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Adverse credit mortgages

It’s not just high house prices that make things difficult when it comes to getting a mortgage. Bad credit plays it’s part too There’s no two ways about it – having adverse credit is not good news. A bad credit rating usually occurs as a result of defaulted or late payments on any form of borrowing from store cards to mortgages. This can often result in a CCJ (County Court Judgment) against you and even once this has been paid off it will ‘infect’ your credit score, which is held by reference agencies Experian and Equifax, for a six-year period.

The result of this, depending on the severity of your credit problems, is that you could find it difficult – or perhaps impossible - to get a mortgage and in turn buy a house. But while most high street banks and building societies may give you a flat refusal, the ‘adverse credit’ (or ‘sub-prime’ market) is a whole new ballpark to explore. To enter it though will mean less choice and flexibility of mortgages, higher interest rates and more complexities to get your head around – for example different lenders have different outlooks on the varying levels of adverse credit. So begin by familiarising yourself with the broad picture of adverse credit and the mortgage it could translate into for you…

Situation One: Near-Prime

Being a near-prime mortgage applicant means you may have had a small (say £500) CCJ, which you cleared quickly years ago – or perhaps you once struggled with meeting some credit card repayments. Either way you are a stone’s throw away from the most bog standard high street loan. In this case then, don’t move further than a stone’s throw away to find it, says Pete Gettins, product analyst at mortgage broker, London & Country. “There is a whole new market springing up that caters for near-prime cases which is great news for the consumer,” he says. “So if you consider you might fall into this category, your first port of call should be straight to a mainstream lender to see what it can offer.”

Gettins sites Abbey and Bristol & West as two leading high street lenders in the near-prime arena. Joe Wiggins, spokesperson for Abbey comments: “It is not the case that we are less prudent lenders but we will look at applicants on a case by case basis. We focus on whether the borrower is able to afford the mortgage rather than drawing a line through the application just because they once had a CCJ.” He adds: “On this basis there are no ‘special products’ designed for borrowers who have had adverse credit. If we consider them to be able to afford the loan, all products will be available.”

Situation Two: Light adverse credit

If however, you have a couple of thousand pounds worth of CCJs – satisfied or not - you may find your situation constitutes ‘light adverse credit’. This is probably the point at which you should enlist the help of a broker, who will be able to source a loan on your behalf. But be warned – some brokers in the sub-prime market take advantage of those in need by charging a whacking fee. Grosvenor Mortgage & Finance for example gives a benchmark of three per cent of the loan as the amount it will charge. On a £100,000 mortgage this amounts to an eye-watering £3,000. Alternatively, a fixed fee could be levied. Broker TML Financial Services for example charges a flat rate of £1,995. “But there is no need to pay at all,” stresses Gettins of fee-free L&C. “Charging any sub-prime borrower any broking fee means hitting those least able to pay.” Within this light adverse field you may also still be referred to a high street lender. Norwich & Peterborough for example has recently dipped a toe into the ‘light adverse’ waters after finding that a growing number of local applicants were not fitting its standard criteria. “We are not going to be aggressive players in this market but did want to meet growing demand,” explains head of communications at the lender, Alison Rolls.

Situation three: Medium Adverse Credit

This is where you might have around £5,000 worth of CCJs – some in the last six months - that are still unsatisfied. It could also be that you have missed more than one mortgage repayment in the last 12 months. At this point most high street lenders have dropped out of the game. Instead your broker will refer you to an intermediary lender, which as the name suggests, will only receive business through intermediaries (or brokers).

Some of these might be a subsidiary of a high street lender such as BM Solutions, which is part of Halifax. Other intermediary lenders such as GMAC and Kensington Mortgages are adverse lenders in their own right.

“We only take mortgage applicants through intermediaries as it is very costly to market what we do,” says Mike Cook, head of products at Kensington. “And as applicants will range from company directors to those who are on the real edge of affordability a broker can explain from the outset what is the best solution for their situation.”

If you are a purchaser (someone who does not already have a mortgage) with medium adverse credit, you might be offered Kensington’s discount product. It runs for up to 15 months and is currently priced at 6.7 per cent, reverting to 8.7 per cent at the end of the period. It is available at 90 per cent LTV and comes with a £499 completion fee. Bear in mind a broker fee may also be payable.

Situation Four: Heavy adverse credit

If you find yourself in the heavy or ‘high’ adverse credit boat – which could mean unlimited CCJs and mortgage arrears in the last six months and/or a discharged bankruptcy - expect to pay through the nose as well as stump up a bigger deposit. For example, if you have both mortgage arrears and CCJs, one mortgage you might be offered from Kensington is its two-year discount, which starts at 7.2 per cent, after which you will revert on to its Standard Variable Rate with loading that will bring the rate up to 9.2 per cent. The deal – available for purchasers - lasts for up to 15 months, comes with a £499 completion fee and requires a 15 per cent deposit.

Although rates like these could send shivers down your spine, there is a silver lining. “In the past the standard duration that a borrower would have to stay on an adverse product before they proved themselves to the high street was three years,” says Gettins. “But this is changing and now two years is widely accepted.” In addition, at around the £500 mark, mortgage-related fees are now almost in line with the high street. And if you do your homework, you can forfeit any broker fee or higher lending charge chopping thousands your loan. “So,” says Cook from Kensington, “it’s not so much a case of ‘last chance saloon’ these days but an opportunity to get back on your feet and clear your debts.”

Did you know?

Research conducted in 2004 by adverse lender GMAC, showed there was little difference between the demographic of a standard and adverse credit borrower. In fact, most adverse borrowers fell into the 35 to 44 years age bracket and were on higher-than-average incomes. Rather than bad management of money, this can be attributed to life events such as ill health, divorce or the demise of a business, all of which are more likely to happen in the middle years of life, the report says.

Watch out!

A so-called higher lending charge, which can apply to mainstream mortgages if you are borrowing more than 95 per cent Loan to Value (LTV), often kicks in at 75 per cent LTV when it comes to adverse credit mortgages. This means you can be charged between five and seven per cent on any borrowing over 75 per cent, adding thousands onto your loan. Kensington and GMAC are two lenders that do not charge higher lending fees.

Case study

Rebecca Graham, 55 and her partner, 47-year old construction worker, Tony Cook have just come to the end of an expensive three-year deal with GMAC where they were paying a variable rate of 7.24 per cent – although this had previously been a lot higher. “We already had one CCJ that we were unaware of and then, a few years back, got another one when we could no longer service a £15,000 development loan we took from NatWest,” says Rebecca. “We were half way through building our barn conversion and living in a caravan so it was a stressful time.”

The couple had taken the loan reluctantly from a local broker, as they knew their credit situation presented them with little choice. “I don’t know if it was the best one on the market but the repayments nearly crippled us,” says Rebecca. “I was waiting for the day when we could leave the loan without paying a redemption penalty.”

When that day came in March this year Tony and Rebecca went to fee-free broker, London & Country. “As the CCJs were satisfied two years ago, our recent payment history was good and we had a large deposit, we qualified for an Abbey tracker with an initial payrate of 4.84 per cent,” says Rebecca. “Straight away, this means a saving of £350, which will make a huge difference.”

This article has appeared in Mortgage Magazine which is available in all good newsagents. Copyright MSM International Ltd

 

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