Specialist Lender Mortgages
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Whilst nothing is guaranteed, and there are still be plenty of hurdles, we can help you stand more chance of becoming a homeowner than you initially thought.
Using a specialist bad credit mortgage lender might help you understand what your situation actually is and perhaps it will help you see your next steps more clearly.
Our industry experts take the time to compare and search through thousands of deals from leading bad credit mortgage providers. Even if you have a poor credit history and have been rejected in the past, our team will find a deal for you.
We’ve helped hundreds of customers who have had a bad credit rating or have previously had payment problems such as missed mortgage payments, defaults on credit cards & loans, CCJ's, and customers who have been bankrupt.
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A specialist bad credit mortgage broker based in the UK, we have years of experience in dealing with customers with bad credit problems and can advise you how to get a mortgage with bad credit whatever your circumstances.
The fact is that, whether you like it or not, you will have a credit score attached to your name. This score is not fixed; it can go up (which is good) or down (which is not so good).
It usually depends on a variety of factors – including how much you have borrowed, how many missed payments you have, how much you’re paying back (paying more than the minimum payment will help your score more, for example), and so on.
And it’s not just having borrowings that causes fluctuations in your credit score. Sometimes not borrowing anything at all can cause you to have a low score because no lender will be able to see that you can pay back what you borrow.
A poor credit score means you may have borrowed more than your income, you may not be paying things back on time, or you might have missed payments altogether. If you have a bad score, lenders will be wary about offering you any additional money, whether it’s for a house, a car, or anything else.
Credit Scores Explained
Experian, Equifax, and TransUnion are the three major credit reference agencies (CRAs) operating in the United Kingdom. They store information about your financial transactions in what is called a credit report and use that information to determine your creditworthiness.
Because each bureau uses a somewhat different scoring system, your credit report from each could show slightly different results. Nonetheless, you'll usually find that you're in the same group for all of them. In other words, although your actual score might vary, you’ll still be in the poor, fair, good, or excellent category, so that can often be the best thing to focus on rather than the number tied to your score.
You may read the term ‘bad credit mortgage’ and wonder exactly what that means. It can be a little confusing, as it implies that there is a whole other type of mortgage, totally separate from traditional residential, buy-to-let and commercial mortgages.
In fact, that’s not strictly the case. Bad credit mortgages are the same as good credit (or standard) mortgages, with the exception that the borrower may be subject to higher interest rates and a lower maximum loan amount.
Did you know...
Bad credit mortgage lenders like customers who have a large deposit and good income, although this would depend on the severity of the bad credit
You may be required to put down a deposit that is at least 20 to 25 percent of the property's worth, up from the more typical five to ten percent that you might have expected.
This means that you will have to save up for longer as your deposit may need to be twice as much as usual. Until you know for sure what kind of adverse credit mortgage is right for you, it’s wise to keep saving and ensure you have paid off as many debts as possible.
The higher deposit amount is due to the fact that a lender's perception of risk increases when a borrower has a poor credit score, so they need to see more commitment. If your credit score is high, you should have a better chance of being approved and receiving preferential interest rates.
A bad credit mortgage is often arranged through a specialist mortgage lender. High street banks and building societies tend to be a little more risk averse, with more of a black and white lending policy. Bad credit lenders on the other hand are more open to risk and have more flexible criteria.
If your application is approved, you will have to make regular payments toward the loan, with the amount due each month dependent on the type of mortgage agreement you choose and the interest rate.
Basically, it's the same as if you were to obtain a traditional mortgage. You borrow money to buy a property, and then, for the next 25 to 40 years, you pay that loan back. This is why a mortgage is such a big commitment and why lending criteria can be so stringent.
It's important to pay your mortgage on time every month. Your home could be in danger if you miss a payment or pay it late – and your credit score will certainly be affected.
You can have either a fixed rate or variable rate mortgage, and there are pros and cons to each type. Once you lock in a fixed rate for a certain amount of time, it doesn't change with the market, so you always know how much your payments will cost.
With a variable rate mortgage, the interest rate you pay can change if the Bank of England's base rate or the lender's Standard Variable rate goes up or down. This can work in your favour if the interest rate goes down and your payments go down. But if interest rates go up, so will the amount you have to pay back.
Reduce debts & borrow more
Remember, all your current financial obligations will be taken into account. So even if you have a high income, if you also have a lot of debt, the amount you can borrow won’t be that high. This is why paying off your debts before you move towards getting a mortgage is so helpful in so many ways.
Remortgaging with bad credit isn’t always a good idea but if you are doing it because you want to get a better deal (and pay less interest) or because you want to consolidate other debts, it can be a good option.
Defaults don’t always lead to refusal
In the right set of circumstances, you may still be able to remortgage your property even if you have defaults on your credit report.
