When you’re making your bucket list of things to do before you die, owning your own home is usually pretty high up the list. A place to call home, that is actually yours always seems to feature in the dreams of the future.
However, with house prices seemingly ever increasing, realising that dream is becoming harder and harder, particularly for those of us with poor credit ratings. Government schemes are being launched to help first time buyers, however these seemingly do no apply to those of us who are not in the ideal financial situation.
Thankfully, schemes like bad credit mortgages, also known as sub-prime mortgages or adverse credit mortgages, are becoming more readily available.
Where they are available, they are not straight forward nor easy to obtain. With advantages and disadvantages to the schemes, it’s tough to know whether they are the right fit for you, or if you should hold off and try and rebuild your credit score to attain a standard rate mortgages.
We understand that this is a bit of a financial mine field, so throughout this article we look to highlight some popular lenders, answer the most frequently asked questions on the topic as well as illuminating some of the advantages and disadvantages of bad credit mortgages.
Thankfully, mortgages do exist for those of use with poor credit scores. Also known as sub-prime mortgages or adverse credit mortgages, these are plans put in place to help even those with missed credit card payments, county court judgements.
Even those who have previously declared themselves or been declared bankrupt, reach their goal of owning their own house. Although these mortgages have become more more readily available in recent years, they are by no means easy to obtain.
Crushing DebtWhat you will find is that interest and deposit levels are going to be much higher than that of a standard mortgage. We’ve mentioned it a few times across this site, but once again the principle of high interest being the price we pay for having poor credit features again here.
To stand a chance at getting awarded any mortgage, let alone a bad credit mortgage, you have to go through the usual steps of attempting to boost your credit score. For example, going through your credit file and making sure that all unused open credit accounts are closed, address anomalies fixed and consistency is across applications. Also, you should research the best mortgage for you, as many failed applications will have a detrimental effect on your mortgage application.
As well as the above, it’s worth having a read through our articles on boosting your credit score, and being awarded other types of credit such as credit cards, mobile phone contracts and short term loans. Any chance you have at proving you can handle repayments is a bonus that should be grabbed with both hands.
Bad credit mortgages work the same as your everyday mortgage in principle, but there are some subtle differences that you should take note of before applying.
To begin with, the interest rates and charges for late payments are going to be much higher than with a standard mortgage. This is because of your poor credit rating, lenders see you as much higher risk of lending money to, therefore, to justify that risk they have to show that they as a business have the potential to turn a profit on your application.
Where these higher rates are occasionally advertised at discount, even when discounted they are substantially higher than standard rates. However, after several years of repaying at higher rates, your credit score my be sufficiently repaired to transfer to a standard rate mortgage. Also, because of the fact poor credit applicants are seen as high risk, a much larger downpayment is required with your application. Where people with good credit can borrow as much as 105% of the value of their property, those of us with less than desirable credit scores will be looking more between the 70 and 80% mark.
This means that as much as a 30% deposit is required with some lenders to secure the mortgage.
When you think of the average house price of £150,000 you need to save up a deposit of £45,000 which is no mean feat. Generally speaking, the higher a deposit you can pay up front, the more likely you are to be approved. It’s also worth remembering that a mortgage is a secured loan. Meaning that if you fail to make the payments you could risk repossession of your property to foot the bill. Taking all these factors into account, researching the right mortgage for you is absolutely essential before applying.
As mentioned previously, bad credit mortgages are becoming increasingly easier to access to more and more people. Where banks and building society’s tend to offer them less frequently, visiting specialist mortgage broker’s will throw up more than a few different deals. We’ve highlighted some of the places you can approach below:
1. Precise Mortgages: - Precise Mortgages are an independent mortgage broker, who have a select range of mortgages available to those with bad credit. Their most popular plan offers a 2.87% initial rate of interest for a 25% deposit and £2500 application fee. The application fee is very expensive, so consider all your options before applying and risking rejection.
2. GE Money: - GE Money are another exclusive mortgage broker, with plans aimed at those with poor credit ratings. They offer an initial rate of interest of 3.17% on a 30% deposit and £1000 application fee. Where the fee is less than Precise Mortgage’s, the interest a deposit required to secure this plan are higher.
3. Barclay’s Bank: - It is unusual for high street lenders to offer mortgages to people with poor credit, however Barclays seem to be the exception to that rule. Barclays will consider you application even if you have had a debt relief order, provided that it was 6 years before you make you application. This suggests that they are far more likely to approve those with poorer credit scores.
4. Accord Mortgages: - Accord Mortgages are our final independent mortgage broker. They are fairly unique in respects to offering mortgages to those that have been made bankrupt just 3 years after their ruling. This also suggests that those with poorer credit will have a much higher chance of approval here.
As with all credit applications, mortgages essentially boil down to the lenders calculation of risk vs profit. As we’ve gone over before, if you have poor credit, you are a high risk in the eyes of a lender. It’s because of this high risk that you are charged higher interest rates and higher late payment fees, as well as being subject to higher deposit demands.
All of these factors reduce the risk in the eyes of the lender, as they now see the potential to make a profit on your loan. Profit is made on every loan, but for them to loan to someone with bad credit profit margins need to be higher.
Where mortgages have the advantage of being a secured loan to back up payments, interest rates to begin with at least, will still be very high, As usual, we would advise that you go through our article detailing quick and easy steps to boost your credit score before taking the plunge and applying for your mortgage.
By ensuring your credit rating is at it’s highest potential value you significantly boost your chances of approval when it comes to your mortgage. The steps are very quick and easy, and can really pay dividends when it comes to getting yourself access to the better rates. The size of your deposit also goes some way to helping you pass the approval process. By being able to put forward a large deposit, you demonstrate to the lender that you have some basis of financial stability despite your poor credit rating.
The benefits of bad credit mortgages are fairly obvious, with the primary benefit being that you get to own your own home sooner rather than later. Where the rates won’t agree with everyone, their effectiveness at reaching you goals is unquestionable.
They enable you to take your first steps up the property ladder even while having less than ideal credit so you shouldn’t just turn your nose up at them. Provided you make the repayments to avoid the heightened charges, they can be an exceptional tool.
Furthermore, as with any type of credit, they have the potential to boost your credit score in the right direction. Once you’ve been making repayments for a number of years, your credit score should have sufficiently recovered to be able to transfer to a standard rate mortgage. Where high interest can not be avoided completely, at least the time that you are paying it can be significantly reduced.
There are numerous drawbacks to adverse credit mortgages that I am about to discuss. Where they may seem severe, you need to remember that bad credit mortgages are a means to an end, where the majority of the time the ends justify the means.
The first disadvantage are the elevated interest rates, once again because you have poor credit, you’re going to have to pay more for any lending you secure. This however is the case across all credit platforms, not just with mortgages.
Secondly, you have to find a substantial amount of money to use a deposit to stand a chance at getting approved for a mortgage while you have bad credit.
With good credit applicants being able to secure as much as 105% the valuation of their property, bad credit applicants are looking at between the 70 and 80% mark.
This means you’ll need to find as much as 30% of the valuation of the house as a deposit, with the closer you can get to the 30% mark significantly improving your chances of approval. However, in today’s market 30% is a huge amount of money.