Borrowers with an adverse credit record now have the chance, once again, to get a mortgage thanks to new lender Magellan Homeloans. But is this a dangerous return to pre-crisis lending?
A mortgage lender has started handing out loans to borrowers with adverse credit records at a cost of 8.55%.
The pilot scheme from Magellan Homeloans will be available to people who have experienced a one-off life event, such as bankruptcy, redundancy or bereavement, which has damaged their credit scores.
These loans, which were one of the main elements of the housing boom before the crisis of 2008, will only be given to people over 25 and require a deposit of 25-35%.
Sub-prime mortgages
Mortgages designed for people with patchy credit records have all but disappeared since the credit crunch, so this launch perhaps suggests a turning point in the recovery of the mortgage market.
But mortgages will only be available to those who meet Magellan's requirements. For example, potential customers will need to have had a clean credit record for the last 12 months and be able to explain what led to the black spot on their financial history.
“Our philosophy is that we understand people hit difficult patches which can lead to financial problems,” explains Matt Gilmour, managing director of the company. He says a “short-term finance wobble” shouldn’t prohibit someone from getting a mortgage.
Mortgage products
Magellan Homeloans is offering five different types of mortgage. Three are available with LTV rates of 65%, 70% and 75% for purchase or remortgage with debt consolidation and two are set at 70% and 75% LTV for purchase or remortgage without debt consolidation.
They are all priced at the same rate of 8.55%, with a 1.5% completion fee at a minimum of £995. Early repayments aren’t allowed.
Mortgages are available for purchase or remortgage up to a maximum of £400,000 for those in England and Wales earning a minimum of £25,000.
They are also open to first-time buyers, but as you’ll need at least a 15% deposit this is not the primary market.
Borrowers who have previously had County Court Judgements, missed payments, bankruptcy orders, Individual Voluntary Arrangements or who have defaulted on loans and have debt management plans will also be considered – if they can explain why this is on their record. But applications won’t be accepted from borrowers who have loans with any short-term financers, such as payday loan companies.
The company is owned by Mars Capital Finance, founded in 2008, which is authorised and regulated by the Financial Conduct Authority.
How does it compare?
HSBC launched the cheapest-ever market-leading mortgage last week set at 1.49% with a £1,999 fee. There are several other deals priced slightly above this two-year fixed-rate offer which are all significantly lower than the Magellan deal.
However, the difference with the new mortgage is the type of person it will be made available to. The best buys will only be offered to those with crystal clear credit scores, and those with a substantial deposit of around 40%.
Gilmour says Magellan is aimed at borrowers who are disenfranshised by traditional high street lenders, but what it actually provides is mortgages for those who won’t be accepted elsewhere because of their negative credit scores.
The rates are expensive, and far more than any of the standard deals on offer, but they are also the only option for people with marks such as CCJs on their financial history.
To see how your credit record shapes up, you can get a free trial with Experian through Lovemoney.
Does this mark a return to pre-crisis lending?
The return to sub-prime lending is a big step.
The benefit of this kind of lending is that more people will now be able to get onto the housing ladder, which in turn will help the economy. Borrowers with a dodgy credit history are unlikely to be accepted for any of the top deals, but these mortgages offer them a way to own a house and get onto the property ladder.
However, the major downside is the fear of a return to pre-crisis lending whereby almost anyone could get a mortgage with relatively few financial checks.
The loans from Magellan do not appear to be going down this route and the checks in place are much tighter than those which helped cause the crash. Potential borrowers will need to prove they are able to repay the mortgage, and meet the strict criteria set out by the lender, before they are accepted.
As this is the first lender to launch in this space in recent years, it’ll be interesting to see if others will follow – and if they will keep up the same standards of affordability to ensure there isn’t a return to the reckless lending of before the crisis.