It can be difficult to find a lender willing to offer you a mortgage if you have had past credit problems. But all is not lost – new lenders are coming into the market catering for these people, especially those who have repaid their credit. Michelle Niziol, director of IMS Group, advises on what you can do
Getting a mortgage can be a minefield, especially if you have never done it before. The maze of knowing how much you can afford to borrow, how much you can afford to pay back each month, how long you want to pay your mortgage for and everything else that comes with it, can be daunting and unfathomable.
Since the global financial crisis in 2008 there has been a number of changes to the mortgage process which mean that lenders have to be more responsible about how they lend money and who they lend it to.
The introduction of the Mortgage Market Review in 2014 and the requirement for lenders to have more stringent stress tests in place, has meant that those applying for a mortgage now should be better protected against a hike in interest rates or a market crash than before the credit crisis. This is because lenders have to test your affordability and your ability to pay back your mortgage, based on current interest rates and any future hikes.
Whilst affordability is important to lenders, so too is your ability to pay back the loan.
Lenders are looking for applicants who can prove they are able to manage their finances – being able to show you can live within your means, pay bills on time, borrow money and pay it back when you are meant to.
But what do you do if you haven’t got a squeaky clean credit history? Maybe you haven’t been paying your bills, you’ve had a County Court Judgement (CCJ) against you or have been declared bankrupt.
Unfortunately, a blemished credit history is likely to lead to your mortgage application being declined by the majority of high street and mainstream lenders.
If you are declined, it is best to seek advice from an independent mortgage adviser about your next steps, as applying to a number of other lenders and being declined again in a short space of time, will also have an adverse effect on your credit file.
New lenders
There is some good news though. Over the past year there has been a significant increase in adverse credit providers, such as Provident Financial, Magellan Home Loans and Pepper Home Loans. These lenders are niche, specialist providers of home loans known as adverse credit or what used to be called sub-prime mortgages.
This type of mortgage typically has a much higher interest rate than conventional mortgages, often three or four times more, sometimes up to a rate of 8%. Whilst this may not seem fair or appropriate for people who have a history of bad credit, the lender is taking a greater risk with its money and therefore will charge more against the risk.
It is also worth noting that lenders will expect you to provide a much larger deposit than conventional mortgage borrowers, typically around 30% but some require only 15%.
Although there is a growing range of mortgage lenders and products on the market for those with a poor credit rating, we would always recommend that you seek advice from a mortgage broker before doing anything. They can review your credit score, find out what your options are and work out the best plan forward for your individual circumstances.
Repair your credit
If you know you can’t get a conventional mortgage because of your history, we would always recommend taking the time to get your finances in order. This is so you are best placed to get a conventional mortgage at a later date or at least a better rate on an adverse credit mortgage product.
Give yourself more time to save for a larger deposit and improve your credit history by showing that what happened in the past was a blip on your record and not a representation of how you manage your finances now.
For example, get a credit card with a £200 limit and use it for your petrol, making sure a direct debit is set up to repay it each month. That way you can show lenders that you can organise your finances and repay and manage credit. However, you should avoid multiple applications for credit facilities as this would adversely impact your credit score.
By taking steps like this to repair any past damage you are likely to get a better interest rate on your mortgage.
Fix your mortgage
The option to fix your mortgage interest rate may be worth considering, especially if you have a history of missed payments. The rate you pay, and the monthly repayments, stay the same for whatever the fixed rate term is, for example, two, three or five years. This will ensure that there is certainty for that period of time, after which the option to review is available.
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Examples of payments
Specialist lender Precise Mortgages currently has a range of mortgage products available for those with a less than perfect credit history, including residential, remortgage, Right to Buy and Help to Buy products. These examples are for two-year fixed rate deals.
Case 1
Based on an average loan of £150,000, paid over a 25-year term
Repayment @ 75% loan-to-value (i.e. 25% deposit)
Fixed interest rate for two years of 3.34%
Monthly payments = £783.13
Term TAP* is £254,393.84**
Case 2
Based on an average loan of £150,000, paid over a 25-year term
Repayment @ 80% loan-to-value (i.e. 20% deposit)
Fixed interest rate for two years of 6.04%
Monthly payments = £970.12
Term TAP* is £275,961.76**
* Term TAP = Total Amount Paid over the 25-year term of the mortgage if you took the fixed rate for two years and then move onto the lender’s standard variable rate (SVR).
