Lending an ear to 'bad risk' borrowers

Paul Gosling looks at companies that specialise in 'non-status' mortgages

THOUSANDS of mortgage borrowers received good news last month, when the Office of Fair Trading announced that the City Mortgage Corporation, the country's largest mortgage lender to people with poor credit ratings, was removing what the OFT called "unfair penalties" from loan agreements. Last year The Independent on Sunday revealed CMC's practice of nearly doubling interest rates as soon as borrowers went into arrears, and the company has also been strongly criticised for imposing large charges on borrowers who paid off loans early.

CMC has now agreed that it will charge 12.4 per cent to borrowers while they are in arrears, instead of the 18 per cent they were previously charging - but calculated by one trading standards officer to be a rate of 21.9 per cent. As soon as the borrower ceases to be in arrears they will return to paying the ordinary rate of 9.9 per cent.

The problems of CMC bring a welcome focus on the often murky world of so-called non-status mortgage lending - loans to people whose credit status is poor, such as discharged bankrupts and people with outstanding county court judgments, but which can also apply to the self-employed. While some mortgage lenders in the sector are honest, it is littered with lenders and brokers who are guilty of sharp practices.

Some small mortgage brokers who specialise in the non-status market have charged exorbitant up-front fees, but never delivered the loans or repaid the fees. Others are accused by trading standards officers of being tied to specific lenders and not giving impartial advice. A legitimate broker should charge no more than a 1 per cent arrangement fee.

Martin Fisher, a trading standards manager with Hampshire County Council, says: "Stay with the big lenders if at all possible. The big name brokers like John Charcol may get something better than brokers that target the non-status market."

Nick Lord, manager of Croydon Citizens' Advice Bureau's money advice centre, agrees: "These [specialist lenders] require a decent deposit anyway. They may only offer 80 per cent loans, plus they will charge a hefty premium. The obvious thing to do is to try to persuade a mainstream lender."

The large mortgage lenders are less hostile to non-status borrowers than they once were, and Abbey National, Barclays and Nationwide are all developing specialist products. It is recognised that the changing character of the labour market makes self-employment and portfolio working more common. This also helps to explain the growing number of new specialist lenders who have entered the market. Each of the following subscribes to the Council of Mortgage Lenders' code of practice on selling mortgages.

The Kensington Mortgage Company was established two and a half years ago and operates a template to determine the deposit required, the amount it will advance and the rate of interest. Factors include how many, if any, county court judgments have been issued against borrowers, whether they have been declared a bankrupt and how long ago, if they are in arrears on an existing mortgage and whether earnings can be verified. Interest rates vary from 3 per cent above the rate banks will lend to each other (currently 7.75 per cent) to 4.5 per cent above. This is about 2 to 3 per cent above a typical building society mortgage rate. The maximum loan is pounds 750,000.

Preferred Mortgages, which also trades as Yellow Brick Road Direct, was launched two years ago backed, like some other non-status lenders, by American finance corporations. Mortgages for loans of pounds 16,000 to pounds 350,000 are available, subject to a maximum of 90 per cent of purchase value. Interest rates are between 3.25 and 4.75 per cent above inter-bank rates.

Paragon Mortgages says it takes a flexible approach to the lending of its Freshstart Mortgages. A spokesman says: "We take the route of the old-style bank manager. What caused the problem? Was there a single cause? Are you back on track, earning and capable? Then, all other things being equal, we will give you a mortgage." The Freshstart Mortgage interest rate is 9.65 per cent for the first three years, before it reverts to Paragon's standard rate of 8.65 per cent.

But Ian Darby, of John Charcol Mortgage Brokers, emphasises that self- employed and contract workers should demand to be treated differently from people with a bad credit history. "I look at them as two very distinct markets and I think there is a danger from the customer's point of view of treating them as the same," he says. "I see the new companies who have been sucked into the impaired credit market as a solution for a problem that wasn't there. There are still risks of up-front fees and penalties. The second market is people who don't have impaired credit, they just don't have perfect credit in terms of regular income and they don't need to go anywhere near the impaired lending market. The new companies are very cleverly trying to position themselves to deal with both. There are plenty of specialist lenders who are well able to provide for the self- employed. The intermediary should have the knowledge to deal with both markets."

q Contacts: Kensington Mortgage Company, 0990 561020; Preferred Mortgages, 01444 412311; Yellow Brick Road Direct, 0800 009977; Paragon Mortgages, 0800 440099; John Charcol Mortgage Brokers, 0171-611 7000.