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Sunday, 3 June, 2001, 19:07 GMT 20:07 UK
Banks target 'poor creditors'
By BBC News Online's Orla Ryan
One of the UK's biggest mortgage lenders has decided to start lending to people with poor credit history.
Halifax - through its Birmingham Midshires subsidiary - is expected to start offering mortgages with higher interest rates later this year to what the industry terms "non-conformist" borrowers.
Many of the big lenders - squeezed by competition in the mainstream mortgage market - are now hoping to make more money in this specialist market.
Estimates vary as to how large the market for sub prime lending is.
Last year, Datamonitor estimated that 8.3 million people in the UK would be consistently refused credit from mainstream lenders. This is about 22.9% of population aged between 18 and 65.
Only 18% of non-conforming households currently have a mortgage compared with 41% of all households, the report added.
People who apply for any kind of credit may be rejected for a number reasons.
They may have a history of debt, have missed payments in the past six years, bankruptcy or have income relying on benefits or be self employment, Datamonitor said.
These people could all fail the credit scoring techniques of High Street banks, but may still be able to make monthly mortgage repayments.
"With credit scoring tests, you need to be a regular person," Simon Walker, a partner in the financial services practice of KPMG said.
But irregular people are on the rise.
Specialist lending has grown with a "general demographic shift in the population whereby more people are self employed, more people are working on a short term contract basis, and gone is the job for life approach," Birmingham Midshires' head of lending Michael Bolton said.
"Five years ago, if someone came through my door with a county court judgement, I almost wouldn't bother to take the case on...now you would," Tyrone Silcott, mortgage broker at Everett McLeod said
More and more banks are now flocking to the specialist sector, as they can make more money by charging high interest rates than in the fiercely competitive mainstream market. Even banks operating solely in mainstream markets have become far more likely to lend money to people with poor credit histories or unusual circumstances.
"What we have seen in last five years is competition within the lending sector grow exponentially and new entrants have focused on the subprime market to create a niche," Tyrone Silcott said.
But there is a point beyond which lenders won't go, typically where previous credit problems have not been settled. Here Silcott says: "I would struggle to get someone a mortgage."
The risks involved for the banks are real.
Some of the building societies that specialised in this sector in the late eighties have since gone under.
The key to success, says Birmingham Midshires head of lending Michael Bolton, is distinguishing between people who have had bad luck in the past and those who habitually don't pay their bills.
"People think these are the unemployed or those on the DSS, these are the people who are in work with disposable income. The sort of reasons [for bad credit] are redundancy, divorce, or having a business go under in recession," he said. "These people are still being turned away by high street lenders."
He points out that far tougher credit scoring techniques are now in place than in the eighties.
Some of the borrowers' that the High Street subsidiaries will turn away will still be welcomed by some specialist lenders.
Kensington Mortgage Company's John Maltsby welcomes the high street lenders' move into the market.
He believes their advertising spend will drive the market as a whole. Some of these players won't have the underwriting expertise to handle the riskier borrowers and will redirect them to companies such as KMC.
There are downsides for borrowers mainly because the lender - unlike in the prime market - is in a position of strength.
Firstly, the interest rate is higher. Borrowers may have to take their buildings and contents insurance. Fees will be higher.
Borrowers will also be tied in for longer as lenders seek to protect themselves from the chance that once the borrower's credit history is improved, they will seek a better interest rate from a mainstream lender.
But as the subprime sector grows, it is likely to become more competitive, with lenders already promising lower rates.
"There is room for better value from a consumerist point of view," Birmingham Midshires' Michael Bolton said.
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