For Case 1, the 75% LTV product, the SVR is currently 4.80%.
For Case 2, the 80% LTV product, the SVR is currently 5.30%.
** The product has upfront fees. All interest rates quoted are correct as of 02.11.2016. Mortgage products can be withdrawn by lenders at any time.
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Think ahead
Bank statements are also extremely important when applying for a mortgage. You will need to present three months of bank statements as evidence of your outgoings and again, how you manage your finances.
You should make sure that you are not going over your authorised overdraft limit and ideally not in your overdraft at all. Make sure you have no bounced direct debits or late charges.
It is also vital to ensure you are on the electoral role.
We work with customers almost a year in advance of them purchasing a property and getting a mortgage. This is so we can understand their financial and personal circumstances completely. Not just looking at their circumstances now but what the future might look like – a couple looking to start a family or an elderly couple looking to retire and downsize. Every situation is different.
Michelle Niziol is founder and director of mortgage broker IMS Group, based in Bicester, Oxfordshire. You may recognise her, as she was a contestant on The Apprentice 2016.
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Expert advice from a specialist lender
What Mortgage spoke to Matt Andrews, managing director of specialist lender Bluestone Mortgages, about what you can do to improve your credit rating.
What advice would you give someone who has had past credit problems, whether they are first-time buyers, home movers or remortgaging?
Unfortunately, many high street lenders quickly disregard hard working people who fail to meet traditional credit scoring models, due to their strict and automated nature.
These lenders do not take into account personal situations, such as self-employment, contractors with complex incomes, or those with adverse credit history due to a genuine bump in the road, but who are otherwise responsible borrowers, leaving many feeling isolated and unable to access loans.
As an industry, we need to strive to make sure we do not turn away perfectly good borrowers by simply ignoring an individual’s personal circumstances.
For the growing number of consumers who sit outside of the ‘perfect borrower’ category and struggle to get access to lending, an accurate and personal underwriting experience is needed to ensure that each case is given the best advice and options available to them and their individual circumstances.
In order to do this, we advise talking to advisers and brokers who take the time to listen and truly understand a customer’s individual and personal financial needs. At Bluestone, we feel strongly that these underserviced people deserve a lender that can provide affordable solutions suited to their lifestyles.
When applying for a mortgage, ask your broker which lenders manually underwrite every application. This will ensure that applications are being treated on a case by case basis, the loan products are suited to a borrower’s specific financial needs, are affordable, and sustainable in the future.
On every step of the housing ladder, whether a first-time buyer, home mover or someone looking to remortgage, communication is key, especially with the broker. With a broker’s specialist knowledge and experience a borrower can be sure that they are being offered the right mortgage and reliable advice throughout the decision making process.
Ultimately, brokers work with lenders to help provide the human touch that people with complex financial situations need. A broker can be contactable at all times throughout the application process, keeping all parties informed and aiming to make not just a fast decision, but the right decision in a timely manner.
What advice would you give someone who still has credit problems but is working through them?
For someone who still has credit problems, it is even more crucial to find a lender and broker who truly understands their current financial situation, how they got there and where they want to be. A current credit problem can make it very challenging for genuinely responsible borrowers to find an affordable mortgage. Many high street lenders exclude adversity either directly or indirectly through their credit scoring systems.
There is a significant difference between a customer that has poor borrowing behaviour, or irresponsible spending patterns, and a customer that has a responsible attitude towards credit, but has experienced a genuine bump in the road: illness, accident, job loss, marital split, separation, or in the case of the self–employed, a one-off event that impacted their ability to trade such as an increase in commercial rents, stock theft, vandalism etc.
Bluestone has over 10 years’ experience supporting these customer populations and we believe they need a champion that is prepared to invest the time and effort into underwriting genuine customer situations rather than adopt a blanket approach to excluding adversity.
General tips
In terms of some general tips for these borrowers looking to secure a mortgage, it could be helpful to use a budgeting tool to see exactly where their money goes each month.
Individuals may also be able to improve their credit score if they correct anything that may be wrong on their credit reference file before applying for a loan. Get any incorrect information changed or removed and add a correction notice to explain any special circumstances.
Lastly, it may also be beneficial to set up a guarantor for those times when you need a little extra help. If you are using a guarantor to borrow, try to pick a guarantor who is likely to have a good credit record.
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