How do bad credit mortgages affect interest rates and fees compared to regular mortgages?

How do bad credit mortgages affect interest rates

Having a bad credit score can limit your mortgage options, often resulting in higher interest rates and fees compared to regular mortgages. A bad-credit mortgage, also known as a subprime mortgage, caters to borrowers with low credit scores or adverse credit histories. In this article, we will explore the differences in interest rates and fees between bad-credit mortgages and regular mortgages and discuss the implications of these differences for borrowers.

Interest Rates

Bad-credit mortgages typically come with higher interest rates compared to regular mortgages. This is because lenders perceive borrowers with poor credit scores as higher-risk, meaning there is a greater chance that they will default on their loans. To compensate for this risk, lenders charge higher interest rates.

While regular mortgages in the UK generally have interest rates between 2% and 5%, bad credit mortgages can have interest rates as high as 6% to 10%. This significant difference in interest rates can result in a higher overall cost for the borrower over the life of the loan.

Fees and Charges

In addition to higher interest rates, bad credit mortgages often come with additional fees and charges compared to regular mortgages. These can include:

Higher arrangement fees: Lenders may charge a higher arrangement fee, which covers the cost of setting up the mortgage, for bad credit borrowers. These fees can range from 1% to 2% of the loan amount.

Higher valuation fees: The cost of having a property valued for mortgage purposes may be higher for those with poor credit.

Higher broker fees: Borrowers with bad credit may need to use a specialist mortgage broker to find a suitable lender, and these brokers may charge higher fees for their services.

Early repayment charges: Some bad credit mortgages may come with higher early repayment charges if the borrower decides to pay off the loan early.

Loan to Value Ratio (LTV)

Another way bad credit mortgages differ from regular mortgages is in the Loan to Value ratio (LTV). LTV is the proportion of the property’s value that is being borrowed. Generally, borrowers with bad credit are required to provide a larger deposit, resulting in a lower LTV. This means that they need to have more equity in the property, reducing the risk for the lender.

For example, while a regular mortgage may offer an LTV of up to 95%, a bad credit mortgage may only offer an LTV of 75% to 80%. This requires the borrower to come up with a larger down payment, which can be challenging for some individuals.

Final Thoughts

Bad credit mortgages in the UK typically have higher interest rates and fees compared to regular mortgages due to the increased risk associated with lending to borrowers with poor credit histories. These additional costs can significantly impact the overall affordability of a mortgage for borrowers with bad credit.

Before applying for a mortgage, people who want to borrow money should carefully consider their options and work to improve their credit score. By doing this, they can improve their chances of getting a better mortgage with lower interest rates and better terms, which will save them money over the life of the loan.

Get a free initial consultation from a mortgage broker.

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