For many UK homeowners with less-than-perfect credit, the prospect of remortgaging can be daunting. Bad credit remortgages are a possible solution, but they come with their own set of challenges.
This guide aims to help borrowers with bad credit understand the process of remortgaging their property, including eligibility criteria, finding the right lender, and improving their chances of securing a remortgage.
Understanding Bad Credit
Bad credit refers to a borrower’s history of missed payments, defaults, or other negative financial behaviours, which may affect their ability to secure loans or credit. Credit reference agencies such as Experian, Equifax, and TransUnion collect this information and generate personal credit data, which lenders use to assess creditworthiness.
Various factors influence credit scores, including payment history, outstanding debt, length of credit history, types of credit, and recent credit applications. Negative events like missed payments, County Court Judgements (CCJs), Individual Voluntary Arrangements (IVAs), or bankruptcy can significantly impact a borrower’s credit score.
Bad credit can make it more challenging to secure loans or mortgages, as lenders perceive such borrowers as higher-risk. Consequently, these borrowers may face higher interest rates, larger deposit requirements, and fewer borrowing options.
Bad Credit Remortgages: Why Consider Them?
Consolidate debts: Borrowers can use remortgaging to consolidate high-interest debts, potentially lowering their overall interest rate and simplifying monthly repayments. (What does debt consolidation mean?)
Obtain better interest rates: Borrowers who have improved their credit score since securing their initial mortgage may be eligible for better interest rates on a remortgage.
Release equity: Remortgaging can allow borrowers to release equity from their homes to fund home improvements, cover unexpected expenses, or invest in other property.
Potential benefits of bad credit remortgages
Improved financial situation: Consolidating high-interest debts and securing better interest rates can lead to significant savings.
Opportunity to repair credit score: Making timely repayments on a remortgage can help borrowers improve their credit scores over time.
Access to more competitive mortgage products in the future: Borrowers who successfully manage a bad credit remortgage may qualify for more favourable mortgage deals in the future.
Eligibility Criteria
Lenders assess a borrower’s loan-to-value (LTV) ratio, which compares the amount of the loan to the value of the property. Borrowers with bad credit may be limited to a lower LTV, typically between 60-75%, requiring a larger deposit.
Lenders will evaluate a borrower’s affordability by assessing their income, expenditure, and existing debts. Borrowers with bad credit should ensure their financial situation can support the remortgage repayments.
Recent improvements in a borrower’s credit history, including settled debts, a decrease in outstanding credit, or timely repayments will be seen as positive events. Demonstrating consistent efforts to improve one’s credit file can help borrowers secure a remortgage.
The property’s type and value may also influence a borrower’s eligibility for a bad credit remortgage. Some lenders may be more hesitant to offer remortgages on non-standard construction properties or those with a low valuation.
Stable employment and income can significantly impact a borrower’s eligibility for a bad credit mortgage. Lenders typically prefer borrowers with a steady income source and a reliable employment history.
Types of Bad Credit Remortgages
Fixed-rate remortgages
Fixed-rate remortgages come with a set interest rate for a specified period, providing borrowers with predictability in their monthly repayments. This can be a suitable option for those who want to ensure their payments remain consistent.
Tracker remortgages
Tracker remortgages have a variable interest rate that follows the Bank of England base rate or another external rate, plus a set margin. While this option can offer lower initial rates, borrowers should be prepared for fluctuations in their monthly repayments.
Discounted variable rate remortgages
These remortgages offer a discount on the lender’s standard variable rate (SVR) for a specified period. Although discounted variable rates can provide initial savings, borrowers should be aware that the rate may increase once the discount period ends.
Capped rate remortgages
Capped rate remortgages provide a variable interest rate with an upper limit or “cap,” ensuring that the rate will not exceed a certain level. This option can offer a balance between the flexibility of a variable rate and the security of a fixed rate.
Offset remortgages
Offset mortgages allow borrowers to link their mortgage with a savings account, using the savings to reduce the interest charged on the mortgage. Although less common for bad credit remortgages, the offset option can offer potential interest savings for borrowers with savings.
Finding the Right Lender
While mainstream high-street lenders may be more hesitant to offer mortgages to borrowers with past credit issues, specialist providers cater specifically to this market. These subprime lenders may be more flexible in their eligibility criteria, making them a better fit for borrowers with poor credit.
It’s essential to research and compare various lenders and their subprime mortgage products to find the best deal for your specific financial situation. Be sure to consider factors such as interest rates, fees, and additional features when comparing offers.
Independent mortgage brokers can be a valuable resource for borrowers with bad credit, as they have access to a wide range of lenders, specialists and remortgage products. A broker can assess your financial situation, recommend suitable lenders, and guide you through the application process.
