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Many people have experienced credit difficulties at one time or another. Estimates suggest one in the five people have been turned down for a mortgage in the UK as a direct result of debt.
Bad money management is partially to blame, but many mortgage lenders have also become more cautious over the applicants they are willing to lend to. Industry statistics suggest around 10 per cent of UK homeowners with a mortgage have an adverse status - also known as sub-prime or non-conforming - home loan.
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Adverse credit mortgages are for borrowers with a poor credit status.
Few people check their credit record on a regular basis, so they don't know that any missed repayments, say, from a mobile phone or even a mortgage payment may have left a black mark on their credit record. The fact is few high street lenders consider mortgage applicants with a problematic credit history.
Some standard mortgage lenders are willing to lend to applicants with relatively minor debt problems, for example, a £200 settled County Court Judgement.
But because mortgage lenders see mortgage applicants with serious past credit problems as a bigger risk than a borrower with a clean credit record, adverse credit mortgage loans are more expensive and offer less flexible terms.
For example:
Those with say, six unsatisfied County Court Judgements (CCJs) or missed mortgage payments may need a larger deposit and usually, the worse the credit history, the higher the interest rate and fees they will have to pay for a home loan or remortgage.
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How people get into debt
Hiccups in life like unexpected unemployment, illness or a relationship breakdown are common triggers for spiralling debt problems. For others, no matter how relatively wealthy, simple disorganisation can lead to missed payments on utility bills or forgetting to pay back a student loan. As a result, mortgage applicants are increasingly finding a bad history can bar their way to a first home or a remortgage on the home they already own.
If debts get unmanageable, homeowners can use their mortgage to consolidate debts like credit cards, store cards or loans. Mortgage interest rates are low compared to the rates on loans or credit cards. So, it can make financial sense for mortgage borrowers to cut costs by remortgaging or by borrowing an extra lump sum from their current standard lender called a further advance.
But for those who have already missed a mortgage or other debt repayment, your current lender may not be able to help.
So to keep your home, an adverse credit mortgage lender may be your only option.
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CCJs
If an unpaid creditor decides to take action against you this can result in a County Court Judgement (CCJ). If you pay the debt, you avoid a court hearing. If you don't, this will result in a private hearing court 'judgement' against you. This order is called a CCJ and will either be for the amount agreed between you and your creditor or, if you can't agree, a payment set by the court. CCJs remain on your credit record for a period of time, even if you have settled the debt.
IVAs
Individual Voluntary Arrangements were established in the mid-eighties as a way for people or businesses in financial trouble to cut their debts but avoid bankruptcy.
IVAs are a legal contract between lenders and a borrower to pay back 30-50 per cent of their debts through an agreed monthly repayment over five years. Interest is frozen over the repayment period and as long as the debtor keeps up payments he or she is debt-free when the term is up. However, IVA holders have zero credit status and cannot apply for any credit during the term of the IVA.
To set up an IVA, 75 per cent of the creditors have to agree to the proposal put forward by the individual's IVA practitioner. The IVA company will look at a person's income and outgoings and calculate how much they can afford to pay each month. According to accountant PricewaterhouseCoopers, an IVA application is made every seven minutes.
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Check your credit status
Before you apply for a home loan, look up your credit record. You can order a report online, by telephone or request it by post from credit agencies Experian and Equifax.
A Statutory Credit Report costs £2 and is a good indication of your status, although all three agencies charge extra for more detailed information if you want regular updates or for early warning signs of credit fraud.
Mortgage lenders automatically check your credit history when you apply for a mortgage. If there is any incorrect information on your file, like a debt listed as unpaid when it has already been cleared, you can tell the credit agency to erase it.
Warning!
Importantly, don't be tempted to apply for a mortgage to see if you get turned down. Each time a lender refuses you credit it shows up as a black mark on your record making it more likely other lenders will refuse you credit.
However, if your credit record is poor, the next thing to do is find out how serious it is and shop around for the best deal through a mortgage adviser.
Minor debt? - lenders who may consider you
- Abbey
- Birmingham Midshires
- Bristol & West
- Irish Permanent
- Hanley Economic BS
- Leeds BS
- Nationwide BS
- Principality BS
- Stroud & Swindon BS
- The One Account
- Yorkshire BS
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It's hard to find in-depth information on adverse credit mortgages because you can only apply for a loan through an Independent Financial Adviser or a mortgage adviser.
Borrowers need to talk to an adviser before applying for these loans for several reasons. An adviser can explain how serious your credit problems are and make sure you only apply for loans from mortgage lenders who will consider your application.
A mortgage adviser can help you with mortgage paperwork and stop you getting more black marks on your credit file by applying to mortgage lenders that reject your application.
Sometimes an adverse credit borrower may also need a self-certification loan because he or she earns income from different sources. An adviser can help you sift through a different range of adverse credit self-cert mortgage loans. Your mortgage is probably the most expensive item you will ever buy, so it's important to make the right choice.
A little extra help?
But many of these specialist lenders don't deal directly with the public at all. So, it is difficult for borrowers with a poor credit record to shop around and compare rates and fees, for example, like a standard mortgage applicant.
