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Bad Credit Mortgages

Boosting Your Chances of Securing a Bad Credit Mortgage

Everyone dreams of owning their own home. For some, gaining a mortgage in which to achieve this is a somewhat simple process. For those with a bad credit history, however, it is a different story. Having a bad financial track record could leave you with rejections from all mainstream mortgage lenders. This is where bad credit mortgages come in.

With the UK not having recovered from the housing crisis over the last decade, those who are young, first-time buyers or those who struggle financially are hit the hardest. Sub-prime or adverse mortgages, otherwise known as bad credit mortgages, are especially designed for those who are being frequently turned down by high street lenders.

Many online mortgage brokers are knowledgeable on such loans, which are similar to a standard mortgage, just typically come with higher interest rates and a larger deposit requirement.

The Details

The main differences between a bad credit mortgage and a standard mortgage provided by a mainstream lender is a higher interest rate and larger deposit. This is due to the nature of the customers being branded as high risk. Owing to a rocky credit history, many loan providers may not feel wholly secured that the loan will be repaid on time or at all.

For an extra sense of security, larger deposits and a higher interest rate will ensure that the lender receives the money they are owed. For a sub-prime mortgage, most providers will require a deposit of nowhere below 15%. Aim to save a deposit of 30% or more for your best chance of securing a bad credit loan. After all, the more you pay up front in the form of a down-payment, the less you have to pay on the loan. The less you pay on the loan itself, the lower the amount of overall interest you will pay.

These type of mortgages work in the same way as normal mortgages in that the loan still needs to be repaid to the provider with an interest rate. All adverse mortgages will come in different types of deals, as per the standard. It is the choice of the customer whether they want to try for a fixed rate or tracker mortgage. Note, however, that not all UK mortgage providers will offer bad credit mortgages – speak to a mortgage broker to save the hassle of researching companies who do not even offer these types of loans.

As well as higher interest and a larger deposit, many bad credit mortgage deals come with higher fees and extra charges. As with standard mortgages, additional charges such as arrangement fees, booking fees, valuation fees, legal fees, early repayment and exit fees and stamp duty may come into play. The difference here is that these payments are likely to be higher than that of a standard mortgage. Although you may not have to pay every single one of these fees, as they vary from lender to lender, be prepared to pay a handful should you be successful in your loan application.

It is important to ensure you search the entire adverse mortgage market to find the best deal with the lowest possible interest rates and extra charges.

If you’re really struggling, contacting an expert mortgage broker could help with your search. They will know which providers offer bad credit mortgages as well as their individual requirements. Also, online mortgage brokers can help with finding the best deal for you and providing extra information on the types of loans available.

Who are They Aimed At?

As previously mentioned, bad credit mortgages were specifically made for those struggling to gain a mortgage deal from a mainstream provider due to their credit history.

It is unlikely that you would be able to gain a standard mortgage rate if you’ve had a County Court Judgement, if you’re on a Debt Management Plan, if you’ve been declared bankrupt in the last six years or even if you’ve missed multiple payments on other loans or bills. If any of these things apply to you, then looking for a bad credit mortgage may be the route to gaining a loan.

Despite this, most lenders will be looking for customers who have a steady income. Employment status is important to most loan providers and whether you’re on a salary or self-employed could be crucial to the outcome of your application. If you’re on the lower end of the income spectrum, a guarantor mortgage may be a better option. Bad credit mortgages aren’t for those with low income explicitly, more so for those with a questionable credit history.

Having said this, some adverse mortgage providers may allow those with a low income to supplement the mortgage with other sources of finance, such as any benefits you may receive. Low income house hunters could also explore Government Schemes, such as Help to Buy or Shared Ownership, to help them get on the property ladder.

Boosting your Chances

There are many ways to boost the chances of securing a bad credit mortgage. From simple things such as making sure you pay all your bills on time and improving your credit score, to saving a higher deposit and seeking advice from mortgage brokers.

Make Payments on Time

This might seem like an obvious thing to do, but it will help your mortgage application massively. By making sure bills and other loan repayments are paid on time, you are demonstrating to a potential lender that you can be trusted to repay your mortgage. If you have a history of missing payments, focus on being able to pay them on time before applying for a mortgage.

Although many lenders’ requirements vary, most will see bankruptcy and County Court Judgements as the most severe. If you’ve missed one or two phone bills, don’t sweat it! These are easier for lenders to overlook.

