Bad credit mortgages

There’s no such thing as a ‘bad credit mortgage’. Mortgages for people with bad credit work in exactly the same way as conventional mortgages. But you may have to pay a higher rate of interest and you might not be able to borrow as much. Here’s what you need to know…

There’s no such thing as a ‘bad credit mortgage’. Mortgages for people with bad credit work in exactly the same way as conventional mortgages. But you may have to pay a higher rate of interest and you might not be able to borrow as much. Here’s what you need to know…

Tobi Owens
From the Mortgages team
11
minute read
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Posted 24 NOVEMBER 2020

Can I get a mortgage with bad credit?

If you have a bad credit rating, it’s more likely that you’ll be rejected by mainstream mortgage lenders. There are specialist lenders who can help, but they may put certain conditions in place.

  •  The lender is likely to demand a larger deposit than they would on a conventional mortgage.  
  • Many lenders cap the amount they’re prepared to lend at 60% of the property value, with just a few lenders prepared to go as high as 80%.
  • Interest rates are likely to be much higher than for a conventional mortgage.

You might also be asked for a guarantor – usually a parent or older relative. This will reassure lenders that your monthly payments will be covered. 

The amount of time that’s passed since any County Court Judgment (CCJ) or bankruptcy can also be a deciding factor. In the case of bankruptcy, most lenders will only consider your application after six years have passed since the bankruptcy discharge.

Although a CCJ can stay on your record for six or seven years, some lenders may consider your application after three years – as long as your debt has been fully paid back.

In the case of an Individual Voluntary Arrangement (IVA), you may have to wait up to four years after successfully completing a debt management plan before you can apply for a mortgage.

If you do take out a mortgage from a specialist lender and meet the repayments, your credit rating might start to repair over time. And once your credit rating has recovered, you may be able to remortgage  to a better deal.

A broker could help you navigate the different options – our broker partner London & Country Mortgages Ltd can help if you need to talk it through with an expert. 

Remember, you could lose your home if you’re unable to keep up your mortgage payments. 

See how London & Country can help

Why is it difficult to get a mortgage with bad credit?

Since the credit crunch in 2008, affordability rules brought in by the Bank of England have forced lenders to be more careful when issuing mortgages. These rules mean it’s become more difficult to get a mortgage if you have a bad credit rating.  
 
If you have a history of not paying back money in full or on time, lenders will be more wary about lending you money. That’s especially true given how large the sums involved in mortgages are. 
 
Also, there are fewer lenders willing to offer bad credit mortgages, so there’s less competition and less choice available.

How has the coronavirus pandemic impacted getting a mortgage with bad credit?

Coronavirus has had a massive impact on mortgage lending and the UK housing market as a whole. During lockdown:

  • Social distancing meant that lenders weren’t able to carry out physical valuations of properties, so inevitably many mortgage applications were turned down.
  • Many lenders tightened their mortgage criteria by lowering the loan to value (LTV) and increasing the deposit amounts for their mortgages.
  • Uncertainty meant that many lenders pulled their best mortgage deals off the market – reducing the overall number of deals available.
  • Around 1.6 million homeowners took advantage of the three-month ‘mortgage holiday’ offered by the government to help ease the impact on their income.
  • Mortgage interest rates fell when the Bank of England cut the base rate to 0.1%.

Bottom line – although the Bank of England interest rate has fallen to a record low, the impact of coronavirus on the UK economy means that lenders are now far more cautious about lending. This could affect your chances of getting a mortgage with bad credit.

What are bad credit mortgages? 

A bad credit mortgage is just a name for mortgages that are targeted at potential customers with a poor credit history. For example, customers with County Court Judgments (CCJs) against their name, individual voluntary arrangements (IVAs) or bankruptcy. Because they have high interest rates and tend to offer lower loan amounts than other mortgages, bad credit mortgages reduce the risk to lenders of people not making their repayments.

In the majority of cases, bad credit mortgage deals tend to be fixed-rate, fixed-term mortgages with an introductory period of two or five years and an LTV of 75% or lower.

The LTV (loan-to-value) is the amount of mortgage you can get against the value of the property. Most mortgage deals for people with bad credit have an LTV of up to 75%. This means that the mortgage lender is prepared to lend you up to 75% of the property value – meaning you’ll need at least a 25% deposit for a chance of being accepted.

Bad credit mortgage rates

Bad credit mortgage rates will typically be higher than normal interest rates. Lenders don’t typically advertise rates specifically for bad credit though. This is because most lenders will consider bad credit applications on a case-by-case basis. The rate you might get could depend very much on your individual circumstances. For example:

  • What type of credit issues you have
  • How recent they were
  • Whether any credit issues are still outstanding
  • Your deposit and the amount you need to borrow (LTV)

Bad credit mortgage rates also depend on the current market rates for general mortgages and the base rate set by the Bank of England.

Bad credit mortgages for first time buyers

For young people who are looking to borrow for the first time, having no credit history can be similar to having a poor credit rating. That’s because lenders are looking for customers who have shown they can successfully manage their credit. 

If you’re thinking of getting a mortgage and you have little or no credit history, you may want to think of sensible, manageable ways of building your credit. That might be taking out a phone contract or having utility bills put in your name. Paying these on time can help build up your credit history. Another way to build credit might be through a credit building card.

