For many people, the thought of climbing onto the property ladder can be a far & daunting prospect. Even the first step seems like an impossible task, with many Millennials and Gen Y’s believing that they’re never going to escape the renting lifestyle. This feeling isn’t solely shared by younger people either, as it’s not uncommon to meet those later on in life who have never had the chance to get the keys to their very own home.
Why? Because of bad credit
There are plenty of reasons people can have bad credit ratings, ranging from innocent mistakes to unfortunate twists in life, but others might be considered a risk for a mortgage without even knowing it. For example, those who have never had a credit card, taken out a loan or borrowed money whatsoever will still have a bad credit history; something that seems cosmically unfair.
However, sometimes people hear rustles & rumours of options for mortgages that are accessible even to those with low credit scores; the elusive ‘bad credit mortgages’. But what are these unfamiliar mortgages? And what makes them so suited for those with a bad credit history? Radcliffe and Rust explain, offering insight into these mortgages as well as help with how to look for them and potential alternatives.
What Causes Bad Credit?
From the moment you start to become financially independent you start to accrue a credit rating. A bank account tied to a debit card kicks off a clock and certain actions can either raise the credit score or lower it. Simple actions like paying bills on time can slowly raise it up, but it’s not difficult for a credit rating to take a beating.
Ranging from small to severe, there are plenty of contributing factors that can lower your credit rating. The most common is a failure to pay a bill on time, which can potentially be seen with leniency if it’s not too drastic a bill (say, a phone bill or a subscription) but can also become quite the black spot against your record. This latter case would be if it’s a rent payment, or even worse, a missed mortgage payment; these are the types of missed payments that can really take a hammer to your credit rating.
Other penalties to your credit score are CCJs and IVAs; County Court Judgments and Individual Voluntary Arrangements. CCJs are court-ordered debt repayments, whereas IVAs are debt-repayments that are taken to court yet are voluntarily undertaken, both of which would need to be discussed with a lender in depth. Mortgage lenders will want to know the current status of a CCJ or an IVA, such as whether it’s still active or been resolved, as well as when you had one.
Finally, there’s the most severe potential contributor to bad credit; declaring bankruptcy. It goes without saying that declaring bankruptcy is the worst-case scenario, but some lenders will hear out the circumstances revolving around a case of bankruptcy. Much like with CCJs or IVAs, lenders will want to know what’s changed since the declaration, and will try to ascertain why you’re no longer a financial risk.
Getting External Advice
Although it’s wise to do thorough research yourself, enlisting external assistance when searching for the right mortgage can be incredibly useful. Even with the internet at our fingertips it can be incredibly hard to find the right information about mortgages, the same can be said about enquiring in person. After all, there’s no portfolio of mortgages labelled ‘bad credit mortgages’ in banks, so it can be tough to find the right mortgage for you on your own.
This is where the expertise of Independent Mortgage Advisors can become invaluable. Their unbiased advice serves as an ear to the ground of the mortgage market, regardless of whether you’re looking for a ‘bad credit mortgage’ or you’re simply seeking the best mortgage for you. The unbiased element of their role is what’s essential when it comes to seeking advice, as their lack of ties to any lender or bank makes their advice incredibly useful.
With their expertise, you’ll be exposed to a wealth of options that you may not have been aware of, along with their knowledge on which mortgage works best for you. There’s also the fact that any unsuccessful applications for mortgages (or even credit cards or overdrafts) lowers your credit score, so having an expert on your side to decide whether you’ve got a good chance with an application can only be beneficial.
Considering Lenders
When you’ve gathering all the information you need and you’ve got a deposit stocked up, it’s time to consider your options. It’s worth remembering that if your only options are those that can be considered ‘bad credit mortgages’ you might need to put in some extra financial effort at this point. For example, what usually defines a ‘bad credit mortgage’ is a mortgage that accepts a bigger financial risk (i.e. someone with a low credit rating) by bolstering the entry requirements, such as by asking for a larger deposit or requiring a higher interest rate.
If you’ve researched your potential mortgages extensively then you’ll know that conventional mortgage options, such as those offered by high street banks, aren’t the only choices. It’s easy to think that walking into a Natwest or Lloyds and asking to speak about a mortgage is the only way to get one, but in reality there are a myriad options for mortgages out there.
In early 2019, a variety of different lenders claimed to be willing to discuss mortgages with anyone who has a negatively affected credit history. These could be broken up into three categories:
- Bad Credit Considered: Barclays, Halifax, the Royal Bank of Scotland and Santander; these banks have stated that they will consider a mortgage on a ‘case-by-case’ basis, suggesting that they’ll be willing to craft individual mortgages if certain requirements are met, for example, if an applicant has a CCJ but it was paid off several years ago.
- Will Offer a Mortgage (But Only Select Mortgages): Buckinghamshire BS, Hanley Economic BS, Pepper Money and Precise Mortgages; these lenders are either independent or they’re building societies, which already shows that your options aren’t limited to big banks. However, they will still consider your application with scrutiny, and you’ll most likely be asked to pay a higher interest than a conventional mortgage.
- Will Offer a ‘Bad Credit Mortgage’: Aldermore, Cambridge BS, Foundation Home Loans, Marsden BS, Masthaven Bank, MBC Lending Ltd, Vida Homeloans; these lenders are much more independent and even more localised, which suggests that exploring any regional lenders (as opposed to national) might be your best bet for a mortgage.
Considering Alternatives (Working on a Credit Rating)
When it comes to finding a mortgage, thorough research and considerable self-reflection is key. After all, this is a financial commitment that must be upheld for decades (with the average being a minimum of 25 years) that has severe ramifications for any failed payments (such as a home being repossessed). One of the wisest choices for those pursuing a ‘bad credit mortgage’ might be a bitter pill to swallow, but at the end of the day might be for the best; to wait.
Building up a credit rating back to a healthy average, or even working hard to ensure it’s a good credit rating, can help in immeasurable ways. Not only will it make it easier to find a mortgage, it’ll also mean that you won’t require nearly as high a deposit, or as high an interest rate. It’s also important to remember that your credit rating can affect anyone else you’re applying with, so if you decide to apply for a mortgage with a partner you might not be able to get as good a mortgage as you could, even if they have a flawless credit rating.
Patience can be a virtue, which isn’t fun to hear if you’re tired of renting or living with family, but the rewards it can reap can make the years without your own home worth it. Whatever your decision is, it’s vital that you consider every one of your options thoroughly before making the life-changing decision to go for a mortgage.
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Daniel Peacock