Why is Equity Release ideal for people with bad credit?
Having bad credit is likely a result of a failure to make payments on an existing agreement or having made some payments late.
The great thing about Equity Release products is you don’t need to make monthly payments, so it’s impossible to default.
So your credit history is irrelevant!
The equity in your home you already own essentially makes the interest payment for you so you can’t default.
As the value of your home (hopefully) goes up, the interest on the loan could be covered by the simple price appreciation of the home you still 100% own. It’s still your house, and you still benefit from being in the property market.
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The money you’ve paid towards property is rightfully yours.
And you don’t have to sell that property to release a partial amount of your equity.
Release equity finance is ideal for when you want or need to borrow a larger sum of money using what’s already yours. What’s more, is that you can release equity when you have bad credit. Don’t think you can’t.
For standard mortgages, each payment you make towards your outstanding mortgage buys a little more equity in your property. While there’s an outstanding balance on your mortgage, the property ownership is shared between you and the existing lender. You will own it one day, but that’s when you are mortgage-free.
The only time you aren’t building equity in a property is if you have an interest-only mortgage. Chances are you don’t as it’s hard enough to get one of those with a decent credit rating as you need to have an alternate repayment vehicle (or multiple) to ensure the full amount of the secured loan is indeed secured.
The majority of mortgages are capital plus interest. The capital you pay is towards your share of the property and the interest goes to your lender.
Think of a release equity loan as you borrowing money back from what you’ve paid towards property ownership. You’re only borrowing back what you’ve already paid. The lender just increases their share of the property. That also means that it will take you longer to repay the loan in its entirety, thereby increasing the overall price you pay for finance because of the additional interest payments.
Equity Release When You Have Bad Credit
Accessing equity release when you have bad credit is a little more challenging, but it’s most certainly possible to get approved, regardless of your credit history.
The main reason is that you have security in the form of what you’ve already paid towards your existing mortgage. That’s with specialist lenders though. The main lenders, such as Barclays and Nationwide, would likely reject your application. All banks and building societies are known as prime lenders, mainly because they cater to prime borrowers. The people with stellar credit ratings.
Subprime lenders, on the other hand, they’re okay with taking some risks. Some are more risk-averse than others. You have lenders who will only approve on minor defaults and others where there’s a been a default on a secured loan, which is a severe type of default to have on your credit file. That shows you’ve mismanaged your money at some point to the extreme that it’s left you exposed to repossession.
No lender wants to repossess. It costs too much. They only do when it’s necessary, and all other avenues have been explored. That’s a lot of overhead, and that’s what they want to avoid by checking credit files.
The more assurances you can offer any lender, the better your chance of being approved for an equity release loan even with bad credit.
Preparing for an Equity Release Loan Application with Bad Credit
Chances are you already know why you have bad credit. That’s in the past. In the here and now there are some things you can do to stand you in good stead to get an equity release loan approved.
Here are the essential preparation steps to take:
- Sort the simple stuff out that’s often forgotten
Get a statutory copy of your credit reports from all three credit reference agencies.
- Call Credit
Statutory reports only cost £2 each. So, £6 to gather all the information you need to assess your situation and get the most accurate information to put in front of a broker.
When you get your credit reports…
- Check your details are correct
Bad credit is not an obstacle to releasing equity from a property you have an investment tied up in. Inaccurate information is though. You should have one primary address that corresponds across all your reporting accounts.
- Your bank accounts
- All credit card accounts
- All home shopping accounts such as GUS, Littlewoods and even the online credit accounts like Very.co.uk
- The Electoral Roll
Do not forget that last one. You’d be surprised the number of people who move address, get the letter through the door, set it aside and forget all about it. The Electoral Roll must have the same address that all your financial accounts use. Otherwise, it’s a red flag.
- Check your financial links with each credit reference agency
It only takes one person with a track record of defaulting accounts to be financially linked to you on your credit file to get lenders suspicious. It could be an ex-partner or a close relative who lived with you. Anyone you’ve ever gone guarantor for on a loan, any line of credit, or even a mobile phone handset, can become financially linked to you on your credit files. Primarily if you’ve held a joint account with that person.
If that’s no longer accurate information, such as your ex-partner has moved out, file a request with each credit reference agency to have the name unlinked from your file. Otherwise, it’ll continuously hinder your efforts to obtain finance. Instead of just assessing your situation, which with bad credit is severe enough, don’t add unnecessary risk to your financial assessments. You do that by removing risky financial connections – provided it’s inaccurate. Don’t lie. That would make things worse.
- For Experian – Print, complete and return this Financial Connections Questionnaire
- For Equifax – Follow these steps to remove a financial association from your report
- For Call Credit – Use this page for the Disassociation Form.
