Sub-prime mortgage market reigns supreme
Demand is rising for high interest-rate loans aimed at those who can't get credit, writes Laura Slattery
Blemishes on consumers' credit histories have increased in tandem with the Republic's soaring levels of personal debt - so much so that the "sub-prime" mortgage market, catering for people who can't get credit from the usual sources, is flourishing.
A new report by Davy stockbrokers estimates that it is currently worth almost €1 billion a year, and could grow to €4 billion in the next few years.
"Mainstream" lenders like Permanent TSB and IIB Homeloans, in conjunction with their financial partners, are now gearing up to launch high interest-rate mortgages aimed at borrowers who have been rejected for a loan because of a bad credit record or because they have a fluctuating, non-guaranteed income.
At the moment, there are just two players in the market: Start Mortgages, which is owned by UK-based company Kensington, and GE Money Mortgages, a venture between GE Money and IFG Group.
Finance Ireland (Fire), formerly known as Ardent, has also joined forces with Investec to form Nua Homeloans.
The Davy report notes that the main Irish banks are hesitant to enter the market because they fear "brand contagion". Permanent TSB and IIB Homeloans are expected to launch their sub-prime operations under new names, lest confused consumers associate their brands with above-average interest rates.
The so-called specialist lenders charge rates of between 5.4 per cent and 9 per cent, compared to a typical "prime" or mass-market tracker mortgage rate of 4.6 per cent and Halifax's new one-year discount rate of 3.5 per cent.
Sub-prime lenders are keen to assert that they are not predators exploiting the most vulnerable of credit-hungry consumers. They argue that using their services is a short-term springboard on to the property ladder for consumers with limited options - a way to repair their credit records and return to the mainstream mortgage market, possibly after about three years.
Without sub-prime lenders, there is little that credit-impaired people can do except sit it out in rented accommodation until the blackest of marks are eventually expunged from their credit records after five years.
But higher interest rates will make owning a home much more expensive for the estimated 15 per cent of mortgage applicants who are turned down by traditional lenders.
Only about 10 per cent of customers are charged the maximum 9 per cent interest rate, according to Start chief executive David Ingram. The average sub-prime interest rate charged by Start is 7 per cent, he says, pointing to the fact that this is much lower than the sub-prime interest rates charged in countries such as the US, which tend to have a margin of 10-15 percentage points over base rates.
But it is still costly. On a mortgage of €250,000 being repaid over 30 years at an interest rate of 7 per cent, the repayments will be €1,663 a month.
The majority of borrowers with regular incomes and untainted credit records will be able to secure a variable tracker mortgage rate of 4.6 per cent or better. At this rate, the monthly repayments on the same mortgage will be just €1,282.
This means the price the average sub-prime customer will pay for a history of debt problems is €381 a month, or €4,572 a year.
Nevertheless, if every bank and building society says no, and someone is determined to get, or - as is more often the case - stay, on the property ladder, borrowing from a sub-prime lender is one way that they can re-establish a healthy repayment record.
After a few years of making repayments on time, they should be able to switch to a lower interest mortgage with a mainstream lender. This is the theory, at least, as the market is still relatively new here.
Start Mortgages, which has been in business for just over two years, is the dominant player in the market with 6,500 customers. "They're not going to be at Start for life," says Ingram.
GE Money has been in the market for four years. Its managing director, Eoin Lynam, says "quite a few" of its customers have moved on to prime rates.
It is a myth that sub-prime lenders are raking in profits off the backs of people trapped in debt, Lynam adds. "Yes, the price is higher, but the costs are higher too. The perception is that it's more profitable, and it is a nice business to be in, but the defaults are higher too," he says.
What about the charge that sub-prime lenders are only exacerbating the debt problems of the over-indebted?
People looking for a sub-prime loan are often already repaying about five loans, according to GE Money. Some of them even manage to lower their monthly repayments by rolling in high-rate credit card and personal loan debt into the mortgage.
"It's not in our interest to lend people money that they can't afford to repay," says Ingram.
At Start, the average loan-to-value (LTV) - the percentage of the property value that the lender will advance - is 64 per cent, he says. "We only go up to 90 per cent and that is only for people who have no arrears or minimum historical arrears."
This contrasts with the 100 per cent finance available to first-time buyers and LTVs of 125 per cent available in other countries.
In the US, penal redemption fees also apply when the borrower exits their loan, Ingram adds, making it difficult for people with impaired credit records to get out of the sub-prime market.
There are application fees to contend with here, however. Start says it has stopped dealing with one mortgage broker, which charged what Ingram calls a "heinous" application fee of €5,000. Fees of about €750 are more standard, he adds, while GE Money has an arrangement fee of 0.5 per cent of the loan. Breakage fees will apply to fixed-rate loans.
Sub-prime lenders are regulated as credit institutions and are subject to the Consumer Credit Act. Start says it has also discussed its operations with the financial regulator and is applying the provisions of its consumer protection code.
Although defaults in the sub-prime market are more common - arrears are about four times higher, according to Ingram - it is wrong to assume that people who have had credit problems in the past are reckless with money, he says. Often people slide into arrears on their mortgage because of an illness in the family, a redundancy or a marriage break-up. Failed entrepreneurs also rank among sub-prime lenders' clients.
"We see a lot of people who tried out a business idea and it just didn't work out. They might have a judgment against them for €30,000 or €40,000 and they're now PAYE, so they will never claw that money back," says Ingram. "They made a mistake. They've got a good salary now, but there is a stigma attached to their past failure."
About 30 per cent of Start's customers are self-employed people who self-certify their income, while 20 per cent have seasonal or irregular income. The other half comprises people who are in arrears on loans or who have been in the past. About 70-80 per cent of the loans are remortgages.
GE Money, meanwhile, has found that high-income individuals account for a significant chunk of its customers. About 15 per cent are earning more than €65,000 - more than twice the national average wage.
Both the companies in the sub-prime game and the mainstream lenders hoping for a slice of the market seem sure of one thing: that no matter how difficult it is to get on the property ladder and no matter how much it costs, most Irish people would rather put up with the burden of a mortgage than spend the rest of their lives renting.