Bad credit mortgages, also known as subprime mortgages or adverse credit mortgages, are loans provided to individuals with a poor credit history. These mortgages cater to borrowers who may have faced financial difficulties in the past, such as missed payments, defaults, or County Court Judgements (CCJs). While bad credit mortgages can provide the opportunity for people to secure a home, it is important to be aware of the potential risks and drawbacks associated with them. This article aims to highlight the possible pitfalls and challenges of obtaining a bad credit mortgage in the UK.
Higher Interest Rates:
One of the most significant drawbacks of bad credit mortgages is the higher interest rates that lenders charge. Due to the perceived risk associated with lending to those with poor credit, lenders often compensate by applying higher interest rates. This means that borrowers with bad credit mortgages will typically have to pay more in interest over the life of the loan, making the overall cost of the mortgage considerably higher.
Individuals with a bad credit history are often required to provide a larger deposit when applying for a bad credit mortgage. This can be financially challenging for those who are already struggling to save for a deposit. In some cases, lenders may require a deposit of up to 20–30% of the property’s value, significantly more than the typical 5–10% deposit for a standard mortgage.
Limited Mortgage Options:
When applying for a bad credit mortgage, borrowers may find that they have fewer options available to them. Many mainstream lenders may not offer mortgages to individuals with poor credit, which means borrowers may have to turn to specialist lenders. This can lead to a lack of competitive mortgage products, potentially resulting in less favourable terms and conditions.
Stricter Affordability Assessments:
Lenders are likely to carry out more rigorous affordability assessments for borrowers with poor credit. This means that even if a borrower manages to secure a bad credit mortgage, they may be offered a smaller loan amount than they would otherwise have been eligible for. This could limit the type of property a borrower can purchase, or force them to take on additional debt in order to make up the difference.
Risk of Repossession:
Taking on a mortgage with a poor credit history increases the risk of repossession. If a borrower defaults on their mortgage payments, the lender has the right to repossess the property in order to recover their losses. While repossession is a risk for any mortgage borrower, it is particularly acute for those with poor credit, as they are more likely to struggle with meeting their monthly repayments.
Impact on Future Borrowing:
Obtaining a bad credit mortgage can further impact an individual’s credit score, making it more difficult to secure future credit or remortgage at a better rate. Additionally, being tied to a high-interest mortgage can make it challenging to save for emergencies or other financial goals.
While bad credit mortgages can provide an opportunity for those with poor credit histories to get on the property ladder, it is essential to consider the potential risks and drawbacks. Higher interest rates, larger deposits, limited lending options, stricter affordability assessments, the risk of repossession, and the negative impact on credit scores are all factors that should be carefully weighed before deciding to pursue a bad credit mortgage.
It may be worth considering alternative options, such as improving one’s credit score or exploring government-backed schemes, to reduce the risks associated with bad credit mortgages.