Editor's note: This brief was summarised by The Property AI Newsroom from a report by Mortgage Solutions. Read the original article for full details.

Lenders Take Nuanced Approach to Bad Credit in UK Mortgage Market

Lenders are increasingly distinguishing between different types of adverse credit, with brokers required to present each borrower's circumstances on an individual basis. The Financial Conduct Authority (FCA) has suggested that lenders should assess affordability based on a borrower's current financial health, rather than excluding applicants solely due to minor or historical credit issues.

As demand for near prime lending rises, brokers are emphasising the importance of weighing lenders' criteria to fit each borrower's situation. According to Atom Bank, 89% of brokers expected to advise on near prime products last month.

The FCA has noted that self-employed borrowers face a 24% higher arrears hazard compared to employed borrowers, and mortgages with dependent children also show a higher estimated arrears hazard. Brokers working with self-employed clients are reviewing business accounts, bank statements, and assets to assess current business performance and sustainability.

Lenders are offering discretion on a case-by-case basis, with some having bespoke departments to consider one-off credit blips. Advisers play a key role in ensuring adverse credit is presented fairly, while lenders tailor their policies and remain risk-averse. Specialist lenders have shown a consistent approach to pricing risk, with more severe adverse credit resulting in lower loan-to-value (LTV) ceilings and higher rate premiums.

Some lenders, such as Aldermore, accept defaults registered as recently as six months ago and may overlook small, low-value defaults. Aldermore ignores combined county court judgments (CCJs) and defaults up to £300 per applicant, while Kensington ignores utility defaults up to a combined £250.

For letting agents and inventory clerks, these developments may affect the pool of potential tenants and buyers, as more individuals with adverse credit histories could access mortgage products under revised lender criteria.