Where to go if your credit's bad

Most wage earners who go to see a man about a mortgage are fairly confident that they will be promised something at the end of the interview. Whether it will be enough to shunt them on to the property ladder is a different matter, but at least they will be aware of where they stand in financial terms.

For some unlucky individuals however, the thought of dropping into their local lender for a chat about a loan is so outlandish that it is laughable. Their credit history, for whatever reason, is such that loan approval is simply out of their reach.

Escaping this unenviable position can be more than difficult, with one or two past slip-ups often dooming a would-be borrower to impossibly tight financial means for the rest of their lives. And this is not a question of being unable to borrow as much as they need; it is a question of not being able to borrow anything at all.

One lender which is more than aware of this financial dilemma is GE Capital Woodchester, the company that last week linked up with IFG to offer homeloans to customers who do not fit into "existing fixed underwriting criteria". In other words, a bad credit record will not represent the same barrier with GE as with other mortgage providers.

The loans, which will be offered through IFG's network, will be sold at between one and 2.2 percentage points above the average standard variable rate.

This extra cost to the consumer, while hardly desirable, is also understandable from the business perspective since, in theory at least, GE is taking a risk with this type of borrower.

It is also worth remembering however that the loans will only be advanced to those who can demonstrate "debt servicing capacity", or the ability to repay the loan.

Furthermore, the new products are only available to those customers seeking to re-mortgage their existing homes, not to those looking for their first property. The risk to GE is thus not as large as it may appear at first glance, since the lender can use the consumer's home as security against the money advanced. The loans are likely to range around 50 per cent of the property's value, a ratio which again offers significant protection to GE.

And as far as the consumer goes, the ability to borrow where a loan had previously been refused is not the only benefit in the new offering.

Perhaps more crucially, it can also help consumers to restore a previously-damaged credit rating by allowing them to prove their financial reliability.

This means that if repayments are made on time and in full for three or four years on the GE/IFG product, the consumer's credit status will have a good chance of being restored and they will be able to move their loan to one of the better-known mortgage providers and take advantage of standard rates like everybody else.

Mr Ian Mitchell of Deloitte pensions and investments says this "micro" benefit should not be underestimated, but he is at the same time less than certain on the "macro" picture behind the loans.

He is fearful, for example, that the GE loans could spawn higher loan default ratios than those recorded in other product. "There is, I think, almost certainly going to be a higher rate of property repossession in this sector, and who knows what effect this may have on the housing market longer term," Mr Mitchell says.

He also expresses concern about the product creating "a further artificial short-term surge in demand for property" that could drive up prices in the market as a whole. On balance though, Mr Mitchell believes that as long as loan to value ratios are kept low and income multiples are kept to "sensible levels", the new offerings will be of benefit to previously-disadvantaged loan candidates.

Experience to date certainly suggests that GE could be on to a winner, with loan applications worth more than €100 million processed during the product's pilot phase over the past six months. GE describes its target market as "near prime" borrowers, and estimates that this could comprise about a tenth of the market.