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Sunday, 3 June, 2001, 19:07 GMT 20:07 UK
Banks target 'poor creditors'
Birmingham Midshires
Birmingham Midshires has become the Halifax's specialist lender

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.

It may now be easier to get that mortgage
It may now be easier to get that mortgage
This could be good news for borrowers who have had difficulty getting a mortgage because of unusual circumstances or poor credit history - but the risks for lenders could be high as profits rely on economic good times continuing.


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.

Five years ago, if someone came through my door with a county court judgement, I almost wouldn't bother to take the case you would

Tyrone Silcott, mortgage broker

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.

Relaxed guidelines

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.

Unemployed worker at factory gates
Specialist lenders will consider individual case histories
Signs are that it is getting easier for people with poor credit ratings to borrow money to buy a house.

"Five years ago, if someone came through my door with a county court judgement, I almost wouldn't bother to take the case 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."

Risks involved

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.

With credit scoring tests, you need to be a regular person

Simon Walker, KPMG
"Everyone is gambling that the economic climate will remain benign. You wouldn't want to be in subprime in a recession," KPMG's Simon Walker said.

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.

Driving growth

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.

Borrower disadvantage

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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