A bad credit remortgage – sometimes known as an adverse, non-standard, or specialist, remortgage – is, as the name suggests, a form of mortgage loan specifically designed for those borrowers, who, for whatever reason, have a poor credit rating. This may be the result of financial difficulties currently, or in the past, which may have resulted in arrears, or defaults, on previous loan, or mortgage agreements, leading to county court judgements, individual voluntary arrangements, and, in the worst case, bankruptcy.
Understanding Bad Credit
The worthiness of a borrower for credit is assessed by mortgage, and other, lenders by the use of a “credit scoring” system – which takes into account, amongst other things, payment history, outstanding debt and length of credit history – to arrive at a final, numerical “credit rating”.
An individual credit report contains entries from the banks, building societies, credit card companies and, indeed, any other financial institutions, with whom a borrower has had dealings in the past. If an account has been properly conducted – that is, in accordance with the terms and conditions of the lender – entries for that account will be positive, adding to the final credit rating. If, on the other hand, there is, for example, a history of missed payments, entries will be negative, detracting from the final credit rating – and it is an accumulation of these negative entries that often leads to a poor credit rating.
There are, of course, often mitigating circumstances surrounding a poor credit rating. Divorce, redundancy and simple over-borrowing are just some of the reasons why borrowers may find themselves in financial difficulty, and, indeed, there are those who may have a poor credit rating for reasons not directly related to their financial situation, at all. People with unusual employment, and irregular income, may not be rated highly by conventional credit scoring techniques, and a similar comment applies to prospective borrowers who are not on the electoral roll, or who have moved address often, in a short space of time. Another possibility, of course, is that an individual is incorrectly assigned a poor credit rating by mistake, perhaps as the result of the activity of another, or former, occupant at an address.
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As far as bad credit remortgages are concerned, bad, or adverse, credit is assessed in terms of degree – “light”, “medium” or “heavy” – and it is this degree of bad credit which governs the availability of mortgage products to an individual borrower. Typically, the higher the degree of bad credit, the higher the interest rate charged, although interest rates, and “loan-to-value” figures do vary between mortgage lenders.
If you are unfamiliar with the term, “loan to value”, or “LTV” – usually expressed as a percentage – is the proportion of the total value of the property that you wish to borrow. For example, if you wish to borrow £90,000 against a property with a total value of £100,000, LTV is calculated, simply, as 90,000/100,000 x 100 = 90%.
A bad credit remortgage is really not all that different from a standard mortgage, except that the interest rate is slightly higher. Remortgaging in this way may allow a borrower to make more manageable, reduced, payments – albeit over a longer total period – and, possibly, to consolidate other debts, in one, low payment, loan. Acceptance for a bad credit mortgage, followed by regular monthly repayments, can be a route back to re-establishing credit, with the prospect, in time, of remortgaging to completely standard mortgage. Indeed, many mortgage lenders offer incentives, to encourage better financial management, such as reduced interest rates for borrowers who complete a certain number of repayments, on time.
As a word of caution, higher interest rates may not be the only downside of bad credit remortgages; higher fees for late payment are often incorporated, along with penalties for early redemption. There is a certain amount of projected profit, included, by a mortgage lender, in a bad credit mortgage offer, and, if the mortgage is repaid earlier than anticipated, this level of profit cannot be attained. The lender therefore imposes an early redemption penalty in an effort to recoup the shortfall. A mortgage lender, should, however – according to FSA (“Financial Services Authority”) regulations – disclose not only the APR (“Annual Percentage Rate”) associated with a mortgage, but also full details of any fees, or charges, in a so-called, “Key Facts” document. Borrowers are required to confirm that they are, in fact, in possession of such a document, before completing a mortgage.
Other Bad Credit Remortgage Considerations
Before applying for a bad credit remortgage, it is worth obtaining both your actual, numerical credit rating, and a copy of your full, detailed credit report, from a credit reference agency. Agencies may charge a small fee, especially for a full credit report, but this is nothing in comparison to the potential savings that can be made, if the report contains erroneous information. If it does, you will probably need to contact individual creditors, themselves, rather than the credit reference agency, to have errors rectified, or removed.
Your credit rating is probably the determining factor with regard to the type of mortgage available to you, and the interest rate that you are required to pay, but many mortgage lenders are adopting a more flexible position, so credit scoring alone may not, in fact, be the sole determining factor. If you are in any doubt about your suitability for a bad credit remortgage – and its implications for your financial future – you should consult a competent Independent Financial Advisor (IFA), for impartial, professional advice relevant to your personal circumstances.
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