The extent of the previous default, how long it's been since the default took place, whether the default was for mortgage payments or another debt, and if the default was settled will all play a role. There is a greater emphasis on recent default notices within the last 18 months, and the presence of other negative information on your credit report may complicate matters.
Your motivation matters
It can also be useful if you need to update the property and make larger changes. It’s not such a great idea if you just like the idea of spending a lot of money – lenders will ask what you intend to do with the money you receive from the remortgaging. If you have bad credit, this can be even harder, despite your reasons being good ones.
Work with a specialist broker
There are a number of specialised lenders who will work with applicants who have a poor credit history, and some of these lenders are more lenient than others when it comes to past defaults. However, applications for these loans can only be considered if they are submitted through a licenced mortgage broker. A short conversation with an advisor will disclose which companies provide items that might work for you and what you can do next.
One of the differences between a standard mortgage and a bad credit mortgage is the interest rate you’ll be offered. Bad credit mortgage rates will often be higher than for someone with good credit, so in the end, you’ll be paying more back.
This is done for two reasons. The first is that it can work as a deterrent, so only those who are sure they can pay the money back accept the terms. Secondly, with a higher interest rate, even if the borrower defaults on the loan, the lender will have received a larger amount back as long as some payments were made. It makes their risk lower, even as it makes things harder for the borrower.
High Street Lenders vs Niche Lenders
At the time of writing, with the Bank of England base rate at 3.5%, Natwest’s SVR was 6.24%. Halifax had an SVR of 6.49% and the Nationwide building society was offering an SVR of 6.99%.
By contrast, Aldermore bank, which specialises in mortgages for people who might find it difficult to normally qualify for a mortgage, set their SVR at 7.99%.
You might think that a 1% difference in a mortgage rate doesn’t seem like a lot and that it wouldn’t make much difference, but because a mortgage is taken out over such a long term, even very small differences in rates can equate to a big difference in the total amount repayable.
Let’s do a quick comparison to make the point. If you took out a £200,000 mortgage over 25 years at a rate of 6.99%, you’d be paying £1,412 every month and would pay back a total of £423,685 over the term of the loan. Increase that interest rate to 7.99% however and your monthly mortgage repayments become £1,542 and the total amount repayable increases to £462,692 – nearly £40,000 more.
Don’t be alarmed
If this sounds a bit daunting, then don’t panic. Just because you might have to settle for higher rates to start with, doesn’t mean you’re tied into them for life. As long as you make your monthly repayments in full and on time every month, you should find that after your initial fixed period you’ll be in a much better position. You’ll have built up a little more equity in your home, so have a lower loan-to-value ratio (LTV), and you’ll have proved that you’re a reliable borrower, meaning you should be able to remortgage at a better rate and start paying less every month.
What should you expect?
Let’s take a look at some current rates (January 2023) to give you an idea of the sort of difference you could expect. Rates of course will vary both between lenders and borrowers, as they will depend on your specific circumstances, but we can compare standard variable rates (SVRs) as an indication. The SVR is a bank’s default rate – the rate that you will automatically move to at the end of a fixed term offer unless you remortgage. While SVRs generally reflect the Bank of England base rate, they are not tied to it in the same way as rates on a tracker mortgage. An individual lender can choose to increase or decrease their SVR by any amount, at any time, for any reason.
When it comes to finding a bad credit mortgage lender, you have a couple of main options.
High Street Lenders
The first is to go to a regular high street bank or building society – one that has a slightly more flexible outlook and may be willing to accommodate you.
The second is to go to a more specialist lender, such as Aldermore, mentioned in the rates example above. Specialist lenders like this have less of a black and white approval process, and appreciate that life isn’t always straightforward. They will take a more holistic look at your finances and employment and try to create a deal that works for you.
Specialist lenders are more difficult to find, and some, including Aldermore, will only deal with a third party, not directly with borrowers, so finding yourself a trustworthy, independent broker is vital if you don’t want to exclude yourself.
Take your time & do research
While you may be tempted to try to keep things simple, perhaps by going straight to your regular bank or picking the first lender you find on Google, you won’t be doing yourself any favours.
Rushing into a mortgage application when you have bad credit can be disastrous. Unless you’ve done your research and feel confident about your chances of success, you could very easily have your mortgage declined. That will show up as a black mark on your credit report, making it even harder to apply again.
Yes, a mortgage broker is always a good idea, even if you don’t have a history of bad credit. The broker’s role is to talk to you about your financial situation, your goals and your family circumstances and then essentially do all of the hard work for you.
