How to Secure an Adverse Credit Mortgage in the UK

Key Takeaways

1. Adverse credit mortgages are tailored for individuals with poor or damaged credit histories, offering a pathway to homeownership despite financial setbacks.
2. While interest rates are generally higher than standard mortgages, diligent research and comparison can help you find competitive offers from specialist lenders.
3. A larger deposit is often required for adverse credit mortgages, typically ranging from 15% to 30% of the property’s value.
4. Improving your credit score before applying can significantly increase your chances of approval and secure better terms.
5. Working with a mortgage broker who specialises in adverse credit can streamline the process, helping you navigate complex lending criteria and identify the best mortgage deals.

The dream of owning a home is a common aspiration, but for those with a less-than-perfect credit history, securing a mortgage can feel like an insurmountable challenge. Whether it’s due to past missed payments, defaults, or even a County Court Judgment (CCJ), adverse credit can create significant hurdles in your home-buying journey. However, all is not lost. Adverse credit mortgages, also known as bad credit mortgages, are specifically designed to help individuals in these situations.

This comprehensive guide will walk you through everything you need to know about adverse credit mortgages in the UK—what they are, how they work, the costs involved, and how you can improve your chances of securing one. By understanding the landscape, you’ll be better equipped to turn your homeownership dreams into reality, even if your credit history is less than ideal.

What is an Adverse Credit Mortgage?

An adverse credit mortgage is a type of mortgage designed for individuals who have a poor or damaged credit history. This could include late payments, defaults, bankruptcy, CCJs, or even previous mortgage arrears. Traditional lenders, such as high street banks, typically shy away from offering mortgages to individuals with such histories because of the perceived risk. However, specialist lenders cater specifically to this market segment, providing tailored mortgage solutions that take your unique circumstances into account.

How Does Adverse Credit Affect Your Mortgage Options?

Credit scores play a crucial role in determining your mortgage options. In the UK, credit reference agencies like Experian, Equifax, and TransUnion provide lenders with your credit score, which is used to assess your reliability as a borrower. A low credit score suggests a higher risk, which means you’re less likely to qualify for standard mortgage products.

Adverse credit mortgages are typically offered by specialist lenders who are more flexible with their lending criteria. However, this flexibility comes at a cost—higher interest rates and often larger required deposits. This is because lenders need to mitigate the risk associated with lending to individuals with a poor credit history.

Key Features of Adverse Credit Mortgages

1. Higher Interest Rates: Due to the increased risk, interest rates for adverse credit mortgages are generally higher than those for standard mortgages. These rates can vary significantly depending on the severity of your credit issues and the lender’s criteria.
2. Larger Deposits: Lenders typically require a larger deposit for adverse credit mortgages, often ranging from 15% to 30% of the property’s value. The higher the deposit, the lower the lender’s risk, which could also help secure a slightly better interest rate.
3. Flexible Lending Criteria: Specialist lenders offering adverse credit mortgages are more willing to consider factors beyond just your credit score. They may take into account your current financial situation, income, employment status, and the reason for your adverse credit.
4. Limited Product Range: The range of mortgage products available to individuals with adverse credit is usually more limited compared to those with a good credit history. You may not have access to the same variety of fixed, variable, or tracker mortgages available on the high street.
5. Shorter Terms: Lenders may offer shorter mortgage terms, meaning you might be required to repay the mortgage over a shorter period, which could result in higher monthly payments.

Can You Get an Adverse Credit Mortgage as a First-Time Buyer?

Yes, it is possible to get an adverse credit mortgage as a first-time buyer, but it does come with additional challenges. Lenders are often more cautious with first-time buyers, and when combined with adverse credit, this caution increases. Here’s what you need to consider:

• Deposit Requirements: As a first-time buyer, you’ll likely need a larger deposit. While a 5% deposit might suffice for a standard mortgage, expect to need at least 15% or more for an adverse credit mortgage.
• Guarantors: Some lenders might ask for a guarantor, typically a close relative who guarantees to cover your mortgage payments if you’re unable to. This reduces the lender’s risk and can improve your chances of approval.
• Government Schemes: Investigate whether you qualify for any government schemes like Help to Buy or Shared Ownership. While these schemes are typically aimed at helping first-time buyers with smaller deposits, you’ll still need to pass the lender’s credit assessment.

