Apoor credit record is no longer a bar to taking out a mortgage. While 10 years ago a county court judgment or a default on a loan repayment would have shut you out of home ownership, lenders are now falling over themselves to lend.

Credit repair mortgages are on offer from a growing range of banks and building societies. Leeds Building Society and Scarborough Building Society are among the latest lenders to broaden their range of sub-prime mortgages – a term that includes both credit repair and self-certification mortgages that are offered to the self-employed.

Leeds last month launched a combined credit-impaired shared ownership mortgage for people who have had financial problems and who cannot afford the full cost of a mortgage. It is charging 6.7 per cent – 0.2 percentage points above its standard variable rate. Scarborough has launched a credit-impaired option across its range of mainstream mortgages.

Alongside the traditional mortgage lenders, investment banks including Merrill Lynch, Investec and Lehman Brothers have also entered this market. Some aim to securitise their mortgage books – bundling up clusters of mortgages as collateral for a bond issue – to earn additional fees.

Some lenders dipped a toe into the market by offering mortgages to the “light adverse” sector of the sub-prime market – people with only a small stain on their credit record such as a county court judgment that is at least six months old.

“Most lenders have two to three-year deals in the sub-prime market offering fixed, tracker or discount mortgages,” says Ray Boulger, senior technical manager at John Charcol, a mortgage broker. “Many will have mortgages for between six and eight categories of adversity compared with three or four a year ago.”

“You would not think that recently discharged bankrupts or people who had gone into individual voluntary arrangements to pay back debts would be able to get a mortgage,” says Louise Cuming, head of mortgages at moneysupermarket.com, a price comparison website. “But they can – at a price.”

Non-standard lending – another term for sub-prime – amounted to £41.2bn or 14.1 per cent of mortgage advances in 2004, up from £15.1bn or 12.6 per cent in 2000, according to Datamonitor.

Growth outpaced the mainstream market over the past five years and continues to do so, says Maya Imberg, a Datamonitor analyst. The appeal for the lenders lies in the higher rates they can charge credit-impaired borrowers.

But the rapid rate of growth has caught the eye of the Financial Services Authority which last month said it was paying special attention to this sector. The FSA, which took over responsibility for regulating the mortgage market in November 2004, is worried that the credit scoring techniques used for this type of lending have yet to be tested during a downturn. It is to launch a review of the sub-prime lenders later this year.

But lenders and brokers appear relaxed about the outlook for the sector. “The more adverse the credit, the higher the risk,” says Boulger. “But the lender prices for the risk. It is true that there has not been a market downturn in the 10 years since the first reputable lenders came into this market but higher interest rates would hit the mainstream market too.”

A feature of the credit-impaired market is that many borrowers – aware how vulnerable their financial position has been – take out fixed-interest mortgages which would mean that, in the early stages at least, they would be shielded from any interest rate upturn.

The regulator may be worried about the flood of new lenders into this market but for the borrower the result has been downward pressure on interest rates charged. Some credit-impaired borrowers can obtain funds at rates below the lenders’ standard variable rates.

“At the lightest end of the ‘adversity’ range you could be paying 0.25 per cent below the standard variable rate,” says Jeremy Hicks of the Chelsea Building Society. “There is a stigma to this market but there are a lot of good quality customers who have just been unfortunate.” Redundancy or divorce are common reasons for otherwise financially sound individuals to get into difficulties.

Rates can range from just over 5 per cent – effectively a prime rate of borrowing – to 10 or 11 per cent, says Cuming.

Having one or more county court judgments against you for non-payment of debt is towards the lighter end of the adversity scale although the size of the debt and length of time since it was discharged are taken into account when assessing creditworthiness.

“In the early days, having multiple court judgments would have been deemed a serious case but now it is regarded a middle order issue,” says Hicks. “At the most extreme end of the range would be discharged bankrupts who could expected to pay between 0.5 and 1 percentage point above the standard variable rate.”

Lenders’ greater familiarity with the credit-impaired sector has meant that some borrowers who might previously have only been considered for a sub-prime mortgage are now eligible to be treated as a mainstream customer.

“If a customer has only a small amount of adversity – say a £500 court judgment that has been paid off six months ago – and the rest of their situation is good, we can place them in the mainstream market,” says Boulger.

Some lenders are starting to offer credit-impaired borrowers the option of switching to a prime rate mortgage without incurring an early repayment charge. The Scarborough Building Society allows borrowers to switch to its core mortgage range after three years as long as their credit record has improved and they have missed no more than two payments on their credit-impaired mortgage.