Guides: mortgages
Adverse credit mortgages
Adverse mortgages are sometimes called non conforming mortgages or sub prime mortgages. If you have several unsatisfied County Court Judgments (CCJs), or a history of arrears on loan or credit card repayments, you will find it much more difficult to get a mortgage and may be required to put up a larger deposit and will have to pay a higher rate of interest than for a standard mortgage. This is because you are deemed to be a higher risk to the lender.
Unexpected events such as unemployment, illness or a relationship breakdown are common triggers for people to get into debt. In addition, the credit crunch has made it increasingly difficult to obtain a mortgage, but this becomes even more of a problem if you have a poor credit history.
If debts become unmanageable, homeowners can use their mortgage to consolidate more expensive debt they hold elsewhere, such as credit cards, store cards and personal loans.
Mortgage interest rates have traditionally been lower compared to the rates on credit and store cards – and even some personal loans – so, in some instances, it can make financial sense for homeowners to cut costs by remortgaging or borrowing an extra lump sum from their current lender. However by its nature a mortgage is generally a long term obligation so it may result in having to pay for the additional debt over many years.
But if you have missed a mortgage repayment, or defaulted on other loans, your current lender may not be willing to lend to you so if you want to remortgage, an adverse credit mortgage may be your only option.
There are now very few lenders offering adverse mortgages and their risk appetite for borrowers with serious credit blemishes is extremely limited. The number of adverse mortgage products available is tiny compared to the number that were available before the credit crunch.
County Court Judgments (CCJs)
If an unpaid creditor decides to take legal action against you, this can result in a CCJ. If you pay the debt, you avoid a court hearing. If you don’t, the judge will automatically make a 'county court judgment’ against you.
This order will be for either the amount agreed between you and your creditor or, if you can’t agree, a payment set by the court. CCJs remain on your credit record for six years, even if you have settled the debt.
Individual Voluntary Arrangements
These were established in the mid-1980s as a way for people or businesses in financial trouble to cut their debts and avoid bankruptcy. They are a legal contract between lenders and a borrower to pay back 30-50% of their debts through an agreed monthly repayment over five years.
Interest is frozen over the repayment period and as long as the debtor keeps up payments they are debt-free when the term is up. However, IVA holders have zero credit status and cannot apply for any credit during the term of the IVA.
To set up an IVA, 75% of the creditors have to agree to the proposal put forward by the individual's IVA practitioner. The IVA company will look at your income and outgoings and calculate how much you can afford to pay each month.
However, in recent years, some banks have been rejecting the terms offered by IVA companies on the grounds that they were only being offered around 40p in the pound of what they were owed. If this happens the IVA route is effectively blocked.
Do you need an adverse credit mortgage?
Before you apply for a home loan, it may be worth checking the records held on you by credit reference agencies. You can order a report online, by telephone, or by post from the three main credit agencies listed below:
Mortgage lenders automatically check your credit history and whether you are on the electoral roll when you apply for a mortgage. If there is any incorrect information on your file, like a debt listed as unpaid – when you can prove that it has been paid – you can tell the credit agency to erase it or add an amendment explaining the reason for the debt.
Warning!
Don’t be tempted to apply for credit recklessly. Each time you apply for credit, it shows up on your record, as a ‘footprint’ and too many applications for credit within a short period will not look good. If your credit record is poor, the next thing to do is find out how serious it is and amend any inaccuracies. Then shop around for the best deal through a mortgage adviser.
An adviser can also help you sift through the range of adverse credit mortgage loans. However, the number of lenders offering mortgages to customers with adverse credit has significantly reduced, and depending upon your circumstances it may prove difficult to obtain a mortgage.
How do I find a mortgage adviser?
It’s important to find a mortgage adviser you trust and who can provide a professional, transparent service. Any extra costs or charges should be discussed upfront and in particular, you need to know your options when any introductory rate comes to an end.
Mortgage advice is particularly important for those seeking an adverse mortgage.
What to ask/tell your adviser
- Do you offer mortgages and insurance from all mortgage lenders in the market or a limited selection? The greater the choice on offer, the better your chances of finding a competitive deal.
- Do you charge fees or commission? Some advisers will not charge you a fee. If so, is it a flat fee or a percentage of the amount borrowed? Paying a flat fee is usually far cheaper than paying a percentage of the mortgage loan.
- Do I qualify for a standard mortgage even though I have a few missed loan repayments?
- How long will it take to repair my credit record?
- I don't want a loan that is any longer than necessary.
A lighter shade of pale?
If your debt problems are minor, you will be regarded as ‘light adverse’ and you may be offered an interest rate, which is not much higher than the best standard rates. If you are ‘medium’ or ‘heavy’ adverse, the rate of interest charged could be double what a standard borrower would pay. It is more likely, given the lack of lenders in this market, that you will not qualify for a mortgage until your credit rating has improved.
Is an adverse credit loan worth it?
An adverse credit mortgage can help you achieve two things:
Firstly, if you take out an adverse mortgage because you couldn't get a standard mortgage, you can stay in your home despite your credit difficulties. Secondly, providing you keep up with repayments, these loans help you repair your credit status by proving you can stick to a credit arrangement, so mainstream lenders may consider you in the future.
Depending on the seriousness of your debts, some high street lenders may lend to you again after two years or so.
What was that name again?
Don’t worry if you have never heard of many of the adverse credit lenders mentioned by your mortgage adviser. Mainstream mortgage lenders often own companies – with a different name than their parent – offering specialist mortgages like buy-to-let and adverse credit.
Since the onset of the credit crunch there are far fewer adverse credit mortgage loans on offer than before. A good way to compare one deal against another is to use the Key Feature Illustration (KFI) for each mortgage you are offered. Features to compare include interest rate, deposit size, length of mortgage term, and the rate you 'revert to' after the initial deal has expired, plus any fees and extra charges you need to pay.
Fees and charges
Lenders require borrowers to pay higher fees and charges for adverse credit loans because of the extra work involved in vetting someone with a poor credit history. You should try to avoid having fees rolled up with the mortgage as you will have to pay interest on this for the lifetime of the mortgage.
Tie-ins
Watch out for loans with overhanging redemption penalties that lock you into the mortgage, even after the discounted deal has ended. Deals with a low initial repayment may be tempting. But you can find yourself between a rock and a hard place if you lock yourself into a rate which increases by £300 a month after a year, and the only way out is to pay a huge redemption penalty.
Be wary of mortgage advisers charging extortionate fees to arrange an expensive sub prime mortgage. You might be eligible for a standard or light adverse mortgage, which might pay the broker less commission.
Always shop around before you commit to an adviser or a loan and do check carefully the terms of the mortgage that you are being offered.
The future of self-certification
In the last quarter of 2009 the last lender offering a self-certification mortgage withdrew their products from the market. The FSA has proposed that it will be necessary in the future to have income verified in all cases thus making the self-certification mortgage redundant.
In the past few years many people have taken on a self-certification mortgage, and at present unless they are in a position to prove their income, it is unlikely that they will be able to do anything other than remain with their current mortgage provider.
The FSA in conjunction with mortgage lenders are currently deciding what criteria should be replied to any replacement product.
