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In the sub-prime of life

A common cause of concern to IFAs when asked to advise on credit-impaired lending is the perception of low quality. Why go to all the time and trouble of placing a difficult case when the likelihood is that any mortgage-related life sales will lapse after a couple of months?

Far from disappearing under a wave of bad publicity, as many thought would happen a couple of years ago, the credit-impaired market has prospered alongside the buoyant housing market.

The credit-impaired sector of the mortgage market has been the fastest growing area for the past two years.

A number of factors have brought about this change, including clear guidelines from the Office of Fair Trading as to how lenders should conduct themselves.

Most of the specialist sub-prime lenders have now joined the Council of Mortgage Lenders and an increasing number of traditional lenders have entered the market. This latter move has helped to increase competit-ion and the choices available to brokers and borrowers alike.

But what about that perception of poor quality? In the past, certain lenders were able to make loans to borrowers with very little regard to the likelihood of repayment. After all, if the mortgage was not paid, the house could always be repossessed and sold with any losses made good.

Not surprisingly, given the ease of getting a mortgage, a large number of borrowers were attracted to the market, subsequently defaulted on their payments and lost a great deal of money.

Brokers suffered too as their efforts to help supposedly genuine problem cases werethwarted by policy cancellations and unwelcome publicity concerning a few lenders.

So why should things be different now? A blurring of the lines between high-street lenders and their sub-prime counterparts has resulted in a raising of quality.

Previously, if a client was refused a mortgage on the high street, their only option was to seek help from a sub-prime lender. But in an increasingly competitive environment, all lenders have had to review their lending terms. The sub-prime players have moved away from the lower end of the market and looked to attract more non-conforming loans while the traditional lenders have sought to relax their criteria to accommodate those deserving cases.

Both sides have been targeting the same group of borrowers – those people who were previously, as a result of genuine financial difficulties, precluded from a loan on standard terms but nevertheless represented a minimal risk to the lender.

These borrowers are more financially astute and have not taken the first loan offered to them. Using their financial advisers, they are able to shop around to achieve better terms.

Most mortgage lenders make loans topeople with adverse credit at some time or other. Good IFAs will know which high-street lenders will accept the odd county court judgment or minor mortgage arrears. Even people with more serious problems can get mortgages on standard terms on the high street. The problem is that the availability of these mortgages is strictly limited. They are rarely, if ever, advertised and usually any funds available are fully allocated in a short period of time.

If the client had a genuine problem but can now demonstrate their credit-worthiness with a recent good track record, they will usually be able to secure a mortgage at a very realistic rate. The better the track record they can provide, the better the rate they can expect.

Those high-street lenders offering loans to credit-impaired applicants, including Chelsea Building Society, Bristol & West and Abbey National via its subsidiary HMC, have successfully attracted this middle market by offering rates at or around 7.75 per cent.

They can do this by accepting only those borrowers who can instil confidence in the lender that future mortgage payments will be met. At Chelsea, we see our credit-impaired loans performing almost as well as our normal lending.

How does the broker benefit? By going that extra mile to secure a better mortgage for his client, he will benefit in a number of ways. He is clearly fulfilling his best advice duty, will gain ongoing loyalty from his client and can be confident that, as long as the mortgage is being paid, associated life policies will also be paid.

The sub-prime market has come a long way in a short time. The blurring of previ-ously distinct lines between different types of lenders has led to a more competitive environment which benefits lenders, borrowers and brokers alike.

Maybe the term sub-prime is itself due for change. Past connotations with unscrupulous lenders and brokers no longer apply. The sector now provides an array of lenders and schemes designed to assist borrowers in allpossible scenarios.

So long as lenders remain focused on providing realistic solutions to genuine problems, everyone can benefit.

Sub-prime, impaired, adverse or non-conforming – take your pick. The opportunities available should not be ignored.

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