For many millions of people in the UK, these are unprecedented economic times. With inflation running at a 40-year high, you need to be at least approaching the age of 60 to have felt the full force of spiralling prices like this before.
According to the Office for National Statistics (ONS), the largest upward contributions to the annual Consumer Price Inflation (CPI) rate in May 2022 came from electricity, gas and other fuels. However, pretty much everything has been rising in price, except for clothing and footwear, which is scant consolation to the millions of people who are struggling to pay their bills.
The war in Ukraine, which started over five months ago, looks unlikely to end any time soon, which means energy prices will most certainly stay high for the foreseeable future.
As a consequence of rising inflation, central banks around the world have been raising interest rates. In the UK, the Bank of England has already raised the Bank Rate four times this year; you would be hard-pushed to find an economist who thinks that’s it for rate rises in 2022 either.
All this means that all of sudden millions of people are finding themselves in financial difficulty. After over a decade of very low borrowing rates, suddenly repayments are becoming a challenge. Rates in some cases may only be a single percentage point higher than before, but this can be enough for those who had stretched themselves financially to be tipped over the edge.
In not totally unrelated news, I read with interest recently that the largest buy now, pay later (BNPL) provider in the UK, Klarna, has started to report to credit reference agencies for the first time. The Swedish business, which states that it has 16 million customers in UK, began sharing customer data with Experian and TransUnion from 1 June, meaning Klarna users’ transactions and debts will now be visible to those making formal checks through those two agencies. There is a real risk that those who have overstretched themselves and made an impulsive purchase, only to struggle to make the BNPL payments, will have their credit history damaged, affecting their ability to get a high street mortgage.
As a consequence of all of these factors, increasing numbers of mortgage holders are going to find it hard to get credit, which is where the mortgage broker can really prove their worth. Brokers with a real knowledge of the specialist market should be able to source alternative lending options in order to safeguard the existing and often preferential first mortgage rate of the client.
For example, brokers with clients wanting to capital raise, whether for home improvements, debt consolidation (or both), should examine whether a second charge mortgage is preferable to a remortgage. If they haven’t recommended a second charge before, then now is the time to educate themselves as to the possible benefits.
The specialist lending market contains a variety of lenders who are used to helping those with credit issues. For example, at Central Trust, we look to help the underserved borrower, as well as those that need to ‘repair and rebuild’, and those who have been victim of circumstance and require a second chance. To us, it’s important to maintain a distinction between those who have impaired credit because they wouldn’t pay, as opposed to those who couldn’t pay.
We can take a common-sense approach to a borrower’s financial situation and don’t let a computer scoring policy to reject good cases out of hand. We will also ignore any adverse credit which is over 12 months old.
In many cases, a second charge mortgage can help rebuild the credit clearing the historical adverse, improving the credit score and enabling the broker to refinance the borrower back onto the high street when the time is right.
There’s no doubt about it: times are tough for many people right now. But that doesn’t mean that they should be punished forever for struggling to pay the odd bill or two. The war in Ukraine will end at some point, the cost of energy will get under control, and the rate of inflation will move back into single-digit territory. Specialist lenders like Central Trust can help borrowers during these hard times, so long as brokers understand where to look.
Maeve Ward is director of commercial operations at Central Trust