Adverse mortgage fees: What you simply need to know before applying

If you’re considering taking out a mortgage in the UK but have a less-than-perfect credit history, you may have come across the term “adverse mortgage fees.” These fees can significantly impact the cost of your mortgage, so it’s essential to simply understand what they are, why they exist, and how you can minimise them.

In this guide, we’ll explore adverse mortgage fees in detail, helping you make an informed decision when choosing a mortgage deal.

Table of Contents hide

1 What are adverse mortgage fees?

2 Types of adverse mortgage fees

3 Why are adverse mortgage fees higher?

4 How to minimise adverse mortgage fees

5 Are adverse mortgage fees worth it?

6 Need expert advice?

7 FAQs

What are adverse mortgage fees?

Adverse mortgage fees are additional costs that lenders charge borrowers with poor credit histories, also known as adverse credit or bad credit. Lenders view individuals with adverse credit as high-risk borrowers, and this increased risk is reflected in the higher fees and interest rates associated with these mortgages.

Common reasons for having an adverse credit rating include:

• Missed or late payments on credit cards or loans
• County Court Judgements (CCJs)
• Bankruptcy
• Defaults on previous loans or mortgages

When applying for an adverse credit mortgage, you’re simply more likely to face higher upfront and ongoing fees as part of the deal.

Types of adverse mortgage fees

There are several types of fees you might encounter when applying for an adverse credit mortgage in the UK:

1. Arrangement Fees:
The arrangement fee is the most common fee associated with mortgages, whether adverse or not. For those with adverse credit, these fees tend to be higher. The arrangement fee covers the administrative costs of setting up your mortgage and can range from £500 to £2,000 or more, depending on the lender and your circumstances.
2. Higher Interest Rates: Though not strictly a fee, the interest rate you’re offered will almost always be higher if you have adverse credit. This is simply because lenders take on more risk by offering a mortgage to someone with a poor credit history. Even a small increase in interest rates can lead to significantly higher monthly payments over the term of the mortgage.
3. Valuation Fees: Lenders will require a property valuation to ensure it’s worth the amount they are lending you. Valuation fees can be higher for adverse credit mortgages, as lenders may want more thorough assessments to mitigate their risk. Expect to pay between £150 and £1,500, depending on the property value and the lender.
4. Broker Fees: Many people with adverse credit choose to go through a mortgage broker who specialises in these kinds of deals. While this can increase your chances of finding a suitable mortgage, brokers often charge a fee for their service. Broker fees can either be a flat fee or a percentage of the mortgage amount, typically around 1% of the loan.
5. Early Repayment Charges (ERCs):
If you decide to pay off your mortgage early or switch to a different lender during a fixed-rate period, you may face early repayment charges. For adverse credit mortgages, these fees can be more punitive, making it more expensive to exit the deal early.
6. Lender’s Legal Fees: Some lenders charge legal fees to cover their costs in processing your mortgage. These fees are typically around £300 to £600. For those with adverse credit, these fees may be slightly higher.

Why are adverse mortgage fees higher?

Lenders use credit histories to assess the risk of lending to borrowers. When you have an adverse credit record, it signals that you may have struggled with debt repayment in the past. As a result, lenders charge higher fees and interest rates to protect themselves from the possibility of future missed payments.

Additionally, the UK mortgage market for adverse credit borrowers is simply smaller, meaning there’s less competition, which can drive fees up. Some lenders specialise in adverse credit mortgages, and their expertise and higher risk tolerance come at a cost.

How to minimise adverse mortgage fees

While adverse mortgage fees are often unavoidable for those with poor credit, there are steps you can simply take to minimise these costs:

1. Improve Your Credit Score: One of the most effective ways to reduce fees is to work on improving your credit score before applying. Make sure you’re on the electoral roll, pay off outstanding debts, and avoid any new credit applications in the months leading up to your mortgage application.
2. Compare Mortgage Deals: Don’t settle for the first offer you receive. Use comparison sites or consult a mortgage broker who specialises in adverse credit mortgages to shop around for the best deal. Even small differences in fees and interest rates can save you thousands over the life of your mortgage.
3. Consider a Larger Deposit: The larger the deposit you can put down, the less risk the lender is taking. A deposit of 25% or more can often help you access better mortgage deals with lower fees, even if you have adverse credit.
4. Negotiate Broker Fees: If you’re working with a broker, don’t be afraid to negotiate their fees. Some brokers are willing to reduce their rates, especially if you’re taking out a substantial loan.
5. Plan for the Long Term: While adverse mortgage fees might be high initially, it’s essential to think about the long-term costs. Once your credit score improves, consider remortgaging to a more favourable deal with lower fees and interest rates.

Are adverse mortgage fees worth it?

While adverse mortgage fees can add significantly to the cost of your mortgage, they often offer a lifeline for those who have struggled with credit in the past. If you’re unable to qualify for a traditional mortgage due to your credit history, an adverse credit mortgage might simply be your best option, even with the additional fees.

The key is to be fully informed about the costs involved and to take steps to minimise these fees where possible. By improving your credit score, comparing deals, and considering a larger deposit, you can reduce the financial impact of adverse mortgage fees.

Need expert advice?

If you’re unsure about your options or want to explore adverse credit mortgages in more detail, simply consult a specialist mortgage broker. They can help you navigate the complexities of the market and find the best deal for your situation.

FAQs

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