Sub-prime mortgages, widely blamed for causing the 2007-08 financial crisis, are making a surprise comeback in the UK, with several new lenders launching home loans for people with poor credit histories.

Lenders are targeting people who have faced serious financial problems including repossession and bankruptcy – as well as those with more minor blots on their records – for the mortgages, which come with interest rates as high as 8%.



Bluestone Mortgages, a lender part-owned by Australia’s biggest investment bank, has just launched in the UK, following hard on the heels of another Australian-owned business, Pepper Homeloans, which similarly caters for those who have experienced a “credit event” such as missing payments on a previous mortgage.

Another recent arrival is Foundation Home Loans, which offers buy-to-let mortgages to people who have had financial problems.



These three join a group of other players in a sector that argues it is offering a lifeline to the sizeable number of people who have suffered a financial “hiccup” and as a result are being rejected by the big name high street lenders.



But the new wave of sub-prime mortgages on offer may prompt concern among those who fear a return to the lending practices of the past.

And these mortgages come at a price: some borrowers taking out a two-year fixed-rate deal will be charged as much as 7%-8%, compared with current best-buy rates of as little as 1.54% on conventional loans.



Peter Tutton, head of policy at StepChange debt charity, sounded a note of caution, pointing out that “last time around, before the crash, there were some really bad lending practices. Certain sub-prime lenders were lending to people who couldn’t afford it and were vulnerable and were being repossessed.”

Tutton said that while it was important that people who had had problems in the past were able to be normal consumers again, if someone had been bankrupt or repossessed relatively recently, “you would expect lenders to think very hard about whether their finances have fully recovered”.

While there were now tougher rules in place, Tutton said he would expect the Financial Conduct Authority to be monitoring this market closely: “These products should be very, very niche [and] the FCA should be all over them.”

Many will be surprised to learn that a type of mortgage they thought had died out – or been outlawed – was mounting a comeback. The years after 2000 saw an explosion in the number of UK mortgage companies catering for people with problems ranging from a few missed credit card payments to having their house repossessed. By February 2007 there were 7,105 “credit impaired” mortgage products on sale, according to data provider Moneyfacts. But then came the credit crunch, and by October 2009 the number had dropped to zero.



Stricter rules on mortgages were introduced in the wake of the financial crisis, but this type of lending was not banned, and amid an easing in lending conditions and rising house prices, more companies are now starting to offer deals.



While some firms will only offer mortgages to so-called “light adverse” borrowers – those with more minor blips on their records – others will potentially take people on who have suffered more serious problems.



Bluestone, which is part-owned by Australia’s Macquarie bank, will consider people who have been declared bankrupt, provided the bankruptcy order was discharged at least 12 months ago.

It is also promising potential customers that, unlike most high street banks, it will not “credit score” them, and that it will ignore county court judgments – a type of court order imposed when someone fails to pay money they owe – and defaults if they are over three years old or for smaller amounts.



Another lender, Magellan Homeloans, will also consider bankrupts discharged at least a year ago, and says that someone who had a property repossessed as recently as 13 months ago may be considered for a loan, “subject to confirmation that any shortfall has been, or is being, made good or has been forgiven”.



Many of the lenders in this sector, including Bluestone and Magellan, say they will only consider people whose financial problems were triggered by a specific event in their lives, such as redundancy, a relationship breakdown, serious illness or an unplanned pregnancy, and who are now willing and able to meet their obligations.

Individuals will usually be required to provide evidence of this event, such as a P45 or doctor’s note.



Peter Gettins, product manager at broker London & Country Mortgages, said: “They are seeking to rule out the serial non-payer. [In other words] there’s a concrete reason why they got into difficulties.”



Andrew Hagger, a financial commentator who runs the website MoneyComms, pointed out that while some borrowers may have previously encountered financial difficulties through circumstances beyond their control, “there are others who have had their homes repossessed or been made bankrupt due to basic financial mismanagement”.

He added: “As you would expect, the cost of these products can be quite eye-watering and reflect the additional risk involved, but with rates at three or four times those charged to prime borrowers plus one-off fees, it’s a high cost to pay.”



These lenders tend to have a low consumer profile as their mortgages are typically only available via brokers and financial advisers. And the firms certainly do not call them sub-prime mortgages, as the phrase sub-prime has now effectively become an all-encompassing shorthand for dodgy lending.



Matt Andrews, managing director of Bluestone Mortgages, said: “We don’t like the term sub-prime – it implies these customers are somehow inferior to prime borrowers, which they are not.

“We believe there are a significant number of hard-working people in the UK that have experienced genuine hiccups, and we feel strongly that these people deserve a lender that takes time to listen and understand rather than allowing a computer to make the judgment.”

