How many people would mortgage lenders consider “non-standard” when applying for finance? And how can this impact your chance of securing a mortgage? We examine new data and offer advice for those who don’t fit in most standard lender boxes.
New research by the mortgage lender Together and economist Dr John Glen predicts that the specialist mortgage market will increase by a colossal 56% by 2030.
What is the specialist mortgage market?
The specialist mortgage market comprises of mortgage lenders that include or consider “non-standard” borrowers. This can mean individuals with less than perfect credit scores, or complex income streams (more on this later), which many high street lenders do not include in criteria.
In the buy to let space, specialist lenders are those that lend on complex properties like HMOs and Multi-Units, and accept landlords investing via limited companies, as expats or with portfolios of more than 10 properties.
Specialist lenders tend not to be traditional clearing banks, as you find on the high street, which lend using balance sheets. Instead, these clearing banks rely on the money markets, meaning rates are slightly higher, but they have a greater appetite for perceived risk.
Why do we need more specialist mortgage lenders?
Dr Glen identifies two key reasons for this anticipated rise.
Firstly, the way we live and work is changing. The rise of the so-called gig economy (freelancers or those who take short-term contracts) and flexible working means that an increasing number of borrowers do not have traditional, regular PAYE incomes. This issue is something many property investors will be familiar with; negotiating with lenders to include rental income in affordability tests when purchasing or remortgaging your own home.
For freelancers or contract workers, some lenders deem the “irregular” income too high risk, limiting the amount they can borrow and the properties they can access. Furthermore, the “emergence of the non-nuclear family” is altering our housing needs, meaning that more people are seeking mortgages without another applicant to help with affordability.
Secondly, the current economic climate is reducing the risk appetite of many lenders. Rising inflation is forcing borrower outgoings up, meaning affordability calculations are not as generous as they once were.
In a survey of over 7,000 consumers, 7% of mortgage applicants in 2021 took a home mortgage with a specialist lender. However, 53% of respondents met one or more criteria for being a “non-standard” borrower. This rises to 62% of those who have applied for mortgages, indicating significant demand for more specialist lenders and flexible criteria.
What makes mortgage borrowers “non-standard”?
As mentioned, non-traditional income structures (e.g., self-employment, multiple incomes, freelancers, etc.) are a primary reason for the rejection of mortgage applications, according to 22% of the respondents. Unsurprisingly, 21% cited poor credit as a cause; however, so did being over 55 or divorced. Unconventional buying situations like shared ownership featured highly (26%), and buying non-standard property (12%) also causes issues for borrowers.
How can unconventional borrowers secure mortgage finance?
While we certainly don’t dispute these findings and fully support the call for more specialist lenders in the market, there is already a solution for many of these borrowers.
Here at Mortgages for Business, we source finance for individuals who don’t meet standard criteria every day for both investment and home property. By using an independent, whole of market mortgage broker, borrowers can access more lenders (including those who only deal with intermediaries like ourselves), giving them a higher chance of success and a greater likelihood of securing the most competitive rate.
In the buy to let space alone, we have access to 31 specialist lenders, do c75% of our business with them, and have bespoke relationships with some big players that give our clients even more. Plus, there are loads of other benefits that come with using a mortgage broker!
Nonetheless, the industry needs to do more. Dr John Glen comments, “At a time when the Government is seeking to extend homeownership, this study shows that as many as half a million future applicants could be locked out of the mortgage market without the support of specialist lenders. This highlights systemic issues with the mainstream mortgage process which currently bars many potential buyers who have non-standard criteria.”
We would add that the mortgage industry needs more lenders to ensure pricing remains competitive for borrowers. It would also help keep lenders’ service levels sharp and encourage them to review lending policies more regularly to ensure they’re in line with the market’s needs.
If you’ve had trouble securing mortgage finance due to an unconventional income structure or for a non-standard property, give us a call on 0345 345 6788 or submit an enquiry, and one of our experts will be able to help.
2nd September 2022