Rewind the clock 4 or 5 years and you’ll be in a world where adverse credit mortgages were ten a penny. Mortgage brokers would have a queue at their door with customers asking for more lending, often happily paying a whopping fee for the privilege. It’s hard to believe now but 125% mortgages, mortgages for those who’ve racked up and defaulted on thousands of pounds worth of debt, and even for those recently bankrupt were all available. With the right deposit and the right broker, pretty much anything was possible.
Since the financial crisis things look rather different. With the crash in house values, fewer lenders on the market, and less money flying around, the supply has definitely diminished, despite the demand remaining relatively high.
Many of those lenders renowned for adverse credit mortgages have left the market altogether. Those that remain have less money, and as a result have tightened their criteria and now deal with much cleaner customers, to make lending less risky.
This has had an obvious impact on consumers who were once able to borrow and now cannot. For instance, those made redundant suffering from credit issues now either lay trapped with a lender they don’t want, or are unable to get new finance despite now having a reliable job.
The added impact of falling house prices has worsened the issue, as for a 100k mortgage on a property valued at 145k 5 years ago that’s now valued at 110k, the loan to value has reduced from 69% to 91%. This reduction in equity will really limit the borrower options when looking to re-mortgage, and many borrowers in this position (clean or adverse) find themselves trapped on high standard variable rates and unable to switch.
Having said this, as the demand still exists for adverse borrowing and the need for a more flexible lending solution, this does create a gap in the market – a gap that is slowly being moved into as lenders gain confidence and the economy continues to settle down.
Within the last 18 months there have been some significant movements by lenders, now offering some fantastic solutions for those who have experienced issues in the past. There’s also some smaller building societies and other institutions who will lend to borrowers without ‘credit scoring’ and only perform a ‘credit search’ – where, so long as the customers profile matches their application and it is within criteria, the underwriting team consider the mortgage favourably. This is great for those failing on poor score but with no major historical credit issues. It fills the gap whilst still being responsible, unlike days gone by.
So things are improving, but there’s certainly room for more forward steps should a lender have the confidence (and money) to do so.
What equity/deposit will I need?
It’s fair to say that greater equity or deposit, brings access to a more flexible a mortgage option. Clearly borrowing at 90% loan to value carries far greater risk to the lenders money than one at 60%, should the house be repossessed. For this reason, it’s important to get a whole of market broker to look at things thoroughly if your credit is severe, as they may just find the solution you’re looking for.
How bad can my credit be?
This really depends on numerous factors, such as how much equity do you have, are you re-mortgaging, moving or a first time buyer, what is your income, how old you are, the reasons behind your credit problems etc…
If you tick the boxes in enough areas, then it is possible to do much more than you may think – some lenders consider mortgages to the recently bankrupt, some may lend to you with a CCJ of £50,000. Because there’s no hard or fast rule, and because criteria changes happen regularly, it’s always best to check with an expert whatever your situation for up to date advice.
Will my rate be much more expensive?
Generally, rates increase when lending becomes riskier. However, for mortgages they tend not to be astronomical unless what you are asking for is very top end. At times, some of the light adverse mortgages come out better than deals on the high street.
Remember that, unlike personal loans, mortgage rates are set and you either qualify or you don’t. The rate won’t increase for a particular product just because you have a lower score. For example, an applicant with a credit score of 999 applying for the same deal as one with 500 would get the same rate if they both qualify.
If it’s a secured loan/second charge then the rates start competitive then start to rocket, and can be anything from 8% – quite scary.
How do I get one?
Adverse credit mortgages can sometimes be accessed if you contact the lender directly, but generally they do their business through a mortgage broker. This is good news as the broker can do the leg work in finding the mortgage, and then arrange it all for you. BUT this often comes with a fee for the service. The days of paying a 3% arrangement fee are over however, and a reasonable fee to pay would be anything from £199 – £799 depending on the loan size and difficulty.
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