High-risk lenders target vulnerable

Citizens Advice Bureaux (CABs) throughout the country are becoming increasingly concerned about evidence that mortgage lenders in the so-called 'sub-prime' market are encouraging social housing tenants to buy their homes with mortgages they cannot afford.

The bureaux say that many such tenants cannot afford to keep up the high repayments, and subsequently become homeless and lose their right-to-buy status when their homes are repossessed.

Right-to-buy has enabled more than 1.6 million council and housing association tenants in England and Wales to buy their homes since 1980 and has raised £46bn. However, in recent months, the surge in the sub-prime market - where specialist companies lend to more 'risky' customers, often with poor credit records - has raised concerns that social housing tenants are being deliberately targeted by some of these lenders. The higher interest rates attached to these loans, and the discounts awarded to right-to-buy tenants, make them attractive propositions for sub-prime lenders.

Eligible tenants qualify for a discount on the property's market value ranging from £16,000 to £38,000, depending on area. But many are encouraged to extend their mortgages to consolidate existing debts, and this, plus the high interest rates, often quickly erodes any gain from the discount.

Suman Antcliffe, a money adviser with a CAB in Staffordshire, reports that almost all the clients who approach the local bureau with mortgage arrears are former right-to-buy tenants who have remortgaged away their housing discount with such lenders. But the problem is not restricted to the Midlands. According to Jackie Fielding, a legal aid adviser based at Selby CAB in Yorkshire, one sixth of all recent repossessions in York were with the same sub-prime mortgage firm.

Another CAB manager, in the south west of England, said she believed that some sub-prime lenders are deliberately moving into repossession and could even be part of a national network of brokers and companies targeting tenants in social housing. 'Many of these clients have poor credit records and leave "footprints" which are picked up by these companies,' she said. 'One lady in Cornwall was approached by a broker based in Yorkshire: the broker found a lender, arranged an in-house solicitor who acted for the lender as well as the client, and advised her to borrow £20,000 more than she needed - helpfully reassuring her that she need only sign the document as they would fill in the details later.'

The client, who suffered from mental health problems, fitted the characteristic profile of many of the people targeted: vulnerable, frequently with learning difficulties, often with poor command of English and little or no experience of dealing with the conventional credit system.

Sub-prime lenders tend to be much more willing than their mainstream counterparts to repossess properties quickly, and for smaller amounts of arrears, according to the CABs. Access to many of these companies can also be difficult: unlike mainstream lenders, many do not have a presence on the high street and contact tends to be by email or telephone. Some of them do not list a trading address and, Fielding points out, this often makes it difficult for many customers to know how and where to send payments, particularly if they do not have a regular income and cannot pay by direct debit.

The increase in repossessions among former right-to-buy tenants also concerns Shelter. 'We too have growing evidence that people with poor credit records are being targeted by mortgage lenders charging high rates and offering very poor customer service,' said Catherine Grannum, a policy officer with the charity.

The right-to-buy scheme has been scaled down in recent years. According to the Office of the Deputy Prime Minister, 76,000 properties were sold in this way in 1990, compared with 50,000 in 2005. The 2004 Housing Act introduced considerably tighter restrictions and reduced discounts, particularly in London and other areas with expensive house prices and high levels of homelessness.

Meanwhile, with specialist mortgages now the fastest-growing segment of the home loans market, the practices of sub-prime lenders are increasingly coming under the spotlight. A report by the Financial Services Authority in September 2005 expressed concern over suitability checks and the advice given to customers by some brokers. A further FSA investigation was meant to take place earlier this year but 'didn't happen', according to a spokesperson, although it is set to take place in the autumn.

'Buying our house ruined our lives'

Shelley and her partner Craig live in a cramped two-bedroom flat in East Staffordshire, with their children aged eight and two. They pay £125 per week to a private landlord and owe more than £140,000 in accumulated debts. Three years ago they had no debt and rented a semi-detached housing association property for £50 per month.

'Our mistake was to try to buy our own home,' says Shelley.

The couple were initially sold a mortgage for £42,000 - £32,000 to buy the property and £10,000 to pay for home improvements - from a sub-prime lender. To begin with everything seemed fine but, after their second child was born, the bills started to mount and they began to use credit to budget. At this stage Shelley and Craig considered selling the house but decided against it because they would have to repay their discount.

'The lender contacted us, explaining that they knew we were experiencing financial problems and asking if we needed any help,' explains Shelley.

They were advised to remortgage and sold a second loan for £67,000. However, it was only after completion, when Shelley first saw the paperwork, that she realised the mortgage was interest-only. 'Nobody told us that, nor did they explain we needed some kind of savings plan to pay it off.'

Last summer things went from bad to worse. After having to repay a Family Tax Credit overpayment, Shelley had to give up work as she could no longer afford childcare. By this time, they were living off credit cards and unable to pay the HP for their car. Again, they were advised to remortgage, this time to free up £8,000 to settle their car loan and consolidate other debts.

In the event, although their monthly mortgage debt increased by £13,000, they received only £2,000. According to Shelley, the broker told them he must have 'miscalculated'. One year on, they have lost not only their house and car, but also their secure tenancy status. According to housing regulations, they are classified as 'intentionally homeless' and remain ineligible for housing benefit.

'I would never buy again,' says Shelley. 'I only wanted to be able to leave something for the children, but this has ruined our lives. We will never pay off these debts.'