There’s only one barrier that’s going to block your success in the bad credit remortgaging process. That’s affordability. If you can prove you can afford the repayments on any loan, then it’s only a question of which lender is most suited to approve your loan.
If you know you can afford the repayments, you then know that you can get a remortgage approved with many types of bad credit entries on your reports.
It’s only the entries that are assessed. Not the score that the credit reference agencies assign to your report.
Common questions answered about the remortgaging process for poor credit mortgages…
Can I refinance my mortgage with bad credit?
You sure can because there are two types of lenders. The most common are your bank as they’ve got nearly every financial product you can imagine… so it’s the logical place to apply – to the company you do your day to day banking with.
The other type of lender is those whose sole business is risk-based. While the banks on the high street are popular, the secondary market isn’t so much. In the finance sector, these lenders are known as subprime lenders.
Think of them like this:
- Prime – Lenders suitable to applicants with a decent to excellent credit report
- Subprime – For all applicants with negative entries on their credit report
The entire credit sector is split into those categories. It doesn’t matter if you need a credit card, secured or unsecured loan, or store finance to buy a new washing machine on credit. When you need to borrow, or obtain goods through a finance agreement, you’ll get finance approved from one of those two types of lenders, the mainstream (prime) lenders or a subprime lender.
There’s a variety of adverse credit remortgage lenders and all of them vary with what they consider to be risky borrowers. Too risky for one lender could be another lender’s perfect customer. That’s where brokers come into the equation as they’ve the experience and knowledge of what each lender considers to be too risky and identify the company (and often more than the one lender) that’d be most likely to approve on the loan.
It depends on the severity of entries on your credit report.
Is it possible to refinance with bad credit and late payments showing?
Any recent late payments are going to indicate to lenders you’re a high risk because you can’t meet your current payment deadlines. As such, your choice of lenders will narrow. It doesn’t rule you out of the remortgage process.
It just reflects a need to prove you’re making efforts to get your finances under control. One of these being a properly prepared budget, which there’s further information about below.
I’m worried my debts are too high to be accepted for any type of bad credit remortgage?
Every lender will always assess your affordability for finance. You will not be approved for a secured home loan if your current financial circumstances indicate you wouldn’t be able to afford the repayments. Rest assured, if you’re approved, you will be able to afford to borrow at the rates presented. And lenders will not charge you based on what they assess you to be able to afford.
They’ll provide a conditional offer based on your personal risk level. You are only approved on affordability. Your household income doesn’t affect your interest rate. Just risk and that’s assessed using the information presented on your credit files. There are other factors to consider such as the term of the loan, when you plan to retire, if you intend to pay your kids university fees etc.
Some people may feel like they’re drowning in debt, especially when there’s not much disposable income left at the month end
To be considered as maxed out on your available credit, you’d be spending over 36% of your current monthly income on debts. A hypothetical example is someone with a £24,000 salary, which is roughly a monthly income of £2,000 (before tax and NI) and spending upwards of £720 per month towards debt repayments. Such a scenario could happen following a relationship breakup resulting in a remortgage being required based on a sole income, rather than a joint household income.
If that were to be the case, you’d need to bring your debt repayments down. Not repay the debts in full. Remortgaging with bad credit is usually done to bring your monthly debt repayments down as it’s often unsecured debts on high interest that move onto secured debts with a lower interest.
To work out if you can realistically afford to remortgage, it’s not as simple as finding a remortgage bad credit calculator online, punching in some numbers and hitting calculate. It’s best to do a complete and thorough budget assessment so you know where you’re currently spending. This is always going to be the case with debts and the first thing you’ll do with any debt advice service.
Prepare a budget
That’s a real budget and not a monthly planner. A tool you can use instead of any type of mortgage calculator is this budgeting tool: http://www.stoozing.com/calculator/soa.php
It’s a “Statement of Affairs” tool that takes into account a wide variety of expenditure. It’s going to help you get all of your figures collated together, ready for an adverse credit mortgage advisor to help you work things out, or work with a debt advisory service. Once you’ve used it for your personal calculations, print a copy of it out as it’ll help you in the application stages.
It’s quite a comprehensive budgeting tool, so will go a long way towards helping you and any advisor you work with to understand your true financial position. If you’d rather remain anonymous and not submit personal financial details online, simply take a note of all the expenses listed, and complete it with pen and paper.
The more details you have accounted for in your expenditure, the more lenders have to help with their risk assessment and for that part, more details are always better.
Whether you need to remortgage with bad credit and arrears, or if it’s minor late payments, or missed payments on a secured loan, there are lenders available to cater to a wide variety of refinance options.
Other Things To Consider Moving Into 2018 And Beyond
The BoE’s Financial Policy Committee (FPC) recently released the June Financial Stability Report. After distilling the contents, reviewing the material and seeing the actions proposed, there are some key insights you should know about the direction that lenders are expected to be taking.
