The Advantages and Disadvantages of a Bad Credit Mortgage

Finding yourself in the situation of having to consider a bad credit mortgage can be a difficult place to be, not knowing if you should proceed down this path or not.

With this in mind we have put some helpful pros and cons of these types of loans to hopefully assist in your decision.

Advantages of a bad credit mortgage

1. Enables you to proceed with your plans
2. May help improve your credit rating 
3. Can help secure a more appropriate rate
4. Could ultimately save you money 

1. Enables you to proceed with your plans: One of the likely reasons you have looked into your mortgage options is that you have a plan that you wish to act upon. This could be buying your property under a government scheme such as right to buy or that you wish to raise funds on your home for improvements. Whatever these plans may be, there could be numerous advantages to you if acting on them now. A bad credit mortgage could therefore still be an ideal solution

2. May help improve your credit rating: Demonstrating that you can manage your finances is key when looking to arrange any new finance whether this be a mortgage or something else. Being a home owner and in turn having a well-paid mortgage can form a large part of a credit application so in turn can assist with any future borrowing needs.

3. Can help secure a more appropriate rate: Typically, a rate on a bad credit mortgage will be higher than its counterpart for someone who has a good credit rating. This is relevant at the time but, what you may find is that by securing a rate in the current market, albeit higher than that you may have obtained with a better credit rating, it could still prove to be more advantageous for you financially in the future. Of course, there are never any guarantees of which direction rates will move but as an example, if you are risk adverse the security of having a bad credit fixed rate mortgage could still be best advice over remaining on a variable rate.

4. Could ultimately save you money: If we knew what the future holds, planning and decision making would be so much easier however, sadly we can only decide what to do based on the facts before us and our thoughts or predictions. Acting now rather than waiting could prove to be the right course of action. There is also no guarantee that your situation will improve sufficiently enough or that the markets remain the same e.g. changes in criteria, lenders appetites to lend etc that you will benefit financially by delaying. It’s always a risk but by getting good advice and all the information you need will at least put you in the best position to make those decisions.

Disadvantages of a bad credit mortgage

1. Higher interest rate 
2. Higher fees 
3. Less choice 
4. Larger deposit or greater amount of equity required 

1. Higher interest rate: Typically, a bad credit mortgage will be offered to you at a higher rate than those available should your credit history be better. Saying that, this is certainly not always the case. A lender’s appetite to lend can be a big influence in the pricing of their interest rates, and on occasion some bad credit lenders have been known to offer rates on a par with those on the high street. Invariably however the rates will be higher but, if this type of mortgage provides a solution to your plans, then hopefully by improving your credit rating you can put yourself in good stead to change the mortgage to a better rate in the future.

2. Higher fees: When comparing bad credit mortgages to those high street deals it will seem that you are disadvantaged everywhere you look in terms of pricing. This includes fees. Invariable the fees will be higher to those available in the high street however, bad credit lenders will typically price their products in the same fashion. This means that yes, for some options there may be fees attached but there may also be options without fees. Always remember to price out the whole deal when making your comparisons.

3. Less choice: The mortgage market is vast with a reputed circa 90 lenders offering their products. However, when you have a history of bad credit this will inevitably reduce the number available to you. Less choice is not always necessarily a bad thing as long as the choice, or choices, you do have can still offer you an acceptable solution to your needs. The bad credit mortgage sector has seen much improvement over the last few years and in turn much more choice has been made available. Finding the right mortgage for you can seem difficult regardless of your circumstances but by carrying out your research or using a bad credit mortgage adviser where applicable may still help you achieve this.

4. Larger deposit or great amount of equity needed: Due to the perceived higher risk a bad credit borrower represents a lender will typically want to offset this by offering mortgages to those that have slightly larger deposits or have higher levels of equity. These both impact on what is referred to as your loan to value (LTV), being the amount of your mortgage in relation to the value of the property. The lower this loan to value is, the lower risk the loan represents. Following the re-emergence of the bad credit mortgage sector following the credit crunch in 2007-08 it was likely you would need a minimum of a 25% deposit or more. However, as time has elapsed the amount of deposit or equity required has certainly reduced for many credit situations. The amount you need will still very much be dependent on your actual credit history including dates, amounts, and what it is that is recorded, but for some would be borrowers a bad credit mortgage could still be available at 85% or even 90% loan to value.