Helping adverse credit borrowers in an improving climate

The last couple of years have been particularly tough for the UK mortgage market and its customers. Economic and political instability at home and abroad, a higher interest rate environment and rising living costs have all placed a squeeze on household incomes, reducing the borrowing capacity and affordability of many mortgage borrowers.

As we head into 2025, however, it is widely expected that market conditions should improve. Industry forecasts suggest the Bank of England will move to cut the base rate at least twice over the course of the year, with some market analysts suggesting the BBR could even fall as low as 3.75% by the end of 2025.

Research conducted by UK Finance is also a little optimistic, with predictions of an 11 per cent increase in gross lending expected this year. This is likely to be largely driven by a 30 per cent increase in remortgage activity due to improved affordability on account of lower rates and a high volume of fixed rate mortgages maturing.

House purchase lending is predicted to increase by 10 per cent, although the prospect for buy-to-let (BTL) is more uncertain, given the stamp duty changes introduced in the Autumn Budget.

Not all borrowers are the same

The predictions of greater demand and improved affordability in the mortgage market seem great news for borrowers and lenders alike, yet we also know that not all borrowers are in a prime position. There will be those who may have experienced some credit blips over the last couple of years of inflationary turbulence.

According to the recent Credit Conditions Survey from the Bank of England, default rates on secured loans increased in Q3 2024 and were on track to increase even further in the last three months of the year.

The central bank’s figures show that, across the board, there has been a general upward trend in credit defaults since 2022, illustrating how affordability has remained a key challenge for many borrowers over the last few years.

Against this backdrop, brokers may find themselves entering the new year encountering greater demand from borrowers looking to navigate more recent financial challenges.

Seeking out solutions to enable more borrowers

This presents brokers with an opportunity to raise awareness about the options available to those borrowers with a history of adverse credit. There are products that sit outside of mainstream lending, such as those offered by smaller banks and building societies, that can help.

Despite the evolution of the mortgage market over the last decade, it is still a widely held misconception among borrowers that a history of adverse credit can limit their chances of taking out a mortgage or buying a home. However, this is not the case.

Many specialist mortgage lenders and smaller building societies for example, offer products specifically aimed at addressing the needs of borrowers who may have experienced a credit blip in the past.

Rather than use a one-size fits all approach, these lenders often use a more flexible and tailored approach to underwriting that enables them to get a better understanding of the borrower’s credit history and the reasons behind their credit score.

Providing the human touch to help borrowers get back on track

This common sense approach to underwriting allows the lender to understand why the credit default happened and determine whether it is the result of a change in life circumstances, such as job loss or divorce, rather than a tendency towards debt.

The impact of such major life-changing events can often be temporary, and borrowers may well be working to get their finances back on track.

Taking out a mortgage that can demonstrate their ability to keep up with payment commitments and help them get back on their feet is essential. Not only will this set them on the path to a better financial future, it will also open up the choice of mortgage products available to them at a later date. 

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