Bad credit mortgages
Bad credit mortgages
There is no such thing as a ‘bad credit mortgage’. Mortgages for those with bad credit operate 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…
Why is it difficult to get a mortgage with bad credit?
Since the credit crunch in 2008, new affordability rules brought in by the Bank of England have forced lenders to be more careful when issuing mortgages. With the introduction of these new rules, 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 are going to 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 mortgages to this section of the market, so there’s less competition and less choice available.
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 count court judgements (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.
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.
If you do take out a mortgage from a specialist lender and meet the repayments, your credit rating might start to repair over time. When 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 is on hand to 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.
When should I apply for a mortgage if I have a bad credit rating?
You might decide it’s better to wait until your credit history has improved, as this could give you access to more affordable mortgage 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 the property of your dreams, make sure you know what you can really afford to pay if your mortgage deal is likely to be more expensive.
Avoid making multiple mortgage applications, 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.
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 provide 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.
What happens if I don’t have a long credit history?
For young people in particular 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 ways of building your credit that are manageable for your personal circumstances. 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.
How does a bad credit history come about in the first place?
There are a number of reasons why you might have a poor credit rating. Typically, the main reason is missing credit card, loan, mortgage or even utility repayments. 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.
And if you’re declared bankrupt, or you’re subject to an Individual Voluntary Arrangement (IVA) or County Court Judgement (CCJ), your credit rating will be affected.
How can I improve my credit rating?
It can take up to six months to improve your credit rating. 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 accounts, as these can temporarily lower your score. Reducing spending and increasing your balances in your 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. It might be that you were suffering with ill health or were made redundant, but are now better or have got a new job.
Get more details on how to build your credit score.
Remortgaging with bad credit
Getting a new deal with your current lender might be a good option for some customers who’ve got bad credit, as you won’t be subject to any further credit checks, provided you’ve kept up with your mortgage repayments.
Lenders 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 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.
What do I need to compare mortgages?
- 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
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.
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.”