A simples guide

Getting a mortgage when you have a bad credit history

Since the credit crunch in 2008, getting a mortgage has got trickier for all borrowers. New affordability rules brought in by the Bank of England have forced lenders to be more careful before issuing mortgages.

Those with bad credit histories have faced the biggest change. Prior to the crunch, so called “sub-prime” mortgages for people with bad credit were used widely by banks. The housing market seemed secure so the bank’s investment was safe – if there were any issues they could just reposes the house. With this in mind they were a bit of a money spinner for the banks. Since the new rules however, getting a mortgage when you've got a bad credit rating has become much tougher.

Tougher but not impossible…


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

There are a number of reasons why people find themselves with a poor credit rating.

The main reason is typically missing credit card, loan or mortgage repayments. In more severe cases, defaulting on the loan completely can have significant implications for your credit rating and ability to borrow in the future.

In addition, those declared bankrupt, subject to an Individual Voluntary Arrangement (IVA) or County Court Judgement (CCJ) can expect to see their credit rating impaired.

Finally, for young people in particular who are looking to borrow for the first time, having no credit history is similar to having a poor rating, at least until lenders see evidence of the ability to repay debt.

credit card

Mortgages for those with bad credit

First off, 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. They also come with the same options with regard to the type of mortgage available.

While those with bad credit are likely to be rejected by mainstream lenders for conventional mortgages, there are specialist lenders who can help.

Unfortunately, you’re likely to face a couple of extra financial barriers. Firstly, the lender is likely to demand a much larger deposit than they would on a conventional mortgage. Many lenders cap the amount that they’re prepared to lend to someone with a poor credit rating at 60% of the property value, with just a few lenders prepared to go as high as 80%.

In addition, interest rates are likely to be much higher than for a conventional mortgage. On the plus side, if you do take out one of these mortgages and start to show you can meet the repayments, over time you may start to repair your credit rating. When your credit rating has recovered, you may be able to remortgage onto a better deal.

How should I go about applying?

Before you start applying for a mortgage, it would be very sensible to actually find out what your credit rating looks like.

You can do this by approaching the big three credit agencies in the UK, Experian, Equifax and Callcredit. Though they all offer relatively expensive reports, they also typically offer 30 days free (as long as you remember to cancel the subscription).

As an alternative you are legally able to request a copy of your statutory report from each agency for £2 each. It may be worth checking more than one as they calculate their scores differently, but it is not necessary to check more than one unless you think there is a problem. Check that the information is correct and then think about what actions you might be able to take to improve your score before you make your mortgage application.

You may decide that it will be better to wait until your credit history has improved, allowing you to access more affordable mortgage deals. Alternatively you could take action to improve your credit rating while you’re saving for your deposit. That way, you may have more options available when you actually make the mortgage application.

Or if you want to see the latest mortgages, use our mortgage comparison service today.

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