That’s not to say it’s impossible for first-time buyers with no credit history to get a mortgage. Although it can limit your choices of mortgage deals, lenders won’t consider your situation as serious as, say, someone with a bankruptcy or CCJ.

Bad-credit mortgages for home movers?

If you have a bad credit history and you’re moving home, it is possible to get a mortgage with a favourable initial interest rate. But you might decide it’s better to wait until your credit history has  improved, as this could give you access to more affordable deals.  

Alternatively, you could take action to improve your credit rating at the same time as saving for a deposit, once you have a rough idea of how much you can afford to borrow with a mortgage. 

If you’ve fallen in love with another property, make sure you’re certain about how much you can afford to pay if your mortgage deal is likely to be more expensive.

Avoid making multiple mortgage applications, though, as you could potentially damage your credit score even further. As mortgage deals might be harder to find, talk to a mortgage adviser as soon as possible.

Is it better to buy a house with bad credit or wait and improve my credit score?

If you’ve already found the house of your dreams, here are some pros and cons of applying for a bad credit mortgage rather than waiting to improve your credit score.

Pros

  • There are deals out there – shopping around and comparing mortgages is one of the best ways to find a deal to suit your situation.
  • You’ll get on the property ladder sooner.
  • If the market is slow, you’ll have a better chance of negotiating a better price for the property you’re after.

Cons

  • If you wait to build up your credit score, you’ll have a wider range of ‘normal’ mortgage deals to choose from.
  • Higher rates – you could end up paying higher interest rates if your credit score is still poor.
  • Bigger deposit – lenders may only consider your application if you have a decent chunk of deposit to put down.

Can I remortgage with bad credit?

Getting a new deal with your current lender might be a good option if you have a bad credit record as you won’t be subject to any further credit checks - provided you’ve kept up with your mortgage repayments and you’re moving to a like-for-like deal. In other words, you’re switching your existing mortgage arrangement to a new rate, but without any changes to the outstanding balance, term or repayment method.

If you’re considering switching to a new lender, they’ll apply the same approach to remortgaging as they do to lending for new mortgages. This means interest rates can be higher and the amounts you can borrow may be lower, if you’ve had bad credit.

Your reason for remortgaging may have an impact on whether anyone is willing to lend to you. If you’re remortgaging to cut your monthly outlay, you’ll have to do your sums carefully to make sure additional remortgaging costs don’t wipe out any savings. And potential new lenders will take a long, hard look at what you can and can’t afford if you’re asking to borrow even more money.

If you took out a mortgage when you had bad credit, but you’ve now managed to bring your finances under control, remortgaging could be a good way of finding a better mortgage deal based on your improved credit rating.

It’s a good idea to talk to a mortgage adviser who can discuss the options available to you, so you can be confident that a remortgage is the best decision for you.

Speak to an adviser at our partners London & Country. They can check your eligibility with a variety of different lenders who will remortgage to homeowners with bad credit.  

How does a bad credit history come about in the first place? 

There’s a number of reasons why you might have a poor credit rating. Typically, the main reason is missing credit card, loan, mortgage or even gas or electricity payments. If you fail to pay back a loan completely or miss payments on your phone contract or utility bill, this can seriously affect your ability to borrow money in the future. Even paying bills a few days late can have an impact on your credit rating.

Being declared bankrupt, or being subject to an Individual Voluntary Arrangement (IVA) or County Court Judgement (CCJ), will affect your credit rating too.

How can I check my credit score?

You can check your credit report for free at Experian and Equifax if you sign up to their free 30-day trial – just be sure to cancel before they start charging. TransUnion (formerly Callcredit) also provides a free credit check, as do other companies.  

Different lenders use different credit-checking agencies, so ideally check with all three.

Also, check for any mistakes on your credit record that you can correct before you start applying for a mortgage.

How can I improve my credit rating?

It’s possible to improve your credit rating, but be patient as it can take up to six months. You’ll have to show you’re using credit responsibly and not paying late or missing payments. Setting up direct debits can help ensure that your bills will be paid on time. Making sure you’re on the electoral roll will also help. Avoid building up further debt and opening new credit accounts, as these can temporarily lower your score. Reducing spending and increasing the amount of money in your bank accounts can help too. 
 
If you have a good explanation for past financial difficulties, it’s worth adding a note of correction to your credit report to explain this and for lenders to see. Maybe you were suffering with ill health or were made redundant, but are now better or have a new job. 

Get more details on how to build your credit score.

What do I need to compare bad credit mortgages? 

To compare bad credit mortgages, you’ll need to have the following information:

  • Details of your salary and any other income
  • If you’re buying with someone else, details of their income
  • Whether you’re going to live in the property or let it out
  • If you’re a first-time buyer
  • How much you want to borrow and what your deposit will be
  • If you’re getting help from a Government scheme to buy your home
  • Details of outgoings for affordability checks

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Why use Compare the Market? 

We compare deals from leading mortgage providers and make it easy for you to find and compare bad credit mortgages. We also work with the UK’s leading mortgage advisers London & Country Mortgages Ltd.

Tobi Owens

From the Mortgages team

What our expert says...

“Don’t despair. If you have bad credit it’s still possible to find a mortgage. And if you can manage your money well and improve your credit rating, you’ll have greater choice.” 

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