Adverse Credit

Adverse Credit

Adverse credit mortgages are a type of loan that might be available to people who have had financial difficulties in the past. This guide explains what these products are, and how their costs may differ from mainstream mortgages. It also looks at some of the things to consider before taking out an adverse credit mortgage and gives answers to common questions about them. 

What is a 'non-conforming', 'sub prime' or 'adverse credit' mortgage?

These are mortgages specifically designed for people who do not qualify for a mainstream mortgage from lenders. They may be suitable in a variety of situations – for example, if you have had credit problems in the past or have difficulty proving a regular or reliable income.

Such situations are unfortunately increasingly common. Life-changing events such as divorce, unemployment and sickness can sometimes cause you to miss making payments on your mortgage or other financial commitments. These things happen to many people at some stage in their lives, but once such problems are behind you, they should not stop you applying for a mortgage.

Lenders and brokers such as ourselves who sell and provide mortgage advice are regulated by the Financial Services Authority (FSA). This means that they have to follow comprehensive rules on how mortgage advice and information is provided. This also gives you important protection as a customer, including access to an independent redress scheme (the Financial Ombudsman Service) if you have a valid complaint about how your mortgage is sold or administered.

This guide is designed to give you information on adverse credit mortgages, and give answers to some common questions. It specifically concentrates on 'adverse credit' mortgages for people who have had financial difficulties in the past.

What should you think about before taking out an adverse credit mortgage?

There are a number of things you should consider before taking out any mortgage. The FSA has a helpful leaflet No selling. No jargon. Just the facts about mortgages which explains how to shop around and understand what you are getting. You should read that leaflet as well as this one.

You should be aware that you are likely to have to pay a higher rate of interest for an adverse credit mortgage than for a mainstream one.

Who can you get an adverse credit mortgage from?

A number of lenders offer adverse credit mortgages. You can find information on the internet, in the personal finance pages of a newspaper or through mortgage magazines sold in newsagents. Some lenders only offer adverse credit mortgages through a mortgage intermediary or mortgage broker. As there are lots of different mortgages designed to suit individual circumstances, you may wish to use a mortgage broker who gives advice and who will be able to recommend a suitable product for you.

Make sure your broker and/or lender is regulated by the FSA. You can check this on the FSA's website.

What does a broker do and how are they paid?

A broker can help you find the right mortgage for your circumstances. They can either provide you with information and you can choose your own mortgage, or they can give you advice and make a recommendation on a mortgage.

When you contact a broker about a mortgage, they will give you a document telling you about the service they can provide; whether they consider all the mortgages in the market, a limited selection or just one lender's products; whether they will give you advice or not; and what they'll charge you for the service. This is called an Initial Disclosure Document (IDD).

Some brokers charge a fee for arranging the mortgage for you. They may also get a payment from the lender for selling you the mortgage.

Make sure you understand what service you will receive, what fees you will need to pay and when you need to pay them. You may have the option of adding these fees to your mortgage, but if you do so you will be charged interest on them, so they will cost you more in the long run.

Why are adverse credit mortgages more expensive?

The interest rate on a mortgage partly reflects the lender's assessment of how much risk there is that the borrower may fall behind with their payments. Statistically, people who have had credit history problems in the past are more likely to have problems in the future.

This means that there is a greater risk to the lender and therefore they charge a higher interest rate. If you have had serious credit problems in the past you will be charged a higher rate of interest than someone who has had more modest difficulties, such as a missed payment or two.

Can anyone get an adverse credit mortgage?

There are mortgages available for most types of credit problems including, if you have previously missed mortgage payments or had your house repossessed, have a County Court Judgement (CCJ), Individual Voluntary Agreement (IVA) or have been declared bankrupt. However, the more serious your past credit problems, the higher the cost of the mortgage will be. Lenders may also limit the amount they are prepared to lend compared to the value of the property (the loan to value (LTV)) more than they would do on a mainstream mortgage. You may also have to find a bigger deposit than you would for a mainstream mortgage.

The more you can show that your problems are in the past, or that you are trying to find ways to reduce your current debt, the wider the choice of mortgages that will be available to you.

What other costs are involved?

You are likely to have to pay costs that are associated with any mortgage such as set-up fees, a valuation fee and legal fees. You may also need to pay a fee to your broker for arranging the mortgage for you.

You should also check to see whether you need to keep the mortgage for a certain length of time, and whether there are any costs for paying back the mortgage early, known as early repayment charges (ERCs). Generally, these costs are a number of months’ interest or a percentage of the outstanding balance of your mortgage.

Can the lender change the interest charged on the mortgage?

You should check that you understand if the lender is able to change the interest on your mortgage and if so by how much and how often. The interest rate may be fixed for an initial period. The interest rate on adverse credit mortgages is often linked to either the bank base rate which is set by the Bank of England or something called LIBOR (the London Inter Bank Offer Rate) which is the interest rate at which banks will lend money to each other.

In particular, you should make sure that you can afford the mortgage repayments, not only during any initial period where the rate may be fixed or discounted, but after any such fixed rate or discounted period has come to an end. In addition, if you take out an interest-only mortgage, you should make sure that you have the means to repay the capital (the amount you originally borrowed) at the end of the repayment period. If your repayment period extends beyond your normal retirement age, you should also make sure that you have the means to meet your mortgage repayments during your retirement.

When you enquire about a mortgage your lender or broker will give you a Keyfacts illustration or KFI. The KFI is in a standard form set out by the FSA, this will help you to compare illustrations from different mortgage providers more easily. Further information can be found on the FSA's website. The website also has a jargon buster covering terms that you might come across.

What insurance do I need?

There are many types of insurance you can take out with a mortgage. Again, there is a lot of information on the FSA's website

The lender will require you to have buildings insurance to protect your home in case it is damaged or destroyed. You will also probably want contents insurance to cover your furniture and possessions against loss or damage.

There are various types of insurance that will pay off your mortgage or meet the monthly payments if something unexpected happens such as unemployment, critical illness or death. Whether they are right for you depends on your personal circumstances and you should read the FSA's separate leaflet on insurance products to see which ones you think you should take out. You can also get advice on insurance from your broker if you use one.

Will an adverse credit mortgage improve your credit rating?

Your credit rating improves if you pay off your debts regularly and do not miss payments. Some lenders offer specific 'credit repair' products where the interest rate improves the longer you make regular payments. If you are able to demonstrate that you are able to make regular payments for several years you may be able to remortgage on to a mortgage with a better interest rate.

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