Mortgages, loans, overdrafts, credit cards: pandemic has made us all specialist borrowers

This year may see a dearth of borrowers with straightforward finances as we all try to cope with the effects of the pandemic.

If possible, you’d always want to be a ‘vanilla’ borrower. 

That’s the way that lenders refer to people who have straightforward circumstances.

For example, there aren’t any missed payments or issues with credit in the past. And vanilla borrowers are those who have a reliable income pattern ‒ they are in a job in a steady industry, with a consistent monthly income.

Essentially, you’re a boring case. You know what you’re going to get with vanilla ice cream ‒ it’s not exciting but it’s fine, safe and reliable.

That’s exactly what lenders tend to want from their borrowing customers.

And there was a time when vanilla was a term that could be applied to plenty of borrowers across the country.

Borrowers who sat on fairly steady jobs, with nothing too exciting or noteworthy within their credit records.

These borrowers could happily nip into a high street bank and pick up a loan, a credit card or a mortgage precisely because of how simple and reliable ‒ how vanilla ‒ their financial circumstances were.

And then the pandemic hit.

Shall we try another flavour?

It’s something of an understatement to say that Covid-19 has had a significant impact on the finances of people across the country.

An awful lot of people have seen their lives turned upside down, forced to try to make do with falling incomes or in some cases losing their jobs entirely.

And to give the lending industry some credit, lenders of all kinds have been pretty good in providing repayment holidays for impacted borrowers, delivering a little bit of breathing space at an incredibly difficult time.

But the pandemic is making it harder to access credit products.

A new study from Royal London has found that around one in four (26%) people who tried to take out a financial product during the pandemic found it harder to do so than before the virus arrived on our shores.

The research revealed that almost one in five people who had applied for a financial product since last March had been declined, with almost half of those applicants experiencing rejection for the first time. 

The most common product that people were turned down for was credit cards (42%), followed by personal loans (25%) and overdrafts (18%).

What’s more, around a fifth say they now feel less confident about meeting criteria for loan products in future.

No more vanilla, thank you

The Royal London study only looks at these day-to-day forms of borrowing, but being realistic it is also likely to hit bigger forms of borrowing like mortgages too.

Lenders know it too. Jeremy Duncombe, director of intermediary distribution at the lender Accord Mortgages, told FTAdviser that vanilla mortgage applications were likely to be “few and far between” this year.

This is part of the reason that lenders have been a bit tentative when it comes to lending to borrowers with a small deposit.

It’s one thing to take an understanding approach to a borrower who has experienced a few Covid-related struggles when they have a 40% deposit, but if they only have a 10% deposit that may be a risk too far.

What are my options?

Focusing on mortgages, there are two key issues here in my view. 

The first is access.

Thankfully specialist lending is something of a growth market ‒ there is a decent number of lenders active in this area of the market, and who manually go through your application to determine if they are happy to lend to you, rather than relying on automated decisions.

But these aren’t lenders you’re going to be able to pop into on the high street (assuming that is allowed in future of course).

These lenders aren’t particularly well known, and in many cases only offer their products through intermediaries.

So even if you reckon you’re a bit of a mortgage whizz and don’t particularly need any advice, you’ll have to use an adviser just to get access to specialist lenders.

Will you pay more?

The other issue to consider is cost. Inevitably, specialist lenders charge more for their products.

The lack of ‘excitement’ in a vanilla borrower translates into the best rates around ‒ lenders are always going to be more confident about lending to people with no repayment skeletons in their closet and a steady wage.

By contrast, requiring a specialist touch means paying more for your loan, on top of also having to cough up a few quid for the adviser who helped you find it.

When it comes to day-to-day borrowing, it is going to force us all to be a bit savvier about applying for products.

That means doing your homework before putting in an application, making sure that you meet the eligibility criteria for the lender, rather than simply going for the product with the lowest interest rate.

Thankfully some price comparison sites and lenders allow you to check eligibility at the outset, to give you an indication of how likely you are to get a thumbs up. 

The new normal requires a specialist approach, not just from the lenders offering the products but from those of us applying for them too.