Borrowers with a minor slip-up on their credit file are growing in number, say brokers, but a lack of lenders serving the near prime market means many will wind up paying a high penalty for a small mistake.
Adverse credit is on the rise and can prevent borrowers from securing a competitive rate on their mortgage.
More than eight million people have experienced adverse credit in the last three years, according to Pepper Money’s 2024 lending study – the highest amount the lender has ever recorded.
Meanwhile, Atom Bank says it received a record number of near prime mortgage applications in Q3, up 47% on last year and the highest number received since it launched the range in 2021.
Brokers say they are seeing an increasing number of applicants who have light arrears such as a missed credit card, utility bill or unsecured loan payment caused by an increase in the cost of living and higher mortgage rates.
But a gap in the market exists, said Stephen Perkins, managing director of Yellow Brick Mortgages, which means these borrowers end up paying 2-3 percentage points more for their mortgage because of a small credit blip in the past.
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Light adverse cases on the rise
Perkins said his firm, which gets business through estate agencies, has seen a 10-15% rise in light adverse cases coming through the doors over the last three months.
“There has been a recent uplift in the number of borrowers who now have blips on their credit profile or are behind on credit cards or on reduced payment arrangements.
“Sadly, there aren’t many options in the market for these light adverse clients. Many high street banks dismiss them completely and there is a big step up in rates to lenders who do accept adverse.
“[There] aren’t many lenders in the middle,” he said.
Perkins said some borrowers who had postponed or reduced their mortgage payments under the Mortgage Charter who have since moved back to full payments have struggled to keep on top of their unsecured debts and household bills.
David White, chief operations officer at Simply Lending, said it has seen a gradual rise in light arrears cases over the last decade.
“The main difference is that 10 years ago you’d see heavier adverse such as bankruptcy, lots of defaults and big CCJs,” he said.
He added: “We have observed not only an increase in the number of enquiries from individuals with credit issues but also a broader range of issues, notably a rise in missed or late payments on credit cards, rather than more severe events like bankruptcy.
“This trend can likely be attributed to the ongoing cost-of-living crisis affecting many households. This does not necessarily stop people from obtaining a mortgage, but will often translate to a higher interest rate and higher monthly payment.”
Filling a market gap
Last week, West One Loans brought in two additional lending tiers to serve borrowers who have had historical credit issues or minor recent credit blips that mean they would struggle to meet high street criteria.
The lender said the changes were brought in following feedback from brokers that borrowers with light, recent adverse credit had few options.
These include a payment blip in the past year or a small satisfied or unsatisfied county court judgment (CCJ) or default from three or four years ago.
Marie Grundy, managing director of residential mortgages and second charges at West One Loans, said: “In our experience, many of these individuals remain good credit risks. Often, they’ve simply been impacted by an unexpected life event that temporarily knocked them off course.
“High street lenders don’t account for these one-off life events. Since we don’t credit score applications, we can immediately assist borrowers who might actually have a good credit profile but don’t meet minimum credit score requirements due to a small blip on their credit file or a minimal credit history. With a high street lender, such an application would likely have been rejected outright.”
West One Loans’ step into lighter adverse credit was welcomed by brokers, but more support is needed.
White said that while around 15 lenders offered products to the heavier adverse market, the light adverse borrowers could be better served.
Near prime innovation needed
Ranald Mitchell, director at Charwin Mortgages, said: “The growing near prime category remains under-served by mainstream lenders, leaving borrowers reliant on second-tier lenders who are stepping in to fill the gap.
“With credit files now holding extensive information, finding an applicant with a spotless record is becoming increasingly rare. Even minor missteps on a digital profile can lead to significant increases in mortgage costs, raising questions about the fairness and accessibility of the market.
“As we approach 2025, it’s time for the industry to re-evaluate what it means to be prime in the modern lending landscape.”
Perkins wants to see high street lenders offering near prime products to borrowers who have had “the odd blip”, with an extra percentage point added to the headline rate for those who don’t meet the automatic credit score.
“There needs to be another tier of products that banks offer, like credit card providers do.
“You apply for a deal, but if you don’t qualify for the headline rate they’ve been advertising, they’ll offer you a higher rate instead of a flat-out rejection,” Perkins added.
