A guide to specialist lending: what is it and why it can help you
But whether you’re a first-time buyer, second stepper or last-time buyer, choosing a mortgage is perhaps the most important financial decision in your life – and it’s important to get it right.
High-street versus specialist: what’s the difference?
With thousands of products available, the market is becoming increasingly diverse and complex. Deciding which route you should take, or even where to start looking, can be daunting.
The first decision is choosing whether to go direct to a lender, or seek the advice of an intermediary – a mortgage broker. If going direct, high street banks usually offer great value deals at affordable rates, but they tend to use a ‘one size fits all’ approach. As a result, not all borrowers are able to access these deals if their circumstances do not fit the checklist – usually in the form of automatic credit scoring.
This can be for a variety of reasons. Firstly, affordability criteria are in place to protect banks against ‘high-risk’ individuals who may otherwise be unable to afford, or repay, the loan. There’s no denying that this is a necessary level of protection. There is, however, a growing pool of individuals with solid financial credentials who are incorrectly deemed ‘high-risk’ and are being denied access to funding.
Anything but a near ‘perfect’ credit history is often enough for a case to be rejected. For example, self-employed workers, contractors and freelancers usually struggle to secure high-street lending; their complex, and sometimes irregular or multiple income streams are often considered unstable. And unstable income, in the eyes of a computer, equates to ‘high-risk’.
It’s not just work-life that can affect your credit history, though, it’s your personal life too. Life is full of unexpected, unanticipated events that cannot always be prepared for. This can come in the form of a surprise bill, accident, or an unfortunate event like a divorce or critical illness. These events are usually outside an individual’s control and yet can result in a damaged credit score.
Here is where specialist lending comes into its own. Unlike high-street banks, specialist lenders use a manual underwriting approach to fully understand the nature of an individual’s personal and financial situation. As these lenders focus on customers who do not usually fit the traditional high-street model, products are often only distributed through mortgage brokers and intermediaries.
Due to the personalised level of service involved in specialist lending, as well as the fact that the borrower represents a ‘higher risk’, you are likely to pay a slightly higher rate on the product chosen compared to a high-street lender.
Even if you have been rejected by the high-street, there is still a very good chance that via a mortgage broker, you will be able to find a lender that is suitable. Unlike going direct, brokers have access to thousands of mortgage products on the market. So, whatever your situation might be, a broker can evaluate your circumstances, consider your options and help guide you through the process to find the most suitable product.
You don’t have to be special to be specialist: the misconceptions
Many still believe specialist lenders only help those who are financially irresponsible. But specialist lenders are still subject to the same rules as high-street banks under the Financial Conduct Authority (FCA) and Mortgage Market Review (MMR) introduced in 2014. This means any potential borrowers are stress tested 3-4 percentage points above the lender’s standard variable rate (SVR) to see if they can afford repayments if interest rates were to rise. Together with manual underwriting, this ensures the borrower is safe to lend to.
Even if a borrower has faced a county court judgement (CCJ), rent arrears, or bankruptcy, these are usually one-off and explainable events. This does not make them repeat offenders, and those who have demonstrated a commitment to improving their financial position do not deserve to be barred from a mortgage outright.
The verdict: which should I choose?
If you are unsure about which route is best for you, speaking to a mortgage broker is always a good place to start. A recent FCA report showed 75% of consumers who have taken out a residential mortgage through a mortgage broker agreed they secured a better deal than they would have on their own. A further 76% agreed a broker helped them consider options they had not previously thought of. Ultimately, a broker will give you the best chance of securing home ownership, whether that be through a specialist or mainstream lender.
Steve Seal is director of sales and marketing at Bluestone Mortgages