What does adverse really mean?
The word “adverse” has many connotations in the minds of financial advisers and mortgage brokers – to some it means lending is not possible to this type of client, to others it’s seen as an opportunity to investigate further and see if financial products can be provided.
Within financial services the term came to prominence during the credit crunch in 2007 when there was too much reliance on the lending and selling on of “toxic debt” based on sub-prime mortgages. The financial castle was built on sand and the tides of recession hit it hard. To its credit, the financial markets have recovered well, and we are now in a new era of stability and possibility. The second charge market epitomises this new world order, offering products responsibly in a newly regulated sector.
So could “adverse lending” lose its bad name? There are many reasons why it could, and we will discuss these later, but it essentially requires a combination of lenders working more closely with brokers and their clients for long-term benefits, and the regulator taking responsibility to implement changes that benefit consumers, while at the same time opening up potential new business avenues for lenders.
What constitutes an adverse client?
There can be many reasons for a client becoming an adverse customer, but ultimately it means those customers that fall into the category of not being able to get finance from a mainstream lender.
Adverse in this context usually means a poor credit record, such as CCJs, defaults, missed payments on credit, bankruptcy or an ongoing or previous arrangement with creditors, be that arrangement formal or informal in nature. Niche lending may also include unusual job types, recent changes in employment, such as newly self-employed, or the client lives in a particular type of property. Of course, customers may fall into one or more camps. However, all of this does not mean that the customer is a bad person, nor is it necessarily an indication of future delinquency. Invariably large proportions of customers who arrive at an adverse or niche lender do so in good faith and often turn out to be good borrowers. Sometimes it is just that the customer’s situation or circumstances do not fit prime products or they have experienced short-term issues in the past such as loss of earnings, divorce, illness or bereavement that affected their ability to service debts.
Financial access – the door should be open
It’s very easy for us to think everyone has access to the basic financial services they need. The Financial Conduct Authority in their Occasional Paper No 17 published in May 2016 highlighted the need for consumers to have access to a variety of financial products over their life time, which can be difficult when the sector is driven by market forces. Access can be denied for a variety of reasons such as customer age, knowledge, a poor credit rating, a disability, their type of job or length of time in a role, where they live and how long, or a lack of other financial products such as a bank account.
Secured lending can help customers in a number of different circumstances to meet their longer-term financial goals, while providing adequate security and a return for the lender.
Uses for second charges are growing
Since the Mortgage Credit Directive (MCD) came into effect in April, the awareness of the second charge mortgages has been brought into sharp focus, mainly because they now need to be considered as a viable option alongside a remortgage. They also now have the same loan application process and documentation.
When it comes to the clients with less than prime circumstances, second charge mortgages can provide solutions in a number of situations to help homeowners.
Some common uses which many brokers have been aware of for a while are to retain an existing low interest rate on their first charge, while borrowing separately for home improvements or another major purchase. This option is often better than a full remortgage, particularly if the first charge is still within the early redemption charges period.
But other uses have come to the fore recently, such as using a second charge to exit a client from a debt management plan (DMP). Entering into a DMP can be a useful step in getting a client’s finances reorganised so as to avoid more serious difficulties later. However, a DMP is a facility that needs to be carefully monitored to ensure it doesn’t exacerbate the problems in the longer term. Remaining in a DMP for the long term might also restrict the customer’s options, such as moving to another house where they need a new mortgage, or changing their car where finance is required. In short, a DMP could reduce the client’s access to other financial services, and delay recovery.
MCD and the new dawn
MCD has opened up a new way of thinking as lenders have reviewed their processes to accommodate the new regulation. Many lenders have reported improved efficiencies and have re-evaluated their systems as a result, which in turn has improved the opportunities for brokers, product development and speed of service.
MCD has been a catalyst for the launch of many sourcing systems to help brokers decide on the right second charge for clients when compared to a remortgage. However, the sourcing systems can only act as a guide when it comes to adverse cases. In the adverse/niche sector nothing compares to an experienced underwriter assessing each individual case on its own merits.
Where now for adverse credit lending?
It has become clear this year that no matter what makes a client “adverse or niche” the situation can be expertly reviewed and a potential way to access finance can be proposed. Individual assessment is vital, but there are also more lenders with wider product criteria to cater for adverse cases.
It is important that products such as second charges are accessible to clients with a less than perfect credit profile or unusual circumstances. In addition, it’s important that they are made available when required in a client’s financial life cycle and perhaps used as a stepping stone to longer-term financial recovery, re-establishing a good credit history and in some circumstances to prevent an ongoing spiral of debt.
The ultimate goal is to help the client achieve an improved outcome with benefits, such as access to a wider range of products and release from the restrictions that an adverse profile might impose.
For more information please do not hesiate to contact us at Hoskin Home Loans.
Hoskin Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority number 613005. The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.