When someone borrows money to buy a property, the full amount they have to pay back depends upon the interest rate charged by the lender. That rate can differ due to a variety of reasons, including the Bank of England’s base interest rate, the type of mortgage chosen, and the credit status of the applicant.
How might these things affect you and your mortgage application? And what can you do about it to make sure you get the best deal possible? To help give an understanding of that, let’s take a look at the different types of mortgage that might be on offer.
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What determines interest rate for bad credit mortgages?
When it comes to determining rates for bad credit mortgages, lenders will charge more than they would those with exemplary credit records. This is because if someone has a history of bad credit, they are deemed to be a bigger risk – or to put it another way, whether fairly or unfairly, lenders think there’s a greater chance they will fail to maintain payments.
That means if we look again at the example used above in the tracker mortgage section, you might find that if the Bank of England’s base rate is 0.25%; then the rate offered to a bad credit applicant is base rate plus 3%, putting the interest charged on a mortgage at 3.25%. (Again, please remember these figures are for illustration only – the actual figures charged may bear no relation to this; you should consult a mortgage adviser for accurate figures.)
Depending on the various adverse credit events involved, a history of bad credit might be considered to be more or less serious; someone with a history of less serious issues, such as late payments or defaults, for example, might expect to be offered a better deal than someone with more serious issues, such as perhaps an earlier property repossession or a bankruptcy order.
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Other considerations to take into account
When you are looking for a bad credit mortgage deal, there are other things to take into account alongside headline interest rates – and in fact, while some of these rewards or incentives might look good on the surface, you could end up paying more in the long run.
The kinds of things to consider include whether a fee-free deal is best, if it’s worth being tied in to a mortgage for a set length of time and what the cost of paying a mortgage off more quickly might be.
For example, if instead of paying a £1,000 arrangement fee you accept a slightly higher interest rate over a fixed term, do you win or lose overall?
If you are tied to a fixed rate mortgage for several years and the interest rate drops, is it better to keep on paying what you are paying, or accept the penalty charge and switch, so your monthly payment drops?
And if you are in a position to increase your monthly payment and clear the mortgage sooner, is it worth your while to do so?
In some cases rewards and incentives play in your favour; in others, they may work against you.
Another issue that might affect you is whether your mortgage is portable. If you are likely to want to move within a few years, then this is a key consideration, as by taking your mortgage with you, you could potentially save a lot of money (not least a further arrangement fee!).
We would always recommend you seek advice from a qualified mortgage adviser who can compare rates across the market. An experienced mortgage broker will help you to compare rates, costs and product features and help you to make a fully informed decision as to which mortgage deal is the right one for you.
How do I get best bad credit mortgage rates?
Speak to Just Mortgage Brokers. We have a specialist team of bad credit mortgage brokers that helps our clients with CCJs and other adverse credit events to obtain affordable bad credit mortgages. People with less than perfect credit histories are usually best served by the sorts of specialist lender that cannot be found on the high street. Just Mortgage Brokers has many years of experience working with a network of bad credit lenders across the UK, so we know exactly where to turn to find a mortgage to suit the particular needs of each and every client, regardless of their credit history.
Can I get a bad credit mortgage?
For many people, a poor credit rating can present the very real threat of being unable to obtain finance, with many high street lenders unwilling to help applicants based on their history of payments. Due to the constraining nature of the industry, we are currently unable to offer accurate rates for customers looking for bad credit mortgages. However, we will aim to achieve the best possible rate for you and even if you have a severe bad credit history, we may be able to help. Get in touch today for free initial advice and no-obligation quotes from our team of experienced bad credit brokers.
What’s the difference between different types of mortgage?
There’s a potentially confusing range of different types of mortgage available on the market – there are literally hundreds of different offers – and this can make it tricky to know which one to go for.
However they work or whatever they are called, the majority of mortgages are repayment mortgages. That means you borrow an amount of money to buy a property and then pay back the loan capital plus whatever interest is being charged over the term of the mortgage. Assuming all payments are made in full and on time, and nothing else happens that affects the loan, at the end of that term the amount borrowed has been repaid – with interest –and the property is yours.
The exception to this is an interest-only mortgage. With this, you pay back only the interest on the loan, and it’s up to you make sure you will be able to pay off the capital at the end of the term. Lenders will want an assurance that you will be able to pay off the loan when it’s due, so you’ll need to be able to show how you plan to do that. This is commonly achieved through investing money in a savings scheme.
Advantages include that you have a reduced monthly mortgage payment, and if it looks like your savings will fall short of what was expected, you ought to be able to switch to a repayment style mortgage to recover the situation. You should bear in mind, however, that this type of mortgage is becoming increasingly less common and you will most likely be offered a repayment mortgage as a matter of course.
Whether you opt for repayment or interest-only, there is a variety of different types of mortgage available. The two main types are fixed rate and variable rate, and other popular options are the discounted rate and tracker mortgages. While other types of mortgage do exist, we’re going to focus here on the most popular options.
Fixed Rate Mortgage
With a fixed rate mortgage, no matter what happens to either the Bank of England’s base interest rate or the rate of interest typically charged by the lender, you will pay the same amount of interest for the term of the loan. The rate is usually fixed for between two and five years.
These have the advantage that you know what you need to pay and so can budget for it with confidence – even if interest rates go up, your payment remains the same.
However, should interest rates fall, you will not gain any benefit, plus the rate charged tends to be higher than with a variable rate deal. You should also be aware that if you decide to change mortgages to try to get a better deal before the term is up, you are likely to be charged a penalty fee.
With this type of mortgage, you need to keep an eye on the term you are tied in for, and start looking for a new mortgage a few months before it’s up.
Variable Rate Mortgage
The repayments on a variable rate mortgage, as the name suggests, can change at any time, depending upon interest rate fluctuations. While that isn’t a problem if the rate goes down, it can cause problems if the rate goes up.
Standard variable rate (SVR) mortgages are charged at the lender’s standard rate of interest, which will change in line with the Bank of England’s base rate. Unlike a fixed rate mortgage, however, you aren’t tied on for a set period of time so can leave to take advantage of a better deal without paying a penalty. You are also able to overpay without penalty, so if you have a windfall, or the interest rate drops but you leave your payment at the same level, you pay off the loan more quickly.
Discounted Rate Mortgage
With this type of mortgage, you are offered a discount on the lender’s SVR. Like a variable rate mortgage, the rate can still go up or down depending on the Bank of England’s base rate, and like a fixed rate mortgage, the deal generally ties you in for a set length of time. This is usually for two or three years, and there are likely to be penalty charges if you want to leave the deal before the end of the term.
These track and change with (usually) the Bank of England’s base rate, and are generally charged at base rate plus a percentage. Introductory tracker mortgages are often offered at a lower than usual interest rate as an incentive to attract new customers, but after a set amount of time the rate will increase to the lender’s standard tracker rate.
Say, for example, that the Bank of England’s base rate is 0.25% – an introductory tracker rate might add 1% to that, putting the interest charged on a mortgage at 1.25%. After (for example) one year, the rate will then increase to the standard tracker rate – say the Bank of England’s base rate plus 1.5% – putting the interest charged on a mortgage at 1.75%. You will need to be prepared for the increase in cost when the rate changes. (Please note: the figures quoted are for illustration only.)
As the interest charged on this type of mortgage is calculated using the Bank of England’s base rate, which is variable, the repayments will fluctuate in line with that. While a drop in base rate will mean a drop in your payments, if the base rate should jump, your payments will, too; you should bear that in mind before committing.