Adverse credit mortgages are specialist products for people with a poor credit history.
If you’ve previously incurred mortgage or loan arrears, had a country court judgement (CCJ) issued against you or been declared bankrupt, you may struggle to find a conventional mortgage.
Many lenders are now offering adverse credit mortgages. They recognise that having had financial difficulties in the past is no indication of your ability to repay a mortgage today.
There are many degrees of poor credit and the adverse credit – or sub prime – market reflects this. Different lenders have different terms for these kinds of specialist mortgages but impaired, sub prime, non-conforming and adverse all mean essentially the same thing but vary according to the severity of your previous credit problems.
For example, light adverse mortgages are designed for people who are just on the edge of adverse credit. The rates and loan-to-value limits are lower than for those with poorer credit histories to reflect the differing level of risk to the lender.
Rates and costs
Interest rates tend to be higher for adverse credit mortgages because the lender is taking on more risk with someone who has had previous financial problems.
Competition means that rates are getting closer to standard variable rates (SVRs) but adverse rates aren’t ever likely to be competitive. Equally, early repayment charges (ERCs) still exist but are gradually coming into line with high street products.
You will, however, need to put down a bigger deposit than with a conventional mortgage – 30% and 35% deposits are quite common for heavy adverse credit mortgages.
Adverse credit lenders employ specialist underwriters to assess your case individually. They will also look at the reasons for your poor credit history and take these into account. For example, if you fell behind with your payments because of a divorce and then got yourself back on track, you are more likely to receive a favourable hearing than if you consistently run up large debts. They are assessing whether you can afford the repayments in the future.
You will be asked to provide full details of your finances, as well as proof of income and some proof of recent loan or mortgage repayments. This will help the lender to assess the severity of the credit problems and any potential risk involved.
If you have stayed with your lender for a period of time (usually around three years), successfully made your mortgage repayments over that time and have no outstanding defaults or CCJs you should have ‘repaired’ your credit rating.
This means you should be able to remortgage to a standard mortgage through your existing lender or another provider – obviously allowing for any tie-ins and ERCs. Generally, this should be as simple a process as remortgaging from any standard product.
Some lenders offer credit repair mortgages that help you to improve your credit status and reward regular repayments. Over a period of years, your annual interest rate is reduced and ultimately reverts to the lender’s SVR, providing you have maintained a spotless credit record throughout that period.
You don’t have to have CCJs against you to run into problems with simple credit checks and be refused a conventional mortgage – it can be because of very minor things. Some of the other reasons for refusal can include:
- Not having a credit record if you have lived abroad or are recently divorced
- Running into financial problems as a student
- Paying a bill late
- Failing to appear on the electoral roll
- Incomplete work or income history
Need to know
- Adverse credit mortgages can help people with a poor credit history
- They are also known as sub prime, impaired credit and non-conforming products
- Rates are higher than for conventional mortgages
- You may need a deposit of as much as 35%
- After a few years of making repayments successfully you can remortgage to a standard product
Information source: Mortgage Advisor & Home Buyer publication