Day one remortgages and the six month rule
There are occasions where you may need to refinance a property very quickly after buying it.
This will be more difficult that you might imagine due to the six month mortgage rule that a lot of lenders enforce. Basically, if you haven’t owned a property for at least six months a lot of lenders will refuse your re-mortgage application.
The solution is a day one remortgage.
Under what circumstances might someone need a day one remortgage? Very often it will be that the property was bought under-value and now the improvements have been done its value has risen. Or that the property was bought with a short term bridging loan as it was a repossession bought at auction.
Tips for Improving Your Chances of Getting a Bad Credit Remortgage
Settling outstanding debts: Paying off existing debts can improve your credit situation and demonstrate to lenders that you’re committed to better financial management.
Making timely payments: Ensure that you make all payments on time, including utility bills, credit card balances, and loan repayments, to show lenders that you’re a responsible borrower.
Using credit responsibly: Use credit wisely by keeping your credit usage low, stay within your overdraft limits and avoiding unnecessary borrowing. Avoid payday loans as these can affect your ability to get a mortgage.
A larger deposit can improve your LTV ratio and increase your chances of securing a bad credit remortgage. Aim to save at least 20-30% of the property’s value as a deposit. You don’t normally need a cash deposit to remortgage, but by reducing the loan to value you open up lots more lenders and products.
Show lenders that you can afford the remortgage repayments by providing evidence of a stable income, minimising your outstanding debts, and maintaining a consistent employment history.
Frequent credit applications can harm your credit history and signal to lenders that you may be a high-risk borrower. Limit the number of applications you make and focus on applying for remortgage products that are suited to your financial situation.
The Application Process
Proof of income: Provide payslips, tax returns, or other documents to verify your income.
Bank statements: Lenders will typically request at least three months of bank statements to assess your financial habits and stability.
Identification: Valid forms of ID, such as a passport or driving licence, will be required to confirm your identity.
Credit reports: Obtain your own credit report from the major credit reference agencies (Experian, Equifax, and TransUnion) and review it for any discrepancies or errors that could negatively impact your credit score.
Be aware of the fees and charges associated with bad credit remortgages, such as arrangement fees, valuation fees, legal fees, and broker fees. These costs can add up, so factor them into your overall remortgage budget.
The remortgage process can take anywhere from 4-8 weeks, depending on factors such as the lender’s processing time and the complexity of your application. Be prepared for potential delays and maintain open communication with your lender and mortgage broker throughout the process.
Bad credit remortgages may seem challenging, but it is entirely possible for UK homeowners with less-than-perfect credit to find suitable solutions.
By understanding how lenders work, improving your credit score, and working with a knowledgeable mortgage broker, you can take charge of your financial future and secure a remortgage that meets your needs.
Remember, rebuilding your credit and finding the right remortgage product takes time and effort, but the rewards can lead to a more stable financial situation and better mortgage opportunities down the line.
FREQUENTLY ASKED QUESTIONS
What is a bad credit remortgage?
A bad credit remortgage is a financial product designed for individuals who have a poor credit history but wish to remortgage their property. This could be to secure a more competitive interest rate, consolidate debts, or release equity from their property.
Can I remortgage with bad credit?
Yes, it is possible to remortgage with bad credit, although the process may be more challenging. Lenders will consider factors such as the severity of your credit issues, the amount of equity in your property, and your current income and expenditure to determine if you are eligible.
How can I improve my chances of being approved for a bad credit remortgage?
To improve your chances of being approved for a bad credit remortgage, you can take several steps:
Clear outstanding debts and improve your credit score.
Maintain a stable employment history.
Demonstrate a strong and consistent income.
Reduce your overall debt-to-income ratio.
Consider using a specialist lender or broker with experience in bad credit remortgages.
How does having bad credit affect my remortgage options?
Having bad credit can limit your remortgage options, as some mainstream lenders may decline lending to those with a poor credit history. However, there are specialist lenders who cater to individuals with bad credit. You may face higher interest rates and less favourable terms, but a bad credit remortgage is still possible.
Can I consolidate my debts with a bad credit remortgage?
Yes, consolidating your debts is one reason you might consider a bad credit remortgage. By remortgaging your property, you could potentially secure a larger loan and use the additional funds to pay off your existing debts. This could help simplify your finances and reduce your monthly repayments.
How can a mortgage broker help me with a bad credit remortgage?
A mortgage broker with experience in bad credit remortgages can help you navigate the application process and improve your chances of approval. They can assess your financial situation, recommend suitable lenders, and guide you through the application process, ensuring you submit the necessary documentation and meet the lender’s criteria.
Does bad credit affect joint mortgages?
Yes. If either of the applicants has any bad credit then it will affect the choice of lenders and eventual outcomes. Read more.
