Mortgage Guides

Bad credit mortgages

Updated: Wednesday 30 November, 2011

By Martin Fagan

In the current credit climate it can be hard to get a mortgage, even if you have a good credit history - but what if your credit history is less than perfect? We take a close look at adverse mortgages.

Mortgage providers have tightened up their lending criteria and are approving far fewer mortgage applications than they used to. Even people with a fairly good credit history are struggling to find a decent mortgage, so those with a poor credit history may feel there is no hope.

However, there are alternative options for those with adverse credit, including adverse mortgages which you may be able to get even if you have been made bankrupt in the past. In this guide we will look at the advantages and disadvantages of adverse mortgages, as well as discussing when adverse mortgage customers should think about switching lender, remortgaging to get a better deal.

• What is an adverse mortgage?
• Advantages
• Disadvantages
• How do I get one?
• When should I remortgage?
• And finally...

What is an adverse mortgage?

An adverse mortgage is a mortgage (i.e. a loan to finance the purchase of property) that has been specially designed for those with a poor credit history. Adverse mortgages are also known as bad credit, subprime, non-standard, or credit-impaired mortgages, and are suitable for those who have any of the following in their credit history:

• County Court Judgements (CCJs)
• Mortgage or rent arrears
• Individual Voluntary Arrangements (IVAs)
• Bankruptcy
• Trust Deeds (Scotland)

If you apply for an adverse mortgage, you will be assessed individually and the terms and rates you are offered will depend on the severity of your credit history. The darker your past, the more expensive your mortgage will be.

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Advantages

The main advantage of an adverse mortgage is the flexible lending criteria. Many people refused mortgages from high street lenders find their only option is to take out an adverse mortgage – without an adverse mortgage they would not be able to buy a house.

Adverse mortgages are also good in that they can rehabilitate your credit. If you are approved for a mortgage you can then “prove” your reliability to the lender and repair your credit rating. If you meet all your payments on time, then after a few years you should be able to remortgage with a standard lender.

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Disadvantages

Borrowers with a poor credit history are seen as posing a bigger risk to the lender, which is why high street banks normally refuse them for mortgages. Specialist lenders offering adverse mortgages will raise the interest according to the “risk” level of the borrower.

This means that adverse mortgages can have very high interest rates attached to them, which in turn means your monthly payments will be higher than average and the total amount of interest you will pay over the term of the mortgage will also be more.

Example - A £180,000 mortgage with a term of 25 years:

Type of Mortgage	Interest Rate	Monthly Payment	Total Interest	Total Cost of Mortgage
Standard	6.5%	£1,215.37	£184,611.87	£364,611.87
Adverse	9.0%	£1,510.55	£273,166.04	£453,166.04

If you kept this adverse mortgage for the full 25-year term, you would end up paying nearly £90,000 more than someone with a standard mortgage on the same house. However, just having an adverse mortgage and making your payments on time will help you repair your credit rating so that after a few years you may be able to re-mortgage onto a standard rate and take advantage of much lower interest rates.

Most adverse lenders will require you to have a large deposit on the house (at least 10%) as this will reduce the risk of negative equity for them if you default on the payments and the house has to be repossessed.

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How do I get one?

Before you apply for an adverse mortgage it is definitely worth checking that you do not have the option of a standard mortgage. Mainstream brokers like Charcol (www.charcol.co.uk) and London & Country (www.lcplc.co.uk) can still help you if you have a poor credit rating and will attempt to find you a standard (and thus cheaper) mortgage despite your credit history. Alternatively, you can compare mortgages yourself using our online comparison service.

If your only option is an adverse mortgage, you will generally need to arrange this through a specialist mortgage broker in what’s called the tertiary or sub-prime market. You can find a directory of mortgage brokers, specialising in both mainstream and adverse mortgages, at Mortgages.co.uk.

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When should I remortgage?

Just because you have an adverse mortgage, this does not mean you will need one forever. You should try and remortgage as soon as your credit rating improves or your fixed-rate deal ends. It’s always worth looking for cheaper deals as almost all mortgage brokers provide quotes and advice for free, so you will only be charged if they do actually find you a cheaper deal and you decide to use it.

If you have improved your credit rating since you took out the initial mortgage then there is a good chance you may now be eligible for a standard mortgage which will greatly reduce the amount of interest you will pay.

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Even if you haven’t improved your credit, you may still be able to benefit from introductory fixed-rate deals from other lenders.

If you are coming to the end of a fixed-rate deal, it is definitely worth contacting your current mortgage lender first and asking about the possibility of a lower rate.

When calculating the savings you could make by remortgaging, you should always take into account any redemption fees you may have to pay on the old mortgage and any arrangement fees you may have to pay on the new one.

If you are stuck with an adverse mortgage and struggling with repayments, if there is no possibility of switching to lower rates or a cheaper provider then you may choose to extend the term of your mortgage. This will reduce your monthly payments but it will result in your mortgage being more expensive in the long term as you will be paying interest for a longer period of time.

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And finally...

If you only have a CCJ or limited arrears, and especially if you have a large deposit, then there is a good chance you may be able to find a high street lender that will provide you with a mortgage. Standard mortgages are much cheaper than adverse mortgages, so they should probably be your first port of call.

If you have been refused a standard mortgage and decide to take on an adverse mortgage, make sure you are aware of all the terms and conditions, paying particular attention to the following:

• Redemption penalties – These are charges which are applied if you choose to pay your mortgage off early or switch to another provider. They are pretty much unavoidable in the adverse mortgage market, but ensure that they don’t last more than three years, otherwise they will tie you to the adverse mortgage and prevent you from remortgaging once you have repaired your credit rating.
• Missed payment penalties – Avoid mortgages with penalties for missed repayments. These could lead you into a spiral of debt, continually increasing your debt when there’s no way you can pay. Some disreputable lenders may structure these penalties deliberately to maximise the chance of repossessing your property.

You can compare mortgages using our online comparison service, which will search through over 5,000 mortgages to find the best deal for you.

Plus, you can use our mortgage calculator to calculate your typical monthly repayments as well as the total cost of your mortgage.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.

THINK CAREFULLY BEFORE SECURING ANY DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.