Before you talk to a mortgage adviser, you could do some research. Magazines like What Mortgage, Your Mortgage and Mortgage Magazine all list the best value adverse credit mortgages at the back to give you an idea of the kinds of interest rates and fees you may pay.
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A selection of mortgage advisers or 'find an adviser' websites
Warning!
It's important to find a mortgage adviser you trust offering a professional, transparent service. Any extra costs or charges should be discussed upfront, certainly not come as a shock after the deal has already been done.
The adverse credit sector used to attract a bad element of profiteering advisers who targeted desperate customers and overcharged them for an unprofessional limited service. But since mortgages became regulated by the FSA in November 2004, it's easier to shop around to find excellent specialist advice, sometimes from a mainstream mortgage adviser.
Since mortgage regulation in November 2004, all advisers have to offer you an Initial Disclosure Document (IDD), which tells you who they are, how much they charge and the services they offer. Now, you know whom you are dealing with before you disclose your circumstances. If the firm isn't keen to reveal much about themselves, walk away.
Questions to ask your adviser
- Do you offer mortgages and insurance from all mortgage lenders in the market or a limited selection?
- the better the choice on offer the better your chances of finding a competitive deal
- Do you charge fees? If so is it a flat fee or a percentage of the amount borrowed?
- Paying a flat fee is usually far cheaper than paying a percentage of the mortgage loan i.e. 2 % of £100,000 is £2,000 compared with an average flat fee of £2-300
- If you found the adviser over the Internet, make sure a head office address is listed on the home page and the firm is registered by the FSA. Check the firm is registered on the Financial Services Authority website at www.fsa.gov.uk by clicking on the Firm Check button on the side panel of the home page.
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More questions to ask your adviser
- How serious are my debt problems and could I still qualify for a standard mortgage loan?
- How long will it take to repair your credit? - Don't tie yourself into a loan for longer than you have to, say, five years when a two-year term is enough. It will cost you.
With adverse credit loans, the worse your debt history, the higher the mortgage rates and fees you will pay.
For example:
Minor or 'light adverse' borrowers with just one satisfied CCJ, for example may be offered interest rates just a little above the best standard rates. But interest rates can reach 7-8 per cent plus for borrowers with a complicated debt repayment history, which is almost double the rate paid by standard borrowers.
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An adverse credit mortgage can help you achieve two things as long as you keep up the repayments. Firstly, you can stay in your home despite your credit difficulties. Secondly, these loans help you repair your credit status by proving you can stick to a credit arrangement, so mainstream lenders will consider you again.
Depending on the seriousness of your debts, some high street lenders may lend to you again after two years, but you need to prove you can keep up regular mortgage payments for the agreed term first.
Who?
Don't worry if you have never heard of many of the adverse credit lenders suggested by your mortgage adviser. Lenders you have heard of like Britannia Building Society, Bank of Scotland or Yorkshire Building Society, for example, own many of these lenders offer specialist loans like buy-to-let or adverse credit under another brand name.
There are over 4,000 adverse credit mortgage loans out there, so make sure your adviser can access all the market to get you the best deal for your circumstances.
A good way to compare one deal against another is to use the Key Fact Illustration (KFI) for each mortgage loan listing each loan's 'key' features.
Those features include interest rate, deposit size, length of mortgage term and the rate you revert to after the initial deal has finished, plus any fees and extra charges you need to pay.
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Lenders expect borrowers to pay higher fees and charges for adverse credit loans. Often you can roll these into the mortgage loan, although you will pay far more over time after the extra interest charges. Application fees, for example, can cost thousands compared to average application fees of £5-600 for a standard mortgage.
Another question to ask your mortgage adviser
- Is my mortgage large enough to make it worth paying a higher fee?
- If you plan to borrow over £82,000 it is probably worth paying a higher mortgage application fee to save money on a lower mortgage interest rate.
This is because the break-even point, or the size of your mortgage where neither the cost of the interest rate or upfront fee outweigh the other is £82,000, say mortgage adviser John Charcol. Put simply, if you take an £82,000 mortgage with a three year fixed rate deal over 25 years at an interest rate of 4.99 per cent, you pay £485 a month which is £17,460 over three years. Add the £495 arrangement fee and the total is £17.959.
The same amount on a rate of 5.29 per cent, with an arrangement fee of £499 costs just £5 more over three years.
Tie-ins
Watch out for loans with overhanging redemption penalties that lock you into the mortgage after the initial deal ends. Tie-ins cost borrowers thousands of pounds in penalty payments each year.
Mortgage deals with a low initial repayment may be tempting. But you can find yourself between a rock and a hard place if you lock yourself into a rate which leaps £300 a month after a year and the only way out is to pay a £4,000 penalty.
On a final note, be wary of mortgage advisers charging what feels like extortionate fees to arrange your mortgage.
Some advisers charge no fee at all for the same service, because in most cases, mortgage advisers receive payment from the mortgage lender for putting your business their way.
So always shop around before you commit to an adviser or a loan, no matter how desperate you are to sort out your finances.
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