Requests to have inaccurate information updated on your credit file should be completed within 28 days of your request being made. Keep in mind that the information available to lenders may still be outdated until the credit reference agencies update their records. It doesn’t happen instantly.
Once you have, or even while you’re waiting for your information to be corrected, it’s time to get the specialist help you’ll need to get an adverse credit equity loan approved.
- Finding an Adverse Credit Mortgage Broker to Work With
It will be more difficult to obtain finance if you try on your own. The easiest approach is to get help from someone knowledgeable about bad credit finance. We specialise in all types of risk because of the number of partner lenders we work with. We have a wide variety of working relationships with some great deals and others that can be negotiated for the best rates. But that’s because of our knowledge and past experiences working with subprime mortgage products and partners. We’re in a good position to help property owners and investors who are struggling to get finance push past the barriers.
A high street mortgage broker may be focused on the local market, with working relationships with major banks and building societies. If they don’t have experience dealing with subprime lenders, they’ll lack the knowledge, and if not the knowledge, most certainly the confidence to get the best deal on the table for you.
We do offer a free advisory service, but like all things, you’re best to make your own decision after reviewing your options. Check with other brokers, compare a few, speak to the advisor(s) and work with the one you feel most comfortable with and who you feel can represent your interests best.
- Clean bank statements
One other thing for those who gamble online is to be aware that lenders tend not to like seeing gambling transactions pop up frequently on bank statements. So, you may want to consider setting a separate bank account up, such as a savings account so that you can use the debit feature on gambling sites without it being disclosed in your financial assessments. It shouldn’t be, but it’s not a mystery the damage problem gambling can have on personal finances, so while not official, expect a raised eye-brow from an assessor. Easily avoided by not depositing from the current account you intend to use the bank statements from for a loan application.
On that topic, if you’re gambling your last £10, it’s probably wise to reflect on how much you’re gambling. There’s a fine line between recreational gambling and problem gambling. If anyone close to you has raised concerns about your gambling, there’s a likely chance a lender will too. GamCare.org.uk will have better advice than us about that.
Back to releasing equity…
The Lenders You Need to Be Approaching for Any Type of Bad Credit Finance
Sub-prime lenders specialise in riskier financial products. They’re generally used after an application has been rejected. Each application made for finance that involves you consenting to a full credit check (not a quotation search) will show on your credit file. It does drop your score, which means any finance company using automated loan servicing software may result in your application being automatically rejected before it reaches someone to assess it. This is often the case with larger finance firms dealing with high volumes of applications.
Smaller sub-prime companies are more compatible for people with bad credit because you can then get your forms in front of a person who will decide on whether to approve or reject the application.
By working with a mortgage broker specialising in adverse credit, you’re able to tap their expert knowledge of the sub-prime market. Things like which company is best for applicants with a CCJ, or defaulted on a secured loan, or if it’s just a general trail of forgetfulness showing on your credit reports, such as three accounts showing defaults when it’s only a few late payments and the account is up to date and not actually sitting in default. These are things that sub-prime lenders look at on an individual basis. They assess the risk based on what’s showing.
What’s more, is your broker can work directly with the lender to explain particular circumstances. It’s not unusual for a string of negative entries on a credit file to have a back story of the person falling on hard times. Banks can’t deal with individual cases in the same way because of the automated nature of the application process. Sub-prime lenders have a human touch to them. It doesn’t mean you can blag your way to a good rate, though.
There are higher interest charges which are based on the level of risk the lender assesses your loan to be. Much of that risk is based on your current financial standing, such as your income and expenditure as you need to prove you can afford the monthly repayments. The more disposable income you have, the better your chances of being accepted.
If you can make cutbacks to your regular outgoings, it would be beneficial. You do have to provide proof of income and bank statements for your affordability assessment. The fewer outgoings you have coming out of your current account, the more disposable income you have.
The subprime lenders are more interested in affordability than they are your past indiscretions. The one thing they will look at is recency. Defaults within the past 6-months raise concerns. Closer to a year since a negative entry was shown will be better and beyond that is often not too much of barrier, depending on the severity of the entry on your credit file.
Get advice directly relevant to your own situation. Every client is unique, so the advice above can only get the ball rolling for you to set things up. You can use that and sort your credit files out, clean up your bank statements and address inconsistencies on your credit reports all in preparation for applying for an equity release loan. For applications, the more resistance you face by being rejected, the longer it will take for any lender to approve on a secured loan. If you’re confident you have enough income and enough disposable income left over after you’ve paid your monthly dues, there is almost always a lender willing to approve an application.
Mortgage brokers specialising in adverse mortgage products are where to go next.
Take the next step, contact us and tell us what’s getting in the way of you getting equity released from your property and we’ll tell you how and who can fix that.
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