The Importance of a Good Mortgage Broker

Navigating the world of adverse credit mortgages can be complex, especially if you’re unfamiliar with the lending criteria and available products. This is where a mortgage broker, particularly one specialising in adverse credit, can be invaluable. Here’s why:

1. Expertise and Knowledge: A specialist broker understands the nuances of the adverse credit mortgage market and can match you with lenders most likely to approve your application.
2. Access to Specialist Lenders: Some specialist lenders don’t deal directly with the public and only offer their products through brokers. A broker can give you access to a wider range of mortgage options that you wouldn’t find on your own.
3. Tailored Advice: A broker can provide personalised advice based on your specific circumstances, helping you understand what you can realistically afford and what steps you can take to improve your application’s chances.
4. Saving Time and Effort: Applying for a mortgage with adverse credit can be time-consuming, particularly if you’re unsure of the process. A broker can handle much of the legwork, ensuring that your application is presented in the best possible light.

Improving Your Chances of Getting an Adverse Credit Mortgage

While your credit history is a significant factor, it’s not the only thing lenders consider. Here are some steps you can take to improve your chances of securing an adverse credit mortgage:

1. Check Your Credit Report: Before applying, get a copy of your credit report from all three major credit reference agencies. Check for any errors or discrepancies and have them corrected. This ensures that your credit report accurately reflects your financial situation.
2. Save a Larger Deposit: The larger your deposit, the more attractive you are to lenders. It reduces their risk and can sometimes help you secure a better interest rate. Aim for at least 15% to 20% of the property’s value.
3. Clear Outstanding Debts: If possible, pay off any outstanding debts before applying for a mortgage. This reduces your debt-to-income ratio, which lenders look at when assessing your ability to afford mortgage repayments.
4. Demonstrate Stable Income: Lenders want to see that you have a stable income and can comfortably afford the mortgage payments. If you’re self-employed, providing at least two years of accounts will strengthen your application.
5. Avoid Multiple Credit Applications: Multiple credit applications within a short period can negatively impact your credit score. Try to space out any applications and avoid applying for new credit in the months leading up to your mortgage application.
6. Consider a Guarantor: If your credit history is particularly poor, having a guarantor can significantly improve your chances of getting approved. The guarantor must have a good credit history and be willing to cover your mortgage payments if necessary.
7. Work with a Specialist Broker: As mentioned earlier, a broker can be instrumental in helping you find the right mortgage. They can also advise on improving your credit profile and strengthening your application.

The Costs of Adverse Credit Mortgages

When applying for an adverse credit mortgage, it’s essential to be aware of the associated costs. Here’s what you can expect:

1. Higher Interest Rates: As previously mentioned, the interest rates on adverse credit mortgages are higher than those for standard mortgages. This means higher monthly payments and more interest paid over the life of the loan.
2. Arrangement Fees: Many lenders charge arrangement fees for setting up the mortgage. These can range from a few hundred to several thousand pounds, depending on the lender and the complexity of the mortgage.
3. Valuation Fees: Lenders usually require a property valuation to determine the loan amount they’re willing to offer. Valuation fees can vary, typically starting from around £150 and increasing based on the property’s value.
4. Broker Fees: If you use a mortgage broker, they may charge a fee for their services. This can be a flat fee or a percentage of the mortgage amount. However, some brokers are paid by the lender, so it’s important to clarify this upfront.
5. Higher Deposits: As discussed, you’ll need a larger deposit for an adverse credit mortgage, which could mean saving for longer or reducing the amount you can borrow.
6. Legal Fees: Don’t forget about the legal fees involved in purchasing a property. These include solicitor or conveyancer fees, which typically range from £500 to £1,500 depending on the complexity of the transaction.

The Future: Can You Switch to a Standard Mortgage?

One of the potential benefits of an adverse credit mortgage is that it can serve as a stepping stone to a standard mortgage in the future. If you take steps to improve your credit score over time, you may be able to re-mortgage to a product with more favourable terms. Here