Broker fees explained
There is usually a fee for using a broker, but fee structures do vary, so shop around to make sure you find what works for you. Some brokers will charge borrowers a flat fee, while others might work on a percentage. Some might not charge anything at all, as they take all of their income as commission from lenders. Be sure to research your options carefully to make sure you’re using an independent broker who has access to the whole of the market and isn’t under any kind of incentive to offer you a mortgage from a particular provider.
Act as your expert guide
They will do all the research, compare offers and can even negotiate on your behalf in some instances. They will be there as your guide through the whole mortgage application process, letting you know exactly what information you need to provide and when.
Access range of niche lenders
With a bad credit mortgage, it’s even more important to use a broker. As we showed in our rate example, even small variations in rates can have a big impact on affordability, so it’s vital that you have someone who can access niche lenders and research rates on your behalf. You’ll also find that many specialist bad credit lenders will only work via a broker, so if you don’t have one, you simply won’t be able to access their products.
The ability to repay a loan is one of the main criteria that lenders consider; this makes sense, as they want their money back once they lend it – plus interest.
They look at your income and expenses to determine whether or not you can afford the monthly instalments. On top of this, they will consider the potential impact that future interest rate increases may have on your ability to make repayments.
The amount that a bad credit lender is willing to loan is based on the same criteria as a traditional mortgage. This will vary from lender to lender but will be based on a predetermined factor that is applied to your monthly or annual income, depending on your situation. The typical annual mortgage income multiple used by lenders is 4 to 4.5, but this will vary depending on the lender. Some may consider going higher, so it’s always worth asking your broker to look at options.
You may also be able to borrow more if you work in a particular kind of job. Some mortgage lenders offer preferential terms and higher income multiples to certain key professions, including doctors, nurses, solicitors, lawyers or teachers. Again, flag this with your broker if you think it could be relevant to you and they will make sure they are getting you the best terms they can.
Remember, your financial obligations will also be taken into account, so even if you have a high income, if you also have a lot of debt, the amount you can borrow won’t be that high. This is why paying off your debts before you move towards getting a mortgage is so helpful in so many ways.
The other limiting factor in terms of how much you can borrow will be how much deposit you have. Although the deposit in itself doesn’t come into a lender’s affordability calculations, it can still be important to think about. You might qualify for a £400,000 mortgage based on your income, but if you only have a £10,000 deposit you’re highly unlikely to be able to borrow that much.
It will definitely help! Income and credit history are just two of the things that lenders will look at when assessing your eligibility for a mortgage, so if one area is weak then it will help if another is much stronger. Getting a mortgage is all about risk, so anything that can show a lender that you are able to make your repayments is a positive thing.
Save a bigger deposit
One of the other big things is the deposit, so one way to increase your chances of success could be the channel that good income into saving for a larger deposit.
Lower LTV is good
The lower the LTV you’re able to get to, the more likely you are to have your mortgage application approved and the better rates you’ll be able to attract.
Should you wait?
It might mean putting your plans on hold for a little while, to give you time to save, but it could make your mortgage a lot cheaper in the long run.
Being a first-time buyer is difficult at the best of times. With property prices so high now relative to income, getting approved for a mortgage is hard even with a perfect credit history. Factor in some financial mistakes in the past and you might be wondering if it’s even possible.
The good news is that it is! Depending on how much deposit you’ve managed to save and what your annual income is like, there’s no reason why with the right broker you shouldn’t be able to find a deal to suit you. If you do find that you’re struggling because of affordability or lack of savings, there are a few options that you could consider.
First Homes Scheme
The first is to take a look at any current government initiatives for helping first-time buyers get onto the property ladder. These are schemes designed to make homeownership more affordable for people in tight financial circumstances.
If you’re a first-time buyer in England for example, you could be eligible for the First Homes scheme, which could give you up to 30-50% off the price of your house. Look for new developments in your area and see which are being advertised as part of the First Homes scheme. Local councils may have additional criteria, such as prioritising certain groups.
If you have a low income or a low deposit, but are keen to at least get started, then shared ownership could be worth investigating. When you buy a home under the shared ownership scheme you initially buy just a percentage of it – often around 25% - and then pay rent on the remainder. Over time you can buy additional shares, working up to owning it outright if that’s something you want to do.
Right To Buy
If you currently live in a council house you might be eligible to buy it through Right to Buy, which would mean a large discount on the cost.
Get A Guarantor
If none of these schemes are right for you, there may still be a way to make a mortgage work. If you have family members, typically a parent, who is in a stronger financial position and owns their own home, they may be able to act as a guarantor for you. With a guarantor mortgage, another person agrees to take financial responsibility for the loan should you default. Another way that families can help is with a family offset mortgage, where their savings are used in lieu of a deposit.
Consult a broker
Talk to a broker who specialises in mortgages for first-time buyers with bad credit or on a low income and they can talk to you in more detail bout these options.
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