A term that is falling out of fashion, subprime mortgages refer to mortgage deals which we would regularly call ‘bad credit’ or ‘poor credit’ mortgages.
These types of specialist mortgages are referred to as ‘subprime’ because the deals are typically not as impressive as an optimal, or ‘prime’, mortgage. That isn’t to say that bad credit mortgages are bad deals, but the rates offered on mortgages that are tailored for people with a history of poorer credit are often a little higher than those available for people with consistently strong scores.
Learning from the subprime mortgage crisis
2007 and 2008 were difficult times in the mortgage industry! The subprime mortgage crisis refers to a period of financial collapse that occurred a decade ago, forcing many lenders to re-evaluate their lending terms and criteria. Today’s bad credit mortgage market is a less risky and more aware industry that benefits from improved regulation. There is little of the old attitude of the subprime mortgage lender still in evidence today.
Obtaining a mortgage today, even one tailored around a poorer credit history, is a little harder than it was at the height of subprime lending during the early years of the 21st Century, but at The Mortgage Hut we can help you get a good deal, no matter your financial situation.
The subprime mortgage lender - willing to take on higher risk, for a little more reward
For the mortgage provider, lending is a matter of risk assessment vs. potential return on investment. Your credit history and other information in your application provides the lender with a way to assess your level of risk, and then it remains for them to determine an appropriate interest rate and agreed loan-to-value to make the prospect a strong investment.
This means that if you present more risk to the lender, it can be mitigated somewhat by their increasing the value of the investment (by raising the interest rate, or lowering the overall loan-to-value).
This is also true in reverse, and those who are lower risk borrowers looking for a conventional mortgage can, therefore, demand lower interest rates and request higher LTV mortgages.
Not all lenders are willing to take on higher-risk prospects, leaving room for a growing number of specialised bad credit mortgage lenders, sometimes called ‘subprime mortgage lenders’. As a mortgage broker, at The Mortgage Hut, we work with a wide range of specialist lenders to ensure we can meet our customers’ needs, and this includes multiple quality bad credit mortgage lenders.
Can I get a subprime loan?
With help through a specialist mortgage advisory service, like The Mortgage Hut, it is not too hard to get a home loan even as a subprime borrower.
Your credit history in the UK tracks the last six years of activity. This means that after six years, any adverse credit situation that was on your report ‘drops off’ and will not affect you on your mortgage application in any way.
For most lenders, you don’t even have to wait the full six years, and events that are four years or older are generally disregarded.
How much impact the last four years of credit history has is down to the type of problem and how long ago it occurred.
Most people only have a few minor marks on their credit report. It is easy to believe that anything and everything is going to hamper your mortgage application, but the truth is that minor issues on your credit history are more typical than you might believe.
Minor events include:
- Bounced direct debits
- Missed bill payments
- Late or missed credit card or loan payment
If you have a minor event on your record, then you may be cut off from some of the very best interest rates, and you may be asked for a higher deposit. A lot will depend on the last twelve months of your history, and if your last minor issue was more than a year ago, the chances are high it will be ignored completely.
Specialist lenders always look at each application individually and no two lenders are the same - so what might be acceptable for one would result in a poorer rate from another. Our experience at The Mortgage Hut means we know which lender is likely to be more amenable to your specific situation and will help you select the provider best suited to your circumstances.
Medium severity events
Medium severity events include:
- Missed mortgage payments
- County court judgments (CCJs)
Again, time is a huge factor and the more months you can put between you and a CCJ or similar problem, the better your chances of a successful mortgage application and good rate.
Medium severity events will put you outside of some of the best deals. 95% LTV loans (those that only require a 5% deposit) will probably be out of reach, and you should expect to raise a deposit of 10% or more.
There are still many mortgage products available to you, with a wide range of deals. We are certain to find a mortgage to fit!
Insolvency and other major events on your credit history will greatly affect the type of loan you can get.
Major events include:
- Individual Voluntary Arrangement (IVA)
Most lenders are going to want you to have a year of clear and improved credit history following any insolvency release before they consider you for a mortgage. While it is by no means impossible to get a mortgage following a recent IVA or bankruptcy, if you are able to wait, then it is advisable. Not only does that put the discharge from the arrangement further into he past, it also provides you with an opportunity to work on (and prove) a more stable financial position going forward.
At The Mortgage Hut we work with some excellent specialist lenders who are willing to consider borrowers soon after an insolvency has been completed, but they are few and would require more substantial deposits as well as imposing higher rates of interest on the deal. Our advice would always be to wait as long as you can before pushing for a mortgage after bankruptcy.
Repossession - the lender’s ultimate security
The greatest mitigation to the lenders’ risk, is that if everything goes wrong and you fail on your monthly repayments, they are legally able to repossess your home and sell it to recoup their losses.
Neither the bank nor you really want this to happen.
The bank will do everything they can early on to make sure that such an outcome isn’t likely, but should you fail to meet your side of the arrangement, they will want to know that the house value covers any outstanding balance, and that the property can be sold swiftly and without complication.
For this reason, another factor in your mortgage application will be the type of property you are buying. If the property is difficult to sell, then it is far more likely you will have your application rejected, even by the specialist subprime lenders who are willing to consider your situation.
In short - if you are looking to buy a property and have a history of poor credit, consider limiting your options to standard build properties in desirable locations; it will improve your chances to do so.
And always remember - your home is at risk if you fail to make payments secured on it.
Help from The Mortgage Hut
At The Mortgage Hut we are dedicated to helping our customers get the best mortgage deals that will suit them. We have a range of articles on subprime and bad credit mortgages, including advice on how you can improve your position for a more successful application.For personalised help, contact us directly. Use our contact form to have one of the specialist team get back to you, or simply pick up the phone today