What’s the truth with being able to secure a mortgage in order to move house if I have credit defaults?
I have read general mortgage advice that states defaults or living in an overdraft are sure ways to be declined.
But I have also read claims from mortgage brokers on the internet who advise that it is possible.
I have £40,000 of unsecured debts – £20,000 on two credit card defaults which are both now in arrangements – but having never missed a mortgage payment in 12 years, is it possible to obtain a mortgage?
If I can, will the rates be extortionate? Or is it worth releasing the equity in our home, clearing our debts and then renting for a while to ‘start again’ in the, hopefully, not too distant future?
Several lenders cater for borrowers who have suffered financial problems in the past
Sarah Davidson, of This is Money, replies: There are a lot of mixed messages out there on whether it is possible to get a mortgage if you have had problems with credit in the past.
As you rightly point out, the prevailing wisdom is that it’s impossible to get approved for a mortgage unless you have a perfect credit score.
And yet, brokers across the country claim to be able to find you finance.
The truth is somewhere in between. To be eligible for the very best mortgage rates and deals in the market, you need to have a combination of good credit, high equity and sufficient secure income to demonstrate you can meet repayments.
But this doesn’t stop those who don’t fit into this category from also being able to find a mortgage that they can afford.
There are a range of mortgage lenders that specifically cater for borrowers who have suffered financial problems in the past, with the most well-known being Kensington Mortgages, Precise Mortgages, Pepper Money, The Mortgage Lender, Together and Vida Homeloans.
A number of smaller local building societies will also consider you for a mortgage even if you have historic impaired credit.
However, nearly all of these lenders do require a certain amount of time to have passed since you encountered the problem, with many needing this to be a minimum of three years.
If you can demonstrate why the problem occurred – for example you experienced a period of redundancy before finding a new job – and show that you have put measures in place to rectify the situation, many of these lenders will consider you.
Each one will have different criteria, so for this reason, it is worth using a mortgage broker who specialises in helping borrowers with a rocky credit history, as not only will they have access to a range of lenders – many of which deal only via brokers – but they will also be able to advise you of your best option.
In practice, this may not actually be to sell your home to repay the credit card debt, as this takes you off the property ladder.
There are a range of other options, which may make more financial sense for you depending on your specific circumstances, including the value of your property, how much equity you have in it, what term is left on your mortgage, how close you are to retirement, what your monthly income is and whether you have any other savings or pension income among other things.
One potential option is to remortgage with a further advance with your existing lender to release equity from your home to repay the credit card debts. This could be at a lower rate than you’re paying on these arrangements which might make sense if you can afford the monthly repayments on the bigger mortgage.
Alternatively, it might be an option to take a second mortgage at a slightly higher rate than your existing mortgage and use this to repay the debt.
Although, the sense of this must be weighed against how long it will take you to repay: paying interest on a second charge mortgage for 25 years may end up costing more than paying down the credit card debt faster.
A word of warning – if anyone recommends you take a short-term bridging loan on a monthly interest rate to fund the purchase of your next home before you’ve sold your first – walk away.
It’s highly unlikely any regulated lender would allow you to do this, but there are still unregulated brokers and lenders out there willing to steer you down a totally inappropriate path just to earn themselves some commission. So beware.
A good and independent mortgage broker with experience of debt consolidation and mortgages for those with impaired credit histories is a must for you to get the best possible outcome.
Check that they have the right regulatory permissions to give you fully qualified advice on the FCA register here.
This way, should you receive bad advice that puts you in a worse off financial position, you are eligible to make a complaint and be considered for compensation from the Financial Services Compensation Scheme.
To give you a flavour of how a lender would view your application, we asked Rob Barnard, director of sales at Pepper Money, to answer your question too.
Rob Barnard, Pepper Money
It is certainly possible to secure a mortgage if you have experienced credit problems and, while rates will generally be a little more expensive than a high street lender, this is a competitive market and pricing reflects the fact that there are many lenders who are equipped and able to lend to customers with credit issues.
For example, at Pepper Money, at the time of writing, our lowest two-year fixed rate is 2.38 per cent.
Your options depend on the type of credit problems you have had and how recently you have had them.
Different lenders will have varying appetites for different types of credit problems and navigating the different permutations can be tricky, so it is a good idea to seek professional advice from a mortgage broker.
Not only will an adviser be able to source the most suitable mortgage for your individual circumstances, but they will also have access to a number of specialist lenders that are not available directly to consumers.
These lenders tend to use underwriters to make their lending decisions rather than an automated credit score. This means they can look at all of your circumstances and will be able to take into account, for example, that you have successfully maintained a track record of payments on your mortgage, even if you have missed payments on unsecured credit commitments.
Some lenders might ask for an explanation about previous credit problems to help them to understand whether these were one-off events or likely to happen again.
In terms of the circumstances you have mentioned in your question, the answer is yes, there could well be lending options available, depending on the rest of your individual situation. Here are a few things to consider when thinking about your options.
If you are able to pay off the default, the lender will show this as satisfied on your credit record
A default occurs when an account has had consecutive missed payments and once recorded, it will remain on your credit report for six years from the default date, after which it will be removed, even if the outstanding amount has not been paid off.
If you are able to pay off the default, the lender will show this as satisfied on your credit record. You will have more options if the defaults in your name are satisfied, but there are lenders that are able to consider unsatisfied defaults within the past year.
There are also options for borrowers in an existing debt management plan (DMP), which is a non-binding agreement between an individual and their creditors to repay debts.
A lender might typically ask that the DMP has been in place and successfully maintained for 12 months before it is able to lend, and it will include your contractual monthly payments as outgoings to form part of the affordability assessment.
Affordability is an important consideration. If you have significant credit card or loan balances and are regularly overdrawn on a bank account, a lender will factor in the monthly costs of servicing this debt when it calculates how much you can afford to borrow on your mortgage.
This could make the difference in whether or not you could afford to move to a house you want to buy.
It would be a good idea to speak to a mortgage adviser and ask them to review your options.
Once you know whether you are able to secure a mortgage, how much you can borrow and what rate you are likely to pay, you can use this information to help make a more educated decision as to whether you move home now or in the future – and don’t forget to factor in the costs of moving and renting when you weigh up the two options.