Mortgage lifeline for borrowers on the rocks

People who have been rejected by traditional lenders because of bad credit history can turn to specialist firms, but they will pay dearly for the privilege, writes Laura Slattery

Bad credit history and/or fluctuating, non-guaranteed incomes are the main reasons why about 15 per cent of people who apply for mortgages are turned down by traditional lenders.

Until recently, there was little these people could do except nurse their rejection wounds and sit it out in rented accommodation until the worst blemishes were eventually expunged from their credit record after a period of five years.

But now the so-called credit-impaired can turn to specialist mortgage lenders happy to take on their business in exchange for much higher interest payments.

These interest rates - ranging from 4.95 per cent to 7 per cent - will make owning a home much more expensive for those who have had serious debt difficulties than it is for the majority of borrowers, who can secure a variable tracker mortgage at a rate of 3.1 per cent.

On a mortgage of €250,000 to be repaid over 30 years at a rate of 3.1 per cent, the monthly repayments will be €1,068, but at an interest rate of 7 per cent, these repayments rocket to €1,663, meaning that the price to pay for past debt problems could be as much as €595 extra every month.

Nevertheless, if the mainstream banks and building societies all say no, borrowing from specialist mortgage lenders such as Start Mortgages and GE Money is one way that credit-impaired people can re-establish a clean repayment record.

After a few years of making their loan repayments on time without hiccups, the theory goes that they should be able to switch to a lower interest mortgage with a traditional lender.

As the market is still relatively new here - the first specialist or "sub-prime" loans were introduced two years ago - this theory has yet to become practice.

But in the meantime, the adverse credit market is flourishing in tandem with increasing levels of personal debt.

Apart from giving loans to first-time buyers rejected by other lenders, specialist mortgage lenders are also sweeping up the refinancing business of homeowners whose credit repayments have gone awry, allowing them to roll personal loans and credit card debt into one extended mortgage.

Mortgagecabin.com, one of the brokers for Start Mortgages, says that it has received €225 million worth of enquiries since January of this year.

Stephen Kehoe, the broker's managing director, has no doubt that mainstream lenders' past generosity is to blame for the strong demand for its services.

"Traditional lenders were very eager to lend to our clients. Some of them were given five, six or seven loans including mortgages, top-ups, two car loans, credit cards and credit union loans," he says. "There is this idea that people who need specialist mortgages are from council estates and are on low incomes, but our clients are often middle-income couples with two cars, and they go on holidays like everybody else."

A spokesman for GE Money says that some of its applicants earn about €100,000, more than three times the average industrial wage in the Republic. People looking for specialist mortgages typically have an average of five outstanding loans, the spokesman says.

Bad luck or tough times then trigger a repayment crisis.

"It's often a lifestyle issue. Maybe they have split up with their partner, or they have lost their job or a business transaction has gone sour," says Kehoe.

In many cases, people are left with only two options: sell their home to pay their debts or refinance.

But despite the fact that their house may now be worth far more than their outstanding loans and they have regular income, mainstream lenders - including their existing lender - will take one look at their less-than-perfect repayment records and suddenly become less generous.

"All the banks are now members of the Irish Credit Bureau and credit history is the most important factor in securing a remortgage. There could be €100,000 coming into the family, but if they're in arrears, the lender will still say no," Kehoe says.

A remortgage to a specialist lender can help bring down total monthly loan repayments, despite the fact that the interest rates are higher than those with an average mortgage. This is because people typically pay rates of at least 7 per cent on personal loans and rates of up to 19 per cent on credit cards; consolidating these debts into the mortgage and spreading the repayments over the longer term can ease immediate pressures.

According to Kehoe, one client was struggling to pay back a total of €6,000 a month to various lenders and had three or four debt collectors knocking on her door - "They always call in the evening during EastEnders or Coronation Street when they know you're sitting down and relaxed." Her repayments are now €1,600 a month.

