First-time buyers with imperfect credit scores are struggling and need lenders to be more flexible to meet their needs, Atom Bank has suggested.
First-time buyers with imperfect credit scores are struggling and need lenders to be more flexible to meet their needs, Atom Bank has suggested.
The bank’s latest Near Prime Index shows that first-time buyers make up an increasing proportion of near prime buyers, which are now the majority of customers in this segment.
But Atom Bank is calling for more flexibility for these borrowers, highlighting the need for higher-loan-to-value (LTV) options, as many find deposit size a barrier.
Richard Harrison (pictured), head of mortgages at Atom Bank, commented: “The housing ladder only functions if first-time buyers can access it.
“However, as our latest Near Prime Index makes clear, that accessibility is increasingly reliant on lenders being more flexible over the credit profile of the borrower, whether that’s due to payment hiccups in the past or simply the fact that the borrower has little credit history to speak of.”
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Types of near prime borrowers
Atom Bank said near prime borrowers tend to fall into two different categories. Rehabilitator borrowers tend to be older – with an average age of 40 – are already on the housing ladder and looking to borrow at LTVs of below 85%. They have fallen into near prime because of previous credit issues, usually sparked by a life event such as a divorce or job loss. They are more than capable of servicing a mortgage but require a lender willing to look beyond their headline credit score.
The bank also sees ‘starter borrowers’, who it said are younger – generally around 35 – and looking to access the housing ladder for the first time. They are typically looking to borrow at around 90% LTV and have lower average household incomes than prime borrowers looking for the same LTV levels (£58,000 compared with £70,000).
Harrison said defaults are the biggest reason customers end up with lower credit scores, while the cost-of-living crisis is becoming a more significant catalyst.
First-time buyers are an increasing proportion of those with lower credit scores seeking mortgages. They represent 30% of clients, up from 25% in Atom Bank’s last index. In many cases, the problem is not that buyers have missed payments, but that they have a ‘thin file’ without much previous credit history.
Research from Experian suggested around five million people in the UK are effectively invisible to the credit system due to a lack of financial data.
Capacity improving
As well as more need, there is more lender capacity for adverse credit cases. More than three-quarters (77%) of brokers said they are seeing appetite for near prime deals from mainstream lenders. One in 10 said the increase is ‘significant’.
Murray Ewing, director of broker The Lending Channel, said lenders needed to be more mindful of circumstances rather than credit scores when lending.
He said: “An imperfect credit score should not be seen as a life sentence. However, there are some lenders who will fail a customer based on minor issues, like a default, rather than looking at what caused it, and why.
“Life events, like a job loss or a death in the family, can impact anyone. But even when the event has been resolved, the mark remains on the credit file. I’d like to see lenders have more empathy towards borrowers, [and] more understanding towards what can be a one-off issue.”