What is a bad credit mortgage?
Bad credit mortgages – also known as sub-prime mortgages or adverse credit mortgages – are specifically for people who have a bad credit rating. Trying to find a mortgage suitable for you when you have bad credit might not be easy.
You might have a few missed payments, had a CCJ (County Court Judgment) or may have even been made bankrupt. You might also be in, or have been in, a DMP (Debt Management Plan). These can all result in a bad credit score, limiting your finance options.
This type of mortgage works well for people who are trying to get on the property ladder but may have been refused a mortgage elsewhere because of their bad credit history. They are also suitable for homeowners or home movers whose financial situation has changed since taking out their previous mortgage.
These mortgages work in exactly the same way as a standard mortgage. The amount you borrow you will pay back to your lender in monthly instalments with interest added.
How are they different to other mortgages?
The main difference with this type of mortgage is that interest rates are higher in comparison to standard mortgages. It’s likely you will need to put down a larger deposit (typically between 15-30% of the total property value). The reason for these cost differences is due to bad credit customers being considered higher risk by lenders.
The good news is that paying a mortgage for a few years can improve your credit score. This can allow you to renew your mortgage with a standard lender at some point in the future.
How do I know if I have bad credit?
Many people don’t know what their credit score is or how it works. Your credit score is actually the most important information about you when applying for any type of finance. Numerous different factors can affect your credit score. Because of this, you shouldn’t assume that your credit score is in good shape because you haven’t been in debt.
Here we have put a guide together of some of the misconceptions around credit scores.
Checking your credit score is the best way of finding out what your financial situation looks like to lenders. There are a number of websites that you can use to get access to credit reports including Experian and Check My File.
Knowing your credit score will give you a good indication of what types of mortgages you can apply for, whether you have bad credit or not. If time allows you can also work to try to improve your credit score before you start applying for mortgages to help you get the best rate possible.
To find out more about credit scores take a look at our bad credit guides.
Applying for a mortgage with bad credit
Before applying for a mortgage it’s a good idea to compare different mortgage deals to find the most appropriate one for you.
When looking for a mortgage you should avoid making lots of applications at once with different providers. Each time you make an application it will leave a mark on your credit file that other lenders will see. Making multiple applications can look like you’re struggling to find a lender who will accept you. Multiple applications can potentially reduce your chances of approval at all.
Here we have put together a guide to some of the things you should avoid doing when applying for a mortgage.
How much can I borrow with bad credit?
If your mortgage application receives approval then the amount you could borrow is largely dependent on your individual circumstances. This involves looking at yours and your partner’s income and working out what you can afford in monthly payments.
You can use our mortgage calculator to get an understanding of how much you could borrow when taking out a mortgage.
Mortgage lenders also tend to take other considerations into account as well. This includes your monthly outgoings and other financial commitments before letting you know if you have been approved.
Why Clever Mortgages?
At Clever Mortgages we can offer you the support and advice required to ensure you get the right mortgage for your first home. We provide access to a comprehensive range of mortgages from across the market. We are also authorised and regulated by the Financial Conduct Authority (FCA) and adhere to the Treating Customers Fairly (TCF) guidelines, so you can be confident that we will treat you with integrity and only recommend products that meet your needs.
A fixed rate mortgage is where your interest rate stays the same for a set time period (usually between 2-10 years). As a result your repayments are exactly the same each month, regardless of what happens to other mortgage rates. These types of mortgages are popular with first time buyers and people looking to budget each month, especially those who have suffered from a poor credit history.
The main downside to a fixed rate mortgage is that if mortgage rates go down you can be paying a higher amount than you would on a variable rate mortgage. However, this can also go in your favour and if interest rates increase you can be paying less than you would on a variable rate.
Every lender will have their own standard variable rate (SVR), which is considered their basic mortgage. This interest rate goes up and down, usually in line with the Bank of England’s interest rates but the lender is free to raise this at any time.
This means that your monthly payments can go up or down depending on what the interest rate is at a given time. Some months you could be paying more whilst other months you could be paying much less.
A discount mortgage is when a reduction is applied to the lenders Standard Variable Rate (SVR) for a certain length of time (typically 2-3 years). Discount mortgages are attractive as they can allow you to pay slightly less than the bank's standard rate. However as the SVR can still fluctuate they are not ideal for people who are looking to stick to a strict long term budget.
A tracker mortgage is basically a type of variable rate mortgage. What makes them different from other variable rate mortgages is that they follow – track – movements of another rate, the most common rate that is tracked is the Bank of England Base Rate.
A capped mortgage is the same as a variable rate mortgage; however the interest rate can never rise above a set “cap”. These mortgages can work well for people who can budget for different mortgage repayments each month but want the reassurance that their payments will never go above a certain amount.
Offset mortgages are linked to a savings account as well as your current account. Your savings will be 'offset' against the value of your mortgage, and you'll only pay interest on your mortgage balance minus your savings balance. These types of mortgages work well for higher earners or people who have a good amount in savings that they want to use towards paying their mortgage.