Pepper Money have recently partnered with Yougov, to carry out some research into the effects and impact of adverse credit in the First Charge and Second Charge markets.
The report unveiled some interesting statistics and revealed that a long-standing problem in the industry still exists: not enough people with adverse credit understand second charge mortgages and their benefits.
In this post, I want to dig deeper into the Second Charge Adverse Credit Autumn 2020 Study and discuss what brokers and lenders can learn from this influential paper.
Removing the stigma around adverse credit
One of the key findings in our paper was that 31% of people have outstanding debt (excluding mortgage and student loans) of more than £5,000. Which goes to show that debt is more than just a common factor in the lives of millions of people.
I think a report of this kind removes a lot of stigma around adverse credit. Many people are affected by life events that have led them into a position of not being able to service their debt. The easiest mistake a lender could do is to exclude these borrowers by not taking the time to understand underlying issues and current statuses. Too many lending decisions are backwards-looking. It’s important that brokers understand the market that they operate in, in a more holistic way. Often, we are focused on the day-to-day processing of applications and don’t take the time to step back and look at the market as a whole.
In addition to this, the report articulates the majority of customers that have adverse credit feel they need a broker’s input to navigate the plethora of options available. For some, a second charge will more than likely be the best option, indicating more second charge products need to be considered from the start.
For example, applicants whose credit has deteriorated over time may actually be excluded from refinancing their first mortgage onto similar terms, so any capital raising activity may prove to be more expensive than taking on a second charge mortgage.
As a broker, it’s important to deliberate the best outcome for your customer by taking into account their past, and how this can work to benefit their future. Where borrowers have an adverse credit history, take the time to understand the requirements and expectations of the lender and communicate the customer’s circumstances to the lender in a concise and understandable way.
Improving customer experience as a lender
It’s not just brokers that could be doing more to help customers.
A number of lenders do not allow debt consolidation as part of a re-mortgage. A second charge mortgage, however, may allow applicants to clear adverse credit over a shorter period than a full capital raising remortgage, thus reducing the total amount repayable.
Then there are unsecured lenders, which typically have credit scores and rules that will either exclude customers with adverse credit or penalise them with significantly higher rates than those offered to their prime counterparts. In these instances, second charges can be critical in helping borrowers secure the capital they need.
Another thing the paper highlighted was the trepidation with which some people are approaching what is a significant financial transaction or restructuring. It is important for lenders to make the application process as positive an experience as possible. Customer engagement tools and enhanced processing applications should not be the preserve of the high street and customers with unblemished credit histories. The key is to create simplicity and understanding from the complex.
Adverse credit should not mean a substandard application process.
What Pepper Money is doing to help
The findings in our report are as much for us to learn from as the wider sector and we’re committed to helping brokers and customers however we can.
As the vast majority of our customers are generated through brokers, we will continue to support brokers with innovative products, a compelling service proposition, training and feedback on target markets to enhance the second charge offering.
On the customer side, Pepper offers bespoke pricing that reflects each applicant’s circumstances. This allows us to take into account adverse credit but also balance this with other more positive characteristics of the application.
It’s an approach that ensures applicants aren’t grouped together with others simply because they have a CCJ or default.
For brokers to build better relationships with their customers and avoid missing out on opportunities to help them, these benefits need to be conveyed. The more we can do at Pepper to help customers and get brokers adding second charges to their armoury, the more the product will become more mainstream and accepted. That can only be good news for the second charge industry as a whole.
If you’d like to chat more about second charge mortgages and what Pepper Money is doing to help brokers, contact Craig Collins on LinkedIn.