Adverse credit mortgages are not the ideal method of financing a home purchase, but they are often the only resort available to those with bad credit. As sub prime lenders seek to lose their tarnished image and appear more mainstream to borrowers, the products they provide are increasingly known by euphemistic names. Thus bad credit mortgages are marketed as non-status mortgages; non-standard mortgages; impaired credit mortgages; and adverse credit mortgages.
They are designed specifically for those with bad credit histories, which typically include major blots on credit reports, such as County Court Judgements, bankruptcy, IVA’s, and repossessions. These can tarnish credit for around six years and people with any of these items recorded on their credit reports will appear as high risk borrowers.
Many people have the legacy of a blot on their credit which can result in traditional lenders declining their business, even if current credit has improved. When they find themselves in the position to enter the property market their only option is to turn to adverse credit mortgages or wait until the past blemishes fall of their credit reports or become less relevant to lenders.
Obtaining a new mortgage will help to further improve credit if payments are made in a responsible manner. The option is available to refinance at some point in the future to a more competitive mortgage, so attention should be paid to any penalty clauses which will restrict early redemption.
Adverse credit mortgages are extremely similar to conventional mortgages, and are generally used as either capital repayment or interest only vehicles. They are available with fixed rates or variable rates in the same way as standard mortgages. The difference lies in the costs. Adverse credit mortgages are loaded with higher interest rates, which can make the difference of many thousands of pounds over the term of the mortgage. They may also carry restrictions as well as high arrangement fees.
Those who apply for adverse credit mortgages will be expected to furnish a large deposit to reduce the lender’s risk and provide immediate equity. The days of 100% mortgages has gone and even sub prime lenders are subjecting borrowers to tighter lending criteria, as required by the FSA. Anyone who applies for a non status mortgage should ensure that the lender is regulated by the FSA.
Comparison shopping for best rates and fees is imperative, and many opt to use a broke to secure them a mortgage. This is an option if it is difficult to personally secure a good deal, but will increase the costs as the broker will expect either a percentage commission or a fee. Once again it is important to ensure that if a broker is used they are regulated by the FSA, and that they use a lender with a reputable name.
Adverse credit mortgages are sometimes used by the self employed who also find it difficult to obtain standard mortgages. Although they may have an unblemished credit history the fact that they need to self certify their income puts them in a high risk category.
Anyone intending to apply for an adverse credit mortgage should first ensure that their financial situation is now stable enough to cope with monthly mortgage payments and other bills. Borrowers should determine if the advantages of becoming homeowners warrant the extra costs involved. However they can be used to provide a good opportunity to step onto the property ladder and start to build equity, rather than paying money out in rent.
Sources: cml.org.uk
Adverse-mortgage-centre.co.uk