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It's sometimes easy to forget that a lot of people get into difficulty with debt each year. According to figures by Registry Trust, the number of County Court Judgements (CCJ's) issued in England and Wales for 2021 was 36% higher than for 2020. There are more than 4 million people in the UK with a CCJ registered against them which is equivalent to 1 in 13 of the adult population. The Money Charity Statistics for December 2022 said that 338 people a day were declared insolvent or bankrupt in England and Wales from August to October 2022. That is equivalent to one person roughly every 4 minutes. The Citizens Advice Bureaux for England and Wales dealt with 2105 debt issues every day in the year to November 2022. So how do the millions of people who have bad credit histories buy homes, move house or simply refinance their current mortgages when their deal runs out? In this blog, we are going to explore how to get a mortgage with a bad credit rating because contrary to the myth there are options out there.
What does it mean to have bad credit?
Bad credit is a term used to describe someone who has a poor credit score or someone with a previous credit problem. It is generally associated with a history of late or missed payments, defaults on loans and other negative financial activity. In the UK there are Credit Reference Agencies, such as Equifax and Experian, which pull together information about every person's financial activity and their conduct in repaying their commitments and debts. They then build a profile around each person and score their activity based on a framework that gives points to certain activities. For example, you could get points for being registered on the Electoral Register, paying your debts on time or having a bank account. You may have points deducted for missing payments, taking out lots of new credit or even moving home. In reality, the score is just an indicator and doesn't mean much. What is more important is the information that is in your credit profile and how this can either help or hinder you from getting mobile phone contracts, insurance and new credit such as mortgages. The more 'blips' you have in your credit profile the worse your score will be and the harder you will find it to get credit plus some 'blips' are worse than others.
Getting a bad credit mortgage
The mainstream high street banks and building societies are usually geared up for customers they see as lower risk. They offer competitive mortgage interest rates to people they believe will pay them back without any issues cropping up further down the line. They, therefore, have a very narrow view of who they will lend to and on what terms. However, there are specialist lenders out there that take a much broader view of a person's previous financial history and take the time to get a complete picture without just relying on credit scores. The mortgages they offer are just the same as the mortgages offered by the high street banks but aimed specifically at people with a poor credit score or history. The main difference will be the interest rates will be higher than in the mainstream. How much higher will depend on you, your credit profile, how long ago any issues were and how bad things got. In some circumstances, they may ask for a higher deposit to be paid as additional security. You can read a lot more about bad credit mortgages on our site. We have also put together a bad credit mortgage calculator to show how much you may be able to borrow, and a mortgage check tool to see if you will have any eligibility issues.
Can you actually get a mortgage with bad credit and what are the ways around it?
It may be more difficult to get a mortgage with bad credit but there are solutions out there. Specialist lenders have wider lending criteria to include more people and carry out different checks rather than just relying on credit scores. In exchange for taking on a higher risk, they charge a slightly higher interest rate. However, the specialist lenders will still want to make sure that you will pay back any money they lend you. They will ask for explanations of what events led up to your credit issues. for example, it may have been a drop in income when you had a baby or lost your job through illness. Whatever the reason they will need to know that your financial stability has improved and that you can demonstrate recent responsible borrowing behaviour. There may be some credit history issues that they simply ignore such as utility defaults or one-off missed payments. Many specialist lenders will also take a more open-minded view of CCJ's, debt management plans and previous bankruptcy. You can still improve your chances of getting a positive result or even a lower interest rate by having a regular income which you can prove, paying your bills on time, and keeping debt levels low and stable. The main key to success is research. By understanding which specialist lenders are available to you and their individual lending criteria, you massively improve your chances of a positive outcome. This is where a mortgage broker who understands you and the market can come into their own, saving you time and money. They will have up-to-date information on all the lenders, their rates and criteria and even be able to have conversations with key contacts to improve your end outcome.
Ways your credit score can actually help you get a mortgage
Specialist lenders will often have different tiered products available at any one time with lower-risk customers starting in the lower tiers and moving through to high-risk customers in the higher interest rate tiers. For example, if you have missed a payment or had a small default registered 3 years ago you could get into the lower tier, lower interest rate products. If you have 4 unsatisfied defaults, a debt management plan and have previously been a discharged bankrupt you will definitely be in the high-risk, high-interest tiers. So what can you do to improve your chances of being accepted and getting a lower-interest product? Focus on your credit profile and money management. Making sure your income is higher than your outgoings (i.e living within your means), consistently paying your bills on time, and not relying on short-term credit like payday loans will certainly help. Also keeping your borrowing to a minimum and not carrying out lots of credit checks will improve your credit profile. There are also some less obvious things you can do such as making sure your address is up-to-date with the bank and other credit providers, that they have your correct name and that you are registered to vote. A combination of all these things will demonstrate that you are a responsible borrower, can manage your finances and, in their mind, are much more likely to pay them back on time. This all adds up to lower interest rates, lower set-up costs, improved access to more lenders and ultimately decreases the costs of borrowing money over the life of the loan.
What to do next if you’re wondering how to get a mortgage with a bad credit rating.
A good starting point is to make sure you know exactly what is in your credit report. You can usually get these for free online but if you need help with this please get in touch. Remember it's not just about the score but the detail.
Get the basics right: manage your money well, pay your bills on time, don't borrow money if you don't need to, try to build savings and pay down any high-balance, high-interest debt.
Make a plan: Setting out how much time you have before you need to get your next mortgage and what steps you will take along the way. Start getting documents together that you know the lender will need such as pay slips, bank statements and evidence debts have been cleared. Write down what events led up to the bad credit being on your profile, what steps you took to address it and paint a picture of how you have managed your finances since and why this is unlikely to happen again in the future.
If you want to know more about getting a mortgage with bad credit contact us at Twin Pine Mortgages. We can start by helping you narrow down a list of lenders and support you in getting your new bad credit mortgage sorted out.