Normally mortgage companies salivate for your business, but if you've a poor credit history they're more likely to spit. They want to lend you the money, and reap the cash in safety. Any hint of risk and they run or raise the price. It's not personal, just the result of computer predictions of your behaviour.
What's adverse credit and how can it affect you?
Adverse credit can mean anything that doesn't follow the usual pattern. It used to mean you were forced to pay hugely over the odds, but increased competition's changing things.
Even some high street lenders will give you a mortgage, however their criteria are strict. The absolute worst case is repossession, however if you've just got a CCJ (County Court Judgement) or limited arrears, you may be lucky. If you've a big deposit, it'll help.
Abbey National, one of the more liberal lenders, is keen to point out it doesn't take on high-risk cases.
However, Nigel Shepherd, head of its specialised underwriting team says, “when credit scores reveal people are on the edge of normal acceptability, we've a team who look at their cases individually. This means there's more room for them to get through, especially if they've a pre-existing relationship with us.”
If high street lenders won't lend you the cash, specialist lenders in what's called the tertiary or sub-prime market, almost certainly will, but for a price.
Alastair Pate, head of marketing at Kensington Mortgage Company comments, "we offer mortgages to higher risk borrowers rejected by the high street and stay profitable because our higher interest rates reflect that risk.”
It also uses individual assessment methods. The worse your credit history the more it charges. Often it's worth pausing for six or twelve months to improve your credit profile and lower your mortgage rate.
How can a sub-prime mortgage help?
Sub-prime mortgages are a way of rehabilitating your credit – meet all the payments and after a few years you should be able to remortgage to a normal lender. It isn't without its risks. Although there are many reputable companies out there, there are a few aiming to screw people in vulnerable situations and squeeze usurious amounts of cash out.
Thankfully it's nowhere near as bad as a couple of years ago. Igroup, one of the big sub-prime lenders which used to provide some of the more askance mortgages is now registered with the Mortgage Code Compliance Board. As a result, the brokers that doled out its mortgages have had to do the same, clearing out many of the sharp practices.
Important checks to make first
If you're looking into sub-prime mortgages there are some important checks to make:
- Interest rate: This shouldn't be more than 4.5% above UK bank base rates. If possible try for a lender whose standard mortgage rate is set in relationship to either
- Redemption penalties: These tie you to the mortgage with swingeing penalties if you choose to pay it off early or switch to another lender. They're unavoidable in the sub-prime market, but ensure they don't last for more than three years. Longer penalties would prevent you remortgaging once you've rehabilitated your credit status.
- Avoid missed repayment penalties: A big warning. Don't get a mortgage which has penalty clauses for missed repayments. These can spiral you into disastrous finances, heaping bigger debts on you when you can't pay. Some dodgy operators structure their loans to maximise the chance of repossessing your property.
Taking an interest only sub-prime mortgage is a useful tactic. Usually this involves repaying just the interest on the mortgage and setting up an investment to build up the money to pay off the capital at the end of the term.
However, as sub-prime's more expensive, one way to keep initial costs down is to just pay the interest but not set up a repayment vehicle. This is only for the more financially sophisticated though.
The aim should be to switch to a normal repayment mortgage which also pays the capital back after a few years. However you have to be careful and disciplined not to let it slip. If there's any doubt, don't bother.
However without wishing to be a party pooper, stop and clinically consider whether you can truly afford the repayments and more importantly could you afford them if interest rates rose by say 3%. If not, you're trapping yourself into further debilitating debt and run the risk of losing your home.
What do lenders use to decide if you're credit worthy?
- The application form. Fill it out carefully as this is their primary source. It's where lenders obtain details of your salary, family size, reason for the loan and whether you're a home owner.
- Your relationship with the lender. They use their knowledge of any dealings you've previously had with them in their assessment.
- Credit reference agency files. A whole raft of details are obtained from one of three companies, Equifax, Experian and Callcredit which compile files on every UK individual. These files contain electoral roll information which details who you live with, information on County Court Judgements (CCJs) and bankruptcies, and they also process around 200 million pieces of financial data on all your payments and transactions from banks and building societies.
You can check your reference files by writing to them enclosing a cheque for £2 to both Experian Consumer Help Service,
Click on the following link for sources of daily updated best buy mortgage information and reliable brokers for sub-prime mortgage getters
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