If you’re looking to re-mortgage, having paid all of your bad credit mortgage payments on time will help immensely. Doing so will aid in re-mortgaging to a standard mortgage with better interest rates, saving you money in the long run.

Save As Much of a Deposit as Possible

The more money you save for a deposit the more likely it is that your offer will be accepted. The deposit is part of the asking price of the property that is paid for upfront. The more you save now, the more money you’ll save on the total cost of the property as you will not be paying any interest on the down-payment. Bad credit mortgage providers are not likely to accept an application with anything less than 15% of the asking price of the house as a deposit. This means that you will be borrowing 85% of the cost as a mortgage loan.

A higher deposit gives the mortgage provider a sense of security, as well as resulting in a shorter repayment period. Certain lenders may also reduce interest rates if you have a larger deposit. To save money, make a finance diary or carefully assess what is going in and especially what is coming out of your bank account. This will help you identify what you can cut back on in order to save for a deposit.

Despite this, it is important that you do not borrow money in the form of a personal or guarantor loan to put towards a deposit. Most lenders will frown upon this. Borrowing from family or friends is fine, as long as you have no legal obligation to pay the money back.

Apply for One Mortgage At a Time

Another way to improve chances of securing a bad credit mortgage is to only apply for one at a time. When you send an application for a loan, it will appear on your credit score. The more you apply, the more obvious it will be that you are struggling to find a lender. Even if you are not struggling but you send all the applications at once, this is how it will appear to all the loan providers. Do your research and ensure the mortgage is right for you before applying.

Know Which Kind of Mortgage you Want

Knowing what kind of mortgage you are after may aid in your quest to securing a bad credit mortgage deal. Look into whether you’d want a fixed rate or tracker mortgage, and whether you want interest only or a full repayment plan. Fixed mortgages come with an interest rate that is the same each month for the entirety of the agreed period.

Tracker mortgages track the Bank of England’s base rate, meaning that your interest rate can change from month to month. With the current economic situation of the UK, most people are opting for fixed mortgages. If you aren’t financially able to cover a rise in interest rates, this type of mortgage is probably best for you.

If you want an interest only mortgage, then you’ll need a separate plan to cover the loan costs. A full repayment plan will automatically cover both. The latter is the easiest option.

Knowing this before sending an application will make the lender’s job much easier, and might bend them round to accepting your offer.

Seek Advice from Mortgage Brokers

If you’re really struggling to find a suitable mortgage deal, or you have questions you need answered, a mortgage broker may be your new best friend. Brokers will know individual lender’s requirements, as well as helping to find the ideal offer for you. They can also help with specialist circumstances and aid with the legal and technical sides to mortgage applications. Applying for the perfect deal for you from the off will help in becoming accepted quicker

Check your Credit Score

Really, you should do this before anything else. It will save you time researching and applying for a bad credit mortgage if you could get a standard mortgage and vice versa. You can get free credit reports from sites such as Experian and Check My File. If time permits, then building your credit score can help in gaining a bad credit mortgage.

Ways to Build your Credit Score

  • Again, paying all bills in full and in time will help here. Boosting your credit score as well as proving to loan providers that you can make payments will aid in securing a mortgage deal.
  • Make sure you close any credit accounts that you do not use. In addition, if your budget can stretch it, then apply for a credit-building credit card. Spending money on the card then paying it off will demonstrate that you can repay loans, as well as booting your credit score on paper.
  • Sustainable borrowing may also be a help, if your finances can support it. Looking into guarantor loans or personal loans and paying them off in full can also show potential providers that you know how to budget and repay loans. It is important to only do this if you are sure you can repay the loans.
  • Finally, ensure you’re on the electoral roll – even if you do not vote. This will help lenders to confirm your address and identity, saving you both time. Getting on a provider’s good side is sometimes enough to tip the scales in your favour.

Remember that building your credit score can take time, and it is not always certain to gain you a mortgage deal, bad credit or otherwise. Be patient, a mortgage is likely to be the biggest financial commitment of your life – make sure you’re ready for it.


Laura Waller

Laura Waller has been working in the mortgages industry since 2013, joining an independent brokerage in Essex. Laura has CeMAP 2 & 3 – Certificates in Mortgages Advice and Practice. Since then Laura oversees marketing for Mortgages Online, using her experience and expertise to write articles and blogs about mortgages and related topics.

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