person’s life, buying a home is on the top ten list. After all, it’s a big decision – both emotionally and financially. Many home buyers go through an anxious period after they’ve arranged for their mortgage and get ready to move into their new home. Knowing you’ll get a pocketful of cash would sure help, wouldn’t it?

That’s a big part of the attraction of cash-back mortgages. A plump cheque is a psychological boost to home buyers who have just made one of the biggest financial commitments of their lives. As mortgage brokers, we like to work with our clients to ensure that they look beyond the temporary “feel good” of the cash, and weigh their options wisely.

Remember that the cash-back option comes with a trade-off: if you choose not to take the cash back, you can get a lower interest rate. Over time, you could see substantial savings in interest payments.

So, start with the most important question: What will the cash be used for? Is this purchase a priority, and is it worth the difference in the rate? Perhaps you have a plan to take advantage of the cash-back to purchase the household appliances for your new home. The extra $3,000 for new kitchen or laundry appliances may be an urgent immediate need and a higher priority overall than the lower interest rate for your mortgage term.

But here is the second question to discuss with your mortgage broker: What will be the impact of the rate difference over time? You’ll need real-life figures to work out the details for your personal situation, but let’s look at an example*:

Let’s say that your cash-back option pays 1% of the mortgage amount on a two-year deal, 3% on five years, and 5% cash back on a ten-year closed mortgage. And let’s assume that you’re looking at borrowing $100,000 for a 5-year term, amortized over 25 years. Not long ago, you might be looking at the difference between cash back and a rate of 6.60%, or a discounted interest rate of 5.29%.

So what’s the bottom line? Your cash-back option would give you $3,000 up-front, but over your 5-year term, you would pay a little over $6,300 more in interest costs than you would have with the discounted rate. The exact cost of the cash-back option in this example is $3,330.44 – paid out over 5 years.

Is that a good deal? It depends. Did you get the much-needed appliances for your home… or use the funds to manage a high-priority expense? Then you probably got good value from the option. If – five years later – you can’t remember where the money went, then perhaps you didn’t make the best trade-off.

There’s every chance that you have already heard of debt management plans. In the current economic climate and in our generation of credit consumers, such plans are becoming increasingly popular with families and individuals struggling to meet their monthly financial commitments. Most often, debt management plans are aimed at individuals with debts of between £2000 and £12000. The plans are not legally binding, unlike an IVA, which is often targeted at those with higher amounts of debt. They are, instead, an informal agreement between yourself and your creditors, often through a third part debt advice company. The debt advice company will often contact your creditors to try and negotiate a freeze on interest or charges and, in some cases, to even reduce the overall amount that you owe. You then make one monthly payment to the debt advice company, who split that as agreed between your creditors. They will often also take a small fee for doing so.

The major advantage of this type of agreement is simply its convenience. It makes meeting your monthly financial debt repayments much more manageable and affordable. It will, however, invariably show up on your credit record that you are enrolled in such a plan and this could potentially adversely affect your credit prospects.

However, before making a decision either way, it would be advisable to seek out professional advice either from financial advisors in the case of individuals, or from a business debtline in the case of small businesses. Many debt management plan providers will offer free and confidential advice from trained financial professionals.