Having a bad credit score doesn’t automatically doom you with no mortgage offers. The mortgage market is flexible and, with the right specialist broker like our team at When The Bank Says No, you can find a suitable deal for your circumstances. You can resort to multiple types of bad credit mortgages, such as flexible, help-to-buy, and guarantor choices.
Nonetheless, before applying, you’ll need to acknowledge the higher risk of each mortgage type and the higher interest repayments and deposits. Stick around to learn more about bad credit mortgage types and their rates to help you make a more informed decision.
Understanding Bad Credit Mortgage
When looking for a mortgage deal, lenders will typically assess your credit score’s eligibility. In this case, your score might be too low to garner low-interest mortgage offers. Now, that doesn’t necessarily mean you’re stuck with high-interest repayments.
Some specialist brokers can help you find reasonable offers, but they’re often paired with a higher down payment or deposit, reaching around 20% to 25%. Besides that, lenders may further consider your credit score in terms of its severity and how it became low.
Types of Bad Credit Mortgage
Having a low credit score doesn’t always mean higher interest costs and repayments. Check out the types of bad credit mortgage worth considering to ease your financial burden below.
Help to Buy
The help-to-buy mortgage option is a government-offered equity loan targeting first-time buyers. The catch is that it must be your first residence and not a buy-to-let space. In addition, you’ll need to provide a 5% deposit of the home’s value.
In most parts of England the help-to-buy mortgage offers 20% of the purchase price, while in London, it’s 40%. You can borrow the amount interest-free for up to five years.
There’s a cap to how much you can get from the mortgage, depending on which region you reside in. For instance, if you’re in London or the East of England, the help-to-buy price cap is £600,000 and £407,500, respectively.
Even though the option may not provide you with the whole resident value for your property, it eases mortgage costs. Your LTV will be lowered. In turn, you’ll accumulate a reduced interest than if you were to get a 90% LTV deal.
To be considered for a help-to-buy mortgage with bad credit, you would need the support of a specialist mortgage broker and a solid repayment plan. Work with us today and we’ll support you through the process.
As the name suggests, this mortgage type gives you flexibility in terms of its repayment scheme. It allows you to complete underpayments and overpayments on your mortgage.
The prior means that you can pay less than the monthly repayment, specifically if you’re ahead on your finances. Overpayments allow you to pay a lump sum extra to your monthly repayments, so your mortgage period ends quicker. It helps you reduce interest costs accumulating at the end.
In some scenarios, your lender could create a reserve account where the extra payment goes. If you’re dealing with financial strains, you can withdraw that amount. That said, before enlisting in a flexible mortgage, consider the additional charges piled.
For instance, some lenders may charge you if you go above a limit, such as 10%, in the overpayments. Whilst flexible mortgages are more flexible than most, they still have certain terms and conditions attached to them.
As someone with bad credit, you must understand the terms of this type of mortgage so you know what to expect. You’ll also need to be aware of how overpaying or underpaying your mortgage could affect you.
A shared ownership mortgage type will allow you to purchase about 25% to 75% of the property’s ownership. Meanwhile, you’ll be renting the rest of the home at a lesser rate. The option is ideal if you’re unable to gather a large deposit due to bad credit in the past.
Once you purchase part of the property, you can start another mortgage to purchase the rest when your credit score improves. It’s also called staircasing.
Similar to other bad credit mortgages, the shared ownership deal might be harder to find since it’s more complex. Work with When The Bank Says No’s team of experts today to help find the best bad credit mortgage type and rates for you.
When opting for a guarantor mortgage, you’re letting someone else take charge of the repayments should you fail to do so. It’s usually a close family member, like a parent or grandparent. The guarantor secures the mortgage with their savings or current property.
They won’t have ownership over the property. The guarantor is only responsible for paying off a sum or all of the mortgage if you can’t. Lenders are more at ease with this mortgage type since they won’t have to rely on your repayment but on someone with a higher credit score, meaning your bad credit is less relevant here.
Overall, a guarantor mortgage is risky because if your close family member is unable to repay the mortgage, the lender will possess their savings or property. For this reason, consulting a specialist broker is critical before making this decision.
Right to Buy
The right-to-buy mortgage type is primarily available to council tenants. It allows you to purchase a home at discounted rates courtesy of the government. The highest discount you can get with this mortgage is around 70%.
In London, it’s capped at £112,300, while other regions in England limit the discount rate to £84,200. Nonetheless, the rate tends to increase following the Consumer Price Index (CPI) at the beginning of each tax year on the 6th of April.
Apart from being a council tenant, the property must be your main residence and you need a lifetime tenancy. In terms of how the government calculates the discount, it’s usually based on the duration of tenancy with a public sector landlord.
The longer you’ve stayed in tenancy, the higher your discount. Plus, it also depends on your property’s value and whether it’s a flat or a house. The prior offer better and quicker discounts.
With bad credit, you’re much more likely to be accepted for the right-to-buy mortgage because you’ve proven yourself reliable by paying your rent over the years. And, thanks to the discount applied, you’ll be paying a smaller mortgage, meaning lower repayments throughout the mortgage.
Joint Borrower Sole Proprietor (JBSP)
Like the guarantor mortgage, the Joint Borrower Sole Proprietor (JBSP) option also requires a lending hand. It allows someone else to join the mortgage repayment scheme, whether a family member or a close friend.
Nevertheless, they don’t get ownership over the property. It boosts your chances of receiving a mortgage offer because your family member or friend’s income is also taken into account.
Aside from that, lenders don’t expect that the joint repayment will last throughout the entire period. They might assume that once your income is more stable and your credit score becomes higher, you’ll take full responsibility for the mortgage.
The prime downside to this low-credit mortgage type is that it’s not as widely available. You’ll require a broker to help you navigate and find a JBSP mortgage lender, so work with us today.
Who Offers Bad Credit Mortgages?
Several lenders can offer bad credit mortgages. You can survey high-street lenders and specialist mortgage providers, but these are best navigated with the help of a specialist mortgage broker.
Finding out which one will accept your mortgage offer depends on factors like the severity, age, and timing of your credit report.
Different lenders are less strict about different things. For example, some lenders may prove lenient if you have a history of late payments, others may be more concerned about that and be more strict with their low credit score potential clients.
Remember, finding a lender is best done with a specialist broker’s assistance. We can tap into the mortgage market and find offers only available within certain networks, and we offer a more personalised service, so we’re sure to find a mortgage that suits your circumstances.
Pros and Cons of Applying for a Mortgage With Bad Credit
Before applying for a mortgage, here are some pros and cons worth considering.
- You’ll buy the house now rather than wait for future high property costs.
- You can remortgage afterwards and get a more reasonable mortgage once your credit score increases.
- You’ll avoid the risk of accumulating high-interest rates in the future.
- A large deposit payment may be needed.
- You’ll likely have to pay a higher interest rate, increasing mortgage repayment costs.
- Limited mortgage offers
- Lender rejections can further impact your low credit score.
What Lenders Consider If You Have Bad Credit
Bad credit isn’t black and white. Lenders typically analyse the causes of your low credit score and your willingness to increase it. Here are a few factors they consider:
The first thing a lender will view is how severe your adverse credit score is. They’ll see whether your credit history involves missed loan payments, bankruptcy, or irresponsible borrowing habits.
The less serious your issue, the more likely a lender will cooperate and offer a mortgage deal.
Mortgage lenders also need to see how old your financial issues are. If they’re more recent, the lender might be less likely to consider your mortgage request.
Unforeseen circumstances can heavily attribute to your low credit score rather than financial blunders. Consequently, your lender might be more lenient with their decision if there is a clear, uncontrollable reason for your bad credit.
What You’ll Need to Apply for Bad Credit Mortgages
When applying for a bad credit mortgage, you’ll need to prepare some documents, such as:
- Bank statement for the previous three months.
- Payslips from the last three months.
- Proof of bonus payments or commission.
- Business accounts from the previous two to three years if you’re self-employed.
- Identification documents like your passport.
- Earliest P60 form from employer to display the tax amount paid and income from the last year.
- Utility, credit card, and council tax bills from your proof of address.
Can You Apply for a Joint Mortgage with Bad Credit?
Applying for a joint mortgage with bad credit is possible. There’s a looming downside that your credit score can impact your mortgage partner’s score. In turn, the association of credit can affect your future mortgage options.
You’ll likely want to avoid a joint mortgage, at least for now since it’ll result in higher interest repayments and negatively affect your partner’s credit score. Once you’ve raised your credit score, you may wish to remortgage to a joint mortgage with a mortgage partner.
Mortgage Interest Rate Type
After deciding on the type of mortgage you’ll get, you need to also choose the interest rate type from below.
Fixed interest rates allow you to pay a fixed amount for a fixed period. In turn, you’ll know how much you owe each month for two to five years without worrying about rising interest.
The main downside occurs when interest rates go below the fixed rate. Plus, early repayments typically incur penalty fees. Once the fixed period ends, you’ll have to pay interest based on the lender’s standard variable rate (SVR).
Standard Variable Rate (SVR)
The SVR operates based on the rates from the Bank of England. Subsequently, the UK economy is a critical determinant of the rate. Using this interest repayment scheme can be risky since high-interest rates from an unpredictable economy can cost you your property.
You can stay on this rate until the mortgage period ends or if you remortgage. The good news is the flexibility of changing the interest rate at any time, meaning you could repay lower amounts each month compared to those on fixed-rate mortgages.
The discount rate offers a lower or discounted rate from the lender’s SVR. It usually lasts for a fixed period of between two and three years. That said, it’s worth evaluating your discount rate options because a higher rate doesn’t always mean a cheaper repayment.
To demonstrate, two lenders may offer 7% and 6% in interest. The prior offers a 2% discount, while the other 1.5%. Even though the first one has a higher discount rate, the second option is still cheaper since it’s 4.5% rather than 5%.
Capped rates follow the standard base rates, but have a limit to how high they can go. They help you stay below a specific rate and give you more opportunities to take advantage of lower rates. That said, finding a lender willing to offer a capped rate can prove challenging.
Tracker rates follow the Bank of England’s base rate. But they can start at a lower or higher interest rate depending on your lender’s conditions. Understanding these conditions is key to a successful tracker rate mortgage with bad credit.
An offset mortgage payment is connected to your savings account. Your savings amount offsets the mortgage balance, lowering your interest.
For example, let’s assume your balance is £400,000 and your savings account carries £100,000. Your interest will be charged based on the £300,000 difference.
Tips to Help You Land a Mortgage with Bad Credit
Finding a mortgage with bad credit is possible, but it requires extra work. Check out some tips below on how you can improve your chances.
Save a Large Down Payment
Rather than prepare a traditional 5% to 10% deposit for your mortgage, gather a larger 20% to 30% one.
Since you have low credit, you need to provide some sort of advantage to convince lenders to provide you with a mortgage deal. Overall, it’ll give you a lower LTV ranging between 70% to 80%.
If possible, we suggest waiting to sort your finances and build up your credit score. You can do so by repaying debt payments on time. Plus, the extra time will allow you to gather a larger deposit for the bad credit mortgage.
You might have to wait months or years before you can improve your score and find better deals. The waiting will be worth it if it means you get to save more in the future.
Review your spending habits and find unnecessary costs. You might have a streaming account you’re barely using or a membership forgot.
You should have some savings left for each month. Try to keep a consistent spending schedule or use financial tracking applications to sort your spending.
Make Your Case to Lenders
You can show mortgage providers that you’re financially responsible. Reason with them if your low credit score is attributed to an unexpected life expense. For instance, it could be a sudden illness. Either way, mention it in your credit report.
Prove to them that you won’t miss payments by remaining punctual with monthly bills and credit payments.
Work On Your Credit Report
Go through your credit report and ensure that it’s regularly updated. Make sure the information stated is correct.
If there are any previous credit associations with partners that have low credit scores, unlink them. In addition, take note of any shared accounts that are negatively affecting your credit score.
On the other hand, if you have close family members or friends with high credit scores, you can consider asking for assistance to boost your score. Besides that, don’t apply for credit right before applying for a mortgage.
How many years of credit history do lenders typically check?
Lenders check the last six years of your credit history. In some cases, they tend to put more focus on the last two to three years.
Does bad credit lead to pricier mortgage rates?
A bad credit score for a lender translates to a risk of you defaulting and an inability to go through with the repayments. In turn, you’ll likely face higher payments from financial institutes and lenders to offset this risk.
With that said, a specialist mortgage broker like our experts, will be able to find you a better mortgage deal than one you’ll find yourself with high street lenders, even with bad credit.
Can you remortgage with a bad credit score?
It’s possible to do, but you need to ensure that your current repayments are up-to-date, so you appear more financially capable to the lender. They will likely assess your income and the portion remaining in your mortgage balance as well. You can apply to remortgage with bad credit with us today.
Bad Credit Mortgage Types & Their Rates Summary
What types of bad credit mortgages are there? In short, you can find several options from guarantor and shared ownership to JBSP and flexible mortgages.
These choices are best found using a specialist bad credit mortgage broker, like our team at When The Bank Says No. We’ll have a wider view of the mortgage market and find better deals for your circumstances.
That said, once you’ve found your match, you’ll want to work on improving your credit score, whether that involves catching up on payments or rebuilding your credit file, and ensuring you stick to the right mortgage rate and type for you. We can help you there.