Lenders like GE Money and Start Mortgages (which also distributes its loans through brokers Mortgages Direct and Money Penny) won't throw any amount of cash at people, however. There are some restrictions.

First of all, the loan-to-value (LTV, or percentage of the mortgage in relation to the value of the property) tends to be lower than on traditional loans, where borrowers with spotless credit records can borrow up to 100 per cent of the property purchase price.

Start Mortgages will advance up to 85 per cent to first-time buyers, but for existing mortgage holders who are already quite in debt and may have a court judgment against them, the maximum LTV will be 70-75 per cent.

GE Money says the average LTV for its remortgaging clients has been less than 50 per cent.

The "debt service ratio" - the relationship between the borrower's repayments and their net income - is generally much lower than on conventional mortgages, according to the GE Money spokesman.

Kehoe says the maximum loan advanced by Start will result in repayments that are no more than 40 per cent of their net disposable income.

He also says it won't lend to first-time buyers who have a judgment against them or cases where there are no extenuating circumstances and it is obvious that the person simply hasn't bothered making their repayments. "There are some cases where we just can't do it," he says.

The interest rates offered will increase according to applicants' risk profile and the loan-to-value. Start has six different variable rates and Kehoe says the most common rate is 5.5 per cent.

Like Start, GE Money's rates start at 4.95 per cent. It also offers a three-year fixed rate of 5.4 per cent.

Mortgagecabin.com charges an application fee of €750, payable on completion, while GE Money has an arrangement fee of 0.5 per cent of the loan.

With these costly rates and fees in mind, it is vital that borrowers make sure that they cannot qualify for a normal mortgage before they approach specialist lenders, the GE Money spokesman says.

"People should also remember that this is a temporary measure," he adds.

Mortgagecabin.com says that it is in talks with a mainstream lender to take on its clients after they have demonstrated a clean repayment record for at least 12 months. It is also thought that GE Money may eventually offer mortgages at more standard rates to customers who either shed their former bad habits or simply enjoy better luck.

• Don't assume that no mainstream lender will give you a mortgage just because you have missed a few loan repayments in the past.

Use a mortgage broker to shop around, but remember that brokers don't represent all lenders: get a list of the ones that they will check on your behalf, then apply to the rest yourself.

• If lenders keep turning you down for a mortgage and you don't understand why, check your credit history for a fee of €6 by contacting the Irish Credit Bureau (ICB) at 01 260 0388.

There could be a mistake on your record, it could be out of date or someone else's information may have been mixed up with yours.

• Repossessions are rare events: lenders don't like to inflict them because they are legally messy. But that doesn't mean defaulting on mortgage repayments is ever a good idea.

The lender will record the arrears on your credit report, making it difficult for you to get approval for any future loans.

• Don't ignore your debt problems, the Irish Financial Services Regulatory Authority advises.

"If you are in financial difficulty, contact your lender and try to work out an alternative payment arrangement."

Alternatively, the Money Advice and Budgeting Service (Mabs) offers a free, confidential service for people with debt problems.

• If you must use a specialist lender, remember that you are paying higher interest than you would on a conventional mortgage, but if you consolidate credit card debt and personal loans into the new mortgage, you may be able to lower your repayments in the short term.

You should be aware that, by paying back this short-term debt over the longer term, your total interest bill will be higher.

• Try to switch to a lower interest mortgage offered by a mainstream lender as soon as possible. Bear in mind that it may take a few years of full, on-time repayments to the specialist lender before other lenders will even consider your business.

However, after five years, details of your past debt difficulties should be erased from your credit history.

• Keep some savings aside for emergencies such as a serious illness or the loss of a job. If you don't have any income protection as part of your company pension scheme, consider taking out an income protection policy (from life assurance companies Friends First or Irish Life) that will repay the mortgage in the event you are too sick to work.

• If you are remortgaging to a specialist lender, resist the temptation to borrow more than you absolutely need - after all, borrowing too much money was probably part of the original problem.