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Bad credit mortgages

Straight and Narrow

Previous financial problems no longer mean you can’t get a mortgage but, says Ben Wilkie, you need to know where to look.

When sales manager Simon lost his job after his company closed down, he wasn’t too concerned. There were plenty of other jobs out there, and he thought it would only take him a couple of weeks to get back into the rat race. But then Simon was injured in a car accident and it took him six months before he was well enough to start looking for another job. And in that time, his finances took a battering. And the aftermath lasted for years.

There are millions of people with stories like Simon’s, and for them, getting a mortgage may seem like an impossible dream. High street lenders are generally risk averse, so if you’ve had financial problems in your past, they feel you are more at risk from suffering the same fate twice.

But there are few barriers these days to being accepted for a mortgage and bad credit is no longer one of them. These days, you can have an extremely chequered financial past and still have lenders lining up at the door with handfuls of attractive deals.

But these lenders are unlikely to be household names. Adverse credit lenders, as they are known, are specialists. They provide a much more personal service and treat each application on its own merits.

Specialists
A number of them are subsidiaries of the household names - Birmingham Midshires is part of the Halifax, while First National Mortgage Company is owned by Abbey National. Others, such as Kensington Mortgages, stand alone.

The reason for the separation is that applications for adverse credit mortgages are dealt with in a completely different way. High street lenders try to operate on a one size fits all philosophy. They generally have a set of criteria, which if you fit in them, means you will get a loan. It’s not the same in the adverse market.

For those who have had problems in the past, the lender also looks at what caused them. For a large number of people, a single event caused people to get into trouble - redundancy, a serious illness or divorce are all common causes.


No credit
It’s not just people with credit problems in their past that these lenders can help. If you have no credit history at all, the high street may be loathe to take you on. If you have been living abroad for some time, or have had a partner who has dealt with all the family finances for many years you could still fail a credit score simply because the lender will have no evidence of your ability to repay any loans.

Although each case is treated individually, lenders bracket applicants with poor credit into three into three categories, light, medium and heavy adverse credit. There are no hard and fast rules as to how much bad credit you need to fit into each one.

But as a guide, light adverse would mean you had missed a couple of payments on a mortgage or other regular debit, or had maybe one County Court Judgement (CCJ) against you for a relatively small sum. Medium adverse would be three CCJs totalling less than £3,000, while heavy adverse could mean a bankruptcy that is only just spent.

But regardless of the category in which you are placed, the lender needs to be convinced that you have both the means and the intention to repay the mortgage.

Loans
The severity of your history will have a bearing on the type of loan you are able to get. And in the majority of cases, this will be reflected in the loan to value (LTV) you are able to get and the interest rate you will pay.

Some loans are not that different from the high street. You can get a LTV of 95 per cent, and the rates are extremely competitive. But in most cases, you will have to stump up a bigger deposit and pay a higher rate.

But if your problems are bigger, the terms won’t be quite so good. In some cases, you will have to provide a deposit of as much as 50 per cent, and your interest rate could be as much as five per cent above the base rate.

Care
The other difference to the high street with the specialist lenders is the long term care you’ll receive. Once you have your mortgage, with a high street provider, you’ll generally receive just a statement every so often, once a year with standard mortgages.

The lender will maintain contact with you throughout the duration of your loan, making sure that any potential problems are nipped in the bud before they become insurmountable. And if arrears do build up, these lenders have greater experience in helping you work through your problems.

Short term
The fact is that you are likely to be paying more for an adverse credit mortgage than on one you could find on the high street. The lenders know this and don’t expect you to be paying more for ever.

In effect, the time you spend with an adverse credit lender is spent preparing you for the high street. It’s known as credit repair: if you stay with the lender for a period of time - normally three years - and maintain your payments satisfactorily, you should then become eligible for a standard loan. In which case it’s time for you and your lender to part company.


You can request a copy of your credit file from either of the two companies
responsible for holding financial data on UK residents.

Experian Ltd
Consumer Help Service
PO Box 8000
Nottingham
NG1 5GX
0115 976 8747

Equifax
Credit File Advice Centre
PO Box 3001
Glasgow
G81 2DT
0870 010 0583


Lenders tend to place borrowers with a less than perfect credit history into
three groups:

Case study

Simon Allen didn’t think he’d have a problem getting a mortgage - he had a good job, and a pretty reasonable deposit. But when he visited his bank, he was amazed, and embarrassed, to be turned down flat.

The reason was a poor credit rating. “Basically about 18 months before my girlfriend and I had split up, and we gave up the flat that we were renting,” explains Simon. “I thought all the bills had been paid, but one slipped through the net - and money was still owing even after I’d cancelled the housekeeping account, which was in my name.”

That was a joint gym membership, which Simon had forgotten to cancel and accumulated a debt of almost £1,000. The gym had taken out a County Court Judgement against him, something he was completely unaware of.

“After I’d been turned down, I checked my credit record. It was a bit of a surprise,” he says. “But even after I paid off the debt, I still couldn’t get a mortgage.”

It was then that a friend recommended he visit a specialist broker, so Simon went to see what was on offer. “It was so easy,” he says. “There was so much on offer. I had a big deposit, so fulfilling the criteria wasn’t a problem, and there were plenty of deals out there. And the mortgage I ended up with doesn’t cost much more than what I was going to get from my bank.”

Simon says that once he’s had the mortgage for a couple of years, he’ll go back to see if he can get a better deal. “The adviser said that once I’ve proved I can keep up my mortgage payments, lenders will be falling over themselves to give me money!”



This article has appeared in Mortgage Magazine which is available in all good newsagents. Copyright MSM International Ltd
Published December 2005

 

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