That direction is to edge on the side of caution, because the FPC issued banks with a warning, meaning they need to be more cautious with risky borrowers.
And to make sure they got the message they dis the logical thing and demanded banks pay £5.7bn in the next six months with a further £5.7bn by the end of next year, a total of £11.4 Billion payable in the next 18 months.
That’s the banks problem and there’s nothing in the report suggesting anything of an impact to consumer interest rates or that will affect customers directly or indirectly, at least in the short-term.
What there is though are seven interesting points raised that’s worth bearing in mind about lenders before submitting a mortgage application.
- Risky borrowing will be stricter
This is the obvious one. The FPC is concerned that banks are being complacent when taking on risky customers. It’s been seen with an increase of available adverse mortgage products, but of more concern to regulators is the number of approved mortgages that would be considered risky and probably better approved by a specialist lender rather than being provided as a standard mortgage with some changes.
It’s likely to get tougher to get approved by a bank for a mortgage when you have adverse credit. Nothing new, but for a small time there, some banks were approving.
- Balloon payments on car finance will be viewed as risky
The report revealed that 15% of borrowing is on car finance. The worrying aspect is that the vehicles are purchased under a Personal Contract Purchase (PCP). It’s a type of short term finance similar to hire purchase. At the end of the lease term, you can either pay a lump sum to buy the car, or the dealership will buy it back from you. If you buy the car, it’s a balloon payment, and if you sell it back, the vehicle’s depreciated in value, so there’s a risk you’re going to be liable for a high fee anyway.
If you have a PCP in place, lenders may start asking questions about how you intend to repay it at the end of the term. It’s not a requirement, but it’s a possibility so prepare for that before you apply.
- Home loans for property extensions account for 10% of consumer borrowing
10% of homeowners have taken advantage of the low interest rates to take out finance to upgrade their homes, often by extending the property rather than moving to a larger and more expensive property. The banks are apparently failing to take into account the risk of interest rates rising.
The BoE are worried that lenders are taking on more high risk customers, while failing to take into account future increases to market rates, which will affect a consumer’s ability to repay on the secured loan. The interest rate is only lowered temporarily and it will rise in the future. It’s only a question of when.
Low interest rates make it more likely that people will be vulnerable to interest rate increases when that time comes. That’s why fixed term mortgage rates are appealing just now.
- Credit cards account for 10% of consumer borrowing
Credit cards were mentioned and the stats show that they account for 10% of consumer borrowing. It doesn’t state how much per person but just know that if you have high credit card debts, you’ll likely be asked how much you pay towards it. Paying the minimum is never a good idea because that’s interest only and nothing to your capital. Lenders don’t like that so if you’ve got a credit card balance, ensure you can afford to pay more towards clearing it, and preferably have a date set for when you expect it to be cleared.
- Brexit raises eyebrows
Brexit tops the list of uncertainty. Lenders can risk assess borrowers ‘til the cows come home, but they cannot assess the impact of Brexit. The only thing they can do is hyperventilate and evaluate a worst-case scenario, one of those being to leave with no deal.
Resilience is the keyword for the Financial Planning Committee. They want to ensure the banks and the UK financial market, including insurance firms, is robust enough to withstand any adverse shock to the finance market. Adverse effects could ripple across the economy, result in higher interest rates and possibly impede house prices, which will impact on remortgage deals due to a lower equity in the home.
- Rates are low and you can stress test yourself
According to MoneyFacts.co.uk, the standard rate for an adverse credit mortgage on a two-year fixed term deal is 4.39%. That’s 2.12% higher than a standard mortgage. Because of that, when you’re planning for a mortgage, your worst-case scenario would be a dent in your credit records which you can account for by making sure you can afford mortgage repayments if they increased by 3%.
This interest cushion in your financial planning when applying for a mortgage not only helps you to account for a possible interest rate increase at the end of a fixed term, but also in the event of an unexpected financial situation, such as an adverse credit report increasing your risk level, subsequently seeing you in need of a higher rate lender.
- More adverse credit remortgages are available
Money Facts revealed in June that there were 694 poor credit mortgage products available across the market. That was a 167 increase from March 2017 when there were 527 mortgages available for people with bad credit.
As with anything, when there’s more supply, the rates become more competitive. That’s what is happening just now, but with the FCP issuing the warning to banks, it remains to be seen if the products available will diminish or if it’s speciality lenders that will increase their mortgage product offerings.
For the moment, the only suggestion is that banks will get more cautious and when that happens, it’s often reflected with higher interest rates. There’s too many people been affected by bad credit in the past, that future lending can’t afford to not consider bad credit applicants.
That’s why there are hundreds of products available and those are only the standard products for borrowers with adverse credit. There’s even more deals on offer with specialist lenders that can tailor products to meet your exact requirements.