Mortgage Types and Rates for Bad Credit

illustration of Mortgage Types and Rates for Bad Credit

The mortgage world can seem very confusing. Even more so if you have a bad credit history. The good news is, it’s definitely possible to get a mortgage if you have a poor credit rating. You’ll have fewