It can be difficult to find a lender willing to offer you a mortgage if you have had past credit problems. But all is not lost – new lenders are coming into the market catering for these people, especially those who have repaid their credit.
Our Director Michelle Niziol advises on what you can do in What Mortgage magazine.
Getting a mortgage can be a minefield, especially if you have never done it before. The maze of knowing how much you can afford to borrow, how much you can afford to pay back each month, how long you want to pay your mortgage for and everything else that comes with it, can be daunting and unfathomable.
Since the global financial crisis in 2008 there has been a number of changes to the mortgage process which mean that lenders have to be more responsible about how they lend money and who they lend it to.
The introduction of the Mortgage Market Review in 2014 and the requirement for lenders to have more stringent stress tests in place, has meant that those applying for a mortgage now should be better protected against a hike in interest rates or a market crash than before the credit crisis. This is because lenders have to test your affordability and your ability to pay back your mortgage, based on current interest rates and any future hikes.
Whilst affordability is important to lenders, so too is your ability to pay back the loan.
Lenders are looking for applicants who can prove they are able to manage their finances – being able to show you can live within your means, pay bills on time, borrow money and pay it back when you are meant to.
But what do you do if you haven’t got a squeaky clean credit history? Maybe you haven’t been paying your bills, you’ve had a County Court Judgement (CCJ) against you or have been declared bankrupt.
Unfortunately, a blemished credit history is likely to lead to your mortgage application being declined by the majority of high street and mainstream lenders.
If you are declined, it is best to seek advice from an independent mortgage adviser about your next steps, as applying to a number of other lenders and being declined again in a short space of time, will also have an adverse effect on your credit file.
There is some good news though. Over the past year there has been a significant increase in adverse credit providers, such as Provident Financial, Magellan Home Loans and Pepper Home Loans. These lenders are niche, specialist providers of home loans known as adverse credit or what used to be called sub-prime mortgages.
This type of mortgage typically has a much higher interest rate than conventional mortgages, often three or four times more, sometimes up to a rate of 8%. Whilst this may not seem fair or appropriate for people who have a history of bad credit, the lender is taking a greater risk with its money and therefore will charge more against the risk.
It is also worth noting that lenders will expect you to provide a much larger deposit than conventional mortgage borrowers, typically around 30% but some require only 15%.
Although there is a growing range of mortgage lenders and products on the market for those with a poor credit rating, we would always recommend that you seek advice from a mortgage broker before doing anything. They can review your credit score, find out what your options are and work out the best plan forward for your individual circumstances.
If you know you can’t get a conventional mortgage because of your history, we would always recommend taking the time to get your finances in order. This is so you are best placed to get a conventional mortgage at a later date or at least a better rate on an adverse credit mortgage product.
Give yourself more time to save for a larger deposit and improve your credit history by showing that what happened in the past was a blip on your record and not a representation of how you manage your finances now.
For example, get a credit card with a £200 limit and use it for your petrol, making sure a direct debit is set up to repay it each month. That way you can show lenders that you can organise your finances and repay and manage credit. However, you should avoid multiple applications for credit facilities as this would adversely impact your credit score.
By taking steps like this to repair any past damage you are likely to get a better interest rate on your mortgage.
The option to fix your mortgage interest rate may be worth considering, especially if you have a history of missed payments. The rate you pay, and the monthly repayments, stay the same for whatever the fixed rate term is, for example, two, three or five years. This will ensure that there is certainty for that period of time, after which the option to review is available.
Bank statements are also extremely important when applying for a mortgage. You will need to present three months of bank statements as evidence of your outgoings and again, how you manage your finances.
You should make sure that you are not going over your authorised overdraft limit and ideally not in your overdraft at all. Make sure you have no bounced direct debits or late charges.
It is also vital to ensure you are on the electoral role.
We work with customers almost a year in advance of them purchasing a property and getting a mortgage. This is so we can understand their financial and personal circumstances completely. Not just looking at their circumstances now but what the future might look like – a couple looking to start a family or an elderly couple looking to retire and downsize. Every situation is different.
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