Great news. Bad credit doesn’t mean that you can’t obtain a mortgage, nor does it mean that you won’t be accepted for a loan or credit card.
However, what it does mean is that you will be hit by higher interest rates and less favourable products.
What is a product and an interest rate?
Interest rate – this is the rate a bank or other lender charges to borrow its money. The current Bank of England base rate is 0.75%
The Bank of England base rate is the UK’s most influential interest rate and its official borrowing rate. It is currently 0.75% – a historically low figure. The base rate impacts all other interest rates. When the rate is low, it costs you less to borrow money, however lenders are free to make their rates as high or low (no lower than 0.75% otherwise they will not make profit – just break even) as they see fit.
Product – lenders bundle their interest rates and incentives in to something called a product. For example a product for a first time buyer with Halifax could mean a 1.68% interest rate over a 2 year fixed period with a 2% early repayment charge and £500 cash back to assist with legal fees. Products vary and can be packaged with multiple or no incentives.
Expanding on the above example, this means that over the 2 year fixed period, your monthly payments will reflect the 1.68% interest rate. If you decide to Remortgage or sell your property earlier than when the 2 year fixed period ends, you will have to pay a 1%+ fee (% depends on the terms) of your remaining mortgage to do so.
Interest Rates & Products – These are things you need to take in to consideration. Some people would rather go with a lender that has a product with a slightly higher interest rate which allows them to exit the deal early without a penalty.
These kind of products are good for those that are Remortgaging due to their current product expiring, but wanting to keep their options open and not be fixed in to a lengthy deal as they have the intentions of selling/moving in the near future – within the year or so.
Does having bad credit mean that I can’t get a Mortgage to assist in the purchase of a property?
Having good credit means that your options are limitless. You can get favourable deals from high street lenders with low interest rates and great package deals.
Having bad credit, defaults and missed payments means your options are limited. You are limited to specialist lenders who lend to people with a less favourable credit file. Due to this, the interest rates are high, come with a product fee and little, but mostly, no incentives. An example of this kind of Lender is Pepper Money.
Someone with “bad credit” will be offered a Mortgage with a 5% interest rate at a specialist lender opposed to someone with “good credit” who has more options and can get a Mortgage from a high street lender with an interest rate as low as 1.42%.
Why do specialist lenders have such high interest rates?
This is because they’re offering something that you can’t get anywhere else – they can take advantage. Having “Bad credit”, you are also a liability. How do they know you are going to pay? How do they know that you aren’t going to continue with the same behaviour pattern seen on your credit file? Interest rates that are 3x higher than their high street competitors mean that a specialist lender reclaims like for like funds 3x quicker than said high street lender. Remember the Bank of Englands base rate is 0.75%. Most lenders have accounts with the Bank of England so benefit from a low base rate whilst also benefiting from the profits of a high interest rate when lending to others.
Bad Credit: County Court Judgement, missed payment, default, settlement of unpaid debt within the last 6 years etc.
Good Credit: Active credit card with less than 20% limit in use, none of the above.
Exception: Sometimes a high street lender will want an explanation for a negative marker on your credit file.
For example, “Why did Mr X miss a payment on his mobile phone bill 2 years ago twice?”
Reasonable explanation would be: There was confusion with the Direct Debit dates and account the funds should be retrieved from. This was resolved with the mobile phone company and won’t happen again.
Be responsible with your credit. Your future house buying self will thank you.