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Strength in adversity

It was not long ago that anyone with an adverse credit record was thrown into the financial wilderness because mainstream lenders did not cater for them.

The picture has changed and the launch of a range of sub-prime products by Free-dom Lending is a significant step in getting people labelled as sub-prime, non-conforming or niche back into the mainstream and closer towards securing high-street rates.

The range works by rewarding adverse credit-rated borrowers with lower rates for making payments on time. The On-Track range cuts 0.1 per cent from the rate each time a borrower makes six consecutive monthly mortgage payments on time.

Managing director Colin Snowdon believes a significant number of clients are willing to make the effort to change their credit rating.

The firm claimed the range was built with the FSA’s Treating Customers Fairly initiative in mind. Snowdon says Freedom devised the range as it was not comfortable that the TCF principles could be placed within its old product model.

He says: “The market has simply been about lending to customers. We want to not only lend to them but give them a genuine chance of getting on to a prime rate.”

Freedom gives an example of a heavy-adverse borrower starting on 6.78 per cent and reaching its prime rate within five years.

One growing band of customers that Freedom believes could benefit are those who have suffered a bad credit rating because of the effects of divorce or unemployment”.

According to Datamonitor, the non-standard mortgage market was worth over 15bn in 2002, up from 7.4bn in 1998. It claims that more than 21 per cent of the UK pop- ulation could be classified as non-standard in 2004.

Freedom is not the only lender looking at the adverse-credit sector. GMAC-RFC and Kensington offer loans without early redemption charges, while Victoria Mortgages, which launched last week, specialises in rebuilding credit for clients with problems. General manager Paul Bennington says Victoria offers no higher lending charges and can offer up to five times joint income.

Four years ago, Preferred and Inter-Alliance launched a version of a step-down product moving non-conforming customers towards high-street rates. This featured an annual reduction in rates but did not generate a great deal of interest at the time.

Preferred managing director John Webster says: “Freedom’s On-Track is an inter- esting development at this time but it will not suit everyone. The core traditional products that offer a discounted rate for the first few years will remain popular with customers wanting to keep their initial payments low to better manage their finances.”

Mortgage Promotions managing director Nick Baxter thinks Freedom’s initiative is part of a natural progression in the sub-prime and non-conforming lender market.

He says: “Even up to five years ago, some people with poor credit histories could not get a mortgage. There have been more entrants, which has legitimised the industry. We certainly need product innovation. This is the next natural progression in the cycle within this sector.”

Mortgage Next managing director Martin Maynard sees Freedom’s approach as a good opportunity for intermediaries. He says: “This is the first time in my mind that a lender has gone out of its way to help customers recover their positions in terms of credit. Sub-prime has often been regarded as being a little messy and advisers have left it alone. Freedom is giving the adviser confidence in dealing with sub-prime.”

Another area of innovation has been in sourcing systems. Baxter says the creation of systems such as Trigold’s non-conforming sourcing module ENC on Prospector AAA has helped intermediaries who are unwilling to go through packagers to source non-conforming products. GMAC-RFC, Kensington, SPML, igroup, First National and Mortgages plc were all involved in its launch.

Intermediaries have more options to deal confidently with sub-prime but the FSA has made it clear that it will keep a close eye on the market.

Last month, in the US, HSBC was branded as “predatory” by pressure group Fair Finance Watch for targeting low-income customers from ethnic minorities. Fair Finance has re- ported its findings to the US financial regulator.

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