Credit problems? Me?

The amount of money borrowed in the UK, including mortgages, has just passed the £1.2 trillion mark.

The old proverb “neither a borrower nor a lender be” has fallen out of favour as we borrow for things we want now instead of waiting to save up for it first.

Mortgages and loans secured on property make up the vast majority of these loans – 83 per cent – and the credit meltdown many have been predicting hasn’t come – yet.

But the fact is, with more people carrying heavier debt levels than ever before, the numbers of people refused a home loan by high street lenders is on the rise.

What are ‘credit repair’ mortgages?

Research in 2005 from non-conforming lender GMAC reveals that life-shocks, like unemployment, illness or relationship breakdowns can start the chain-reaction leading to missed mortgage and other debt repayments.

An estimated 10 per cent of all mortgage borrowers in the UK have already faced up to debt problems and remortgaged to a ‘credit-repair’ loan.

Credit-repair loans can be more expensive and have more inflexible terms than standard mortgages.

But these mortgages allow borrowers to consolidate their debts with a remortgage and ‘repair’ their credit file by proving they can repay debt responsibly. In most cases, this takes a minimum of two years before the borrower can remortgage back to a standard, lower-rate home loan.

The extent of your credit problems, how long ago they occurred and how much you wish to borrow will be reflected by the mortgage rate, terms and fees you will pay.

For bankrupts, most high street lenders only consider them again after six years with a clean record.

But for others, for example, some lenders only consider borrowers with deposits of over 30 per cent, and some deals will lock you into a higher rate after the initial rate has ended.

The vast majority of these loans are only available through mortgage advisers. But it’s a good idea anyway to get an independent mortgage adviser to help you through the labyrinth of hugely different charges and mortgage rates to find the best deal.

Buyer beware

Never be led by rate alone when choosing any kind of mortgage. The most competitive rates can sting you with high fees or even tie you to a mortgage beyond the low-rate period. These deals lock you in with high penalties, making it difficult to move to another lender even after your monthly repayments have risen, sometimes steeply.

“One of the main benefits of mortgage regulation is that mortgage advisers and lenders now have to show customers documentary evidence called the KFI (Key Facts Illustration) document, which makes comparing one product’s rates and fees against another’s much easier,” says Bob Sturges, spokesman for lender Money Partners.

However, also be careful how you pick your mortgage adviser. A recent ‘mystery shopping’ report unveiled sharp practice from rogue mortgage advisers taking advantage of vulnerable borrowers, sometimes desperate to consolidate debts at any price.

The report by mortgage adviser The Mortgage Champion found that shopping around for the right deal proved difficult and time-consuming because some advisers tried to sell too quickly instead of doing a thorough fact-find, or pushed customers into credit checks they didn’t want.

High-scoring mortgage advisers, commended for clarity on fees, openness and customer concern include John Charcol, Mortgage Sense and Weaver Finance.

When shopping around for a mortgage adviser, find out what fees they charge and make sure they can arrange a loan as quickly as possible from a good selection of lenders. Get to know the adviser first, never commit to anything and find out how much they charge.

“There are a breed of brokers who charge more than others, whereas others charge nothing at all, so pick the phone up and talk to a few brokers,” says Dev Malle, spokesman for Pink Home Loans.

“But the good news is that more mortgage advisers than ever are capable of dealing with ‘adverse’ clients well.”

Credit problems? Me?

“Generalisations about people with debt problems should be avoided,” says Jim Hodgkins, managing director of Experian’s free online credit-scoring service Credit Expert.

“Affluent career-orientated people are more likely to have good credit scores. But some of the wealthiest people can also be the worst payers of credit because they don’t pay attention to financial practicalities.”

Many potential borrowers have no idea that their credit records are impaired. Hodgkins adds: “There are plenty of younger people in their twenties applying for a mortgage now who never took debts like mobile phone bills seriously, forgot about missed payments and who are now applying for mortgages only to find mainstream lenders can’t help them.”

However, older generations still feel the stigma of debt problems acutely, whereas younger generations tend to be more relaxed about living with debt, suggests Ian Giles, director of marketing with Kensington Mortgages.

Find a best-buy mortgage here.