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What is a Sub-Prime Mortgage?

Got a bad credit score? Need a mortgage adviser to tell you what mortgage you should go for? We’re going to explain why a subprime mortgage could be the right option for you. 

To put it bluntly, having a bad credit score isn’t great. It can leave with you a lot fewer options when you are looking for a mortgage deal. Annoyingly, it can also mean that when you eventually have your mortgage application accepted by a lender, they often provide higher interest rates and require higher deposit amounts.

And while it might seem like the end of the world now, it’s not. There are options out there for bad credit borrowers. What a lot of mortgage advisers recommend for those who have bad credit scores is, what's classed as a sub-prime mortgage. This is basically a type of mortgage that is granted to those with a poor credit score, who, as a result of this, cannot apply for more ‘conventional’ mortgages. This is because sub-prime mortgage borrowers would be a higher risk for lenders to loan money to, given their poor track record of making on-time repayments.

Why should a mortgage lender grant a sub-prime mortgage?

As we’ve already said, sub-prime mortgages can be very risky for mortgage lenders. Although different mortgage advisers may try their absolute best to find a lender who may be willing to offer you a prime rate mortgage, the likelihood is that their search won’t get the return you desire. Then, as a result, you’ll have to go for a sub-prime mortgage. What banks or building societies tend to do to compensate for taking on a risk is charge higher interest rates & request larger deposits or more equity. 

Economic impact of subprime mortgages:

As a result of the housing bubble bursting between 2007-2009, it was nearly impossible for anyone with a poor credit score to get a mortgage. However, as the economy finds itself slowly stabilising itself in the aftermath of this, sub-prime mortgages are becoming increasingly popular.

Yet, although sub-prime mortgages increase the scope for those who are able to afford a mortgage, it does mean that those with a bad credit score are also likely to encounter problems repaying their mortgage. This will, in turn, leave a bad mark not just on the borrower and their credit score but also on the lender who will not receive back the money that they have lent out.

Though, it’s also very important to point out that sub-prime mortgages don’t have to last forever. As you will not have to pay back these high-interest rates plus the capital immediately you can make more sustainable repayments, improve your credit score and then remortgage to a deal that suits you. So remember, having a bad credit score is not the end of the world! Often, its the mortgage that can be your saviour, providing you have sufficient equity. You can borrow additional on your mortgage to clear the debts, CCJ's etc causing you to have a poor credit score. This may also mean that your actual monthly payments across all debts actually reduces. Keep your nose clean for two to three years & you could find yourself able to remortgage to a high street lender.

If you have any more questions, contact one of our mortgage advisers or check out some of the other articles on our website! Our articles have loads of mortgage advice on everything from first-time buyers guides to self-employed mortgage info. We're free to use, so no need to fish out your credit card.

Mortgages Online are an online mortgage brokers.


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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