For many people, getting a mortgage is a big step because it gives them the chance to own a home and build financial security. However, for those with a less-than-perfect credit history, obtaining a mortgage can be an uphill battle. A bad credit mortgage can offer a lifeline to such individuals, but how does it differ from a traditional mortgage in the UK? This article aims to shed light on bad credit mortgages, their unique features, and their comparison to traditional mortgages.
What is a Bad Credit Mortgage?
A bad credit mortgage, sometimes referred to as an adverse credit mortgage or subprime mortgage, is a type of mortgage designed specifically for individuals with poor credit scores or a history of adverse credit events. Such events may include bankruptcy, County Court Judgements (CCJs), Individual Voluntary Arrangements (IVAs), defaults on loans, or missed payments on credit cards or loans.
How Does a Bad Credit Mortgage Differ from a Traditional Mortgage?
Credit Score Requirements:
The main difference between a bad credit mortgage and a traditional mortgage is the eligibility criteria. Traditional mortgages usually require a good credit score, demonstrating a history of responsible borrowing and timely debt repayments. On the other hand, bad credit mortgages cater to individuals with low credit scores or adverse credit histories, allowing them a chance to secure a mortgage despite past financial setbacks.
Interest Rates:
Bad credit mortgages typically come with higher interest rates compared to traditional mortgages. This is because lenders view borrowers with poor credit histories as higher risk of default, so they charge higher rates to compensate for the increased possibility of default. In contrast, traditional mortgages offer lower interest rates to borrowers with good credit, as they are deemed more likely to meet their repayment obligations.
Deposit Requirements:
When applying for a mortgage, people with bad credit are often asked to put down a bigger deposit. This is to provide the lender with additional security and reduce the loan-to-value (LTV) ratio. A lower LTV ratio means the lender is taking on less risk, as they are lending a smaller proportion of the property’s value. Traditional mortgages, on the other hand, usually require borrowers with good credit to put down a smaller amount of money.
Mortgage Terms:
Bad credit mortgages may come with shorter mortgage terms than traditional mortgages. This is because a shorter term reduces the lender’s exposure to risk, as the borrower has less time to default on their payments. However, this can also mean higher monthly payments for the borrower, as the mortgage amount is spread over a shorter period.
Loan Amount:
Lenders may be more conservative in their loan amounts for bad credit mortgages, as they want to minimise their risk. This means borrowers with poor credit may struggle to secure a mortgage for their desired property value. In contrast, those with good credit are more likely to secure a mortgage for a higher proportion of their property’s value, thanks to their demonstrated ability to repay debt.
Final Thoughts
Bad credit mortgages can provide a much-needed opportunity for individuals with poor credit histories to secure a mortgage and own a home. However, these mortgages differ from traditional mortgages in several ways, including higher interest rates, larger deposit requirements, shorter mortgage terms, and potentially lower loan amounts. It is essential for borrowers to carefully consider their options and work towards improving their credit scores to access better mortgage deals in the future.
Get a free initial consultation from a mortgage broker.
Related articles:
Can I still get a mortgage in the UK with a low credit score or a history of late payments?
What counts as “self-employment” when applying for a mortgage?
How to get a mortgage on a low income
How Much Deposit Do You Need for a Mortgage?
Top Tips for a Successful Bad Credit Mortgage Application
How Long Does It Take for a Mortgage to Be Approved?