It’s easy to focus on the challenges faced by those on lower incomes at the moment. The persistently high rate of inflation has put budgets under pressure across the board, but it stands to reason that those who may have already been trying to make ends meet have felt that pressure more.
Yet we should not overlook the fact that clients on higher incomes are also likely to have felt the strain, potentially to the point that they have been impacted by the odd credit blip.
Analysis from the Institute of Fiscal Studies last year found that one million working age adults on middle incomes – excluding the richest and poorest fifths of the population – have less than a month’s income saved in an accessible form.
With so little money to hand, all it takes is a large unexpected expense and suddenly those people may find it difficult to pay their bills, landing themselves in credit issues.
Plenty of would-be borrowers ended up in that position too. Research from the Money and Pensions Service (MaPS) last year suggested that around 16 million people missed a bill at some point in 2023, with two million of them missing a payment for the first time.
Not all of them will be the poorest – there will likely be significant numbers of people on middle incomes who have nonetheless ended up with a black mark on their records.
More than a blip?
It’s important to recognise there is a difference between a blip and a more long standing problem.
The fact that a client has had a late or missed payment can easily be a one-off, a case of circumstances getting in the way. It’s something that can happen to anyone, which is why it’s so concerning that these blips can have such a detrimental impact on a borrower’s prospects for the long term.
Of course, the counter is also true; there will be some clients for whom that missed payment is the sign of bigger problems under the surface. The point though is that the simple fact that the blip occurred is not evidence alone; you need to do more digging to get a better idea of whether this is a one-off or actually the start of more substantial issues.
Homebuying plans on hold?
However, the fact that these blips have occurred can have a huge impact on a client’s borrowing prospects.
They may have missed a single payment in the past, leaving a single black mark, and yet now find their chances of obtaining a mortgage are severely reduced.
That’s hugely unfair, and not reflective of how modern society works. It threatens the chances of our housing market working properly, if perfectly good borrowers are essentially excluded in this way.
Working with understanding lenders
Recognising that credit blips can impact such a wide range of potential borrowers is only the start, however. The real task for brokers is identifying lenders who are equipped to support such borrowers on their mortgage journey.
Lenders who are overly reliant on credit scores are unlikely to be an option. These lenders put a lot of weight, when it comes to assessing applications, on the score of an applicant, which is problematic if the client has had an issue or two in the past. Those black marks on the credit record can fatally undermine their chances with such lenders. Equally, specialist lenders who offer adverse credit may not be able to offer these borrowers the value and service they would normally receive from a more mainstream lender.
Not all lenders operate in this manner, however. At Atom bank for example we take a more comprehensive approach, allowing us to get a fuller picture of the applicant and their situation. That approach allows us to make a more informed judgement on the prospects of the applicant, and how well positioned they are to service a mortgage. As a mainstream lender, we are also in a position to reward the customer with a prime product at maturity providing they have met the requirements, helping them get over that initial hiccup.
Given the current economic situation, brokers are only likely to see increased numbers of clients who fall within this ‘near prime’ category, who are perfectly capable of making their repayments but who have some sort of historical black mark.
While some lenders are not interested in this market, there are others like Atom bank who recognise the potential these borrowers offer and are determined to support them where possible. Working together, we can help these clients achieve their borrowing goals.
Richard Harrison is head of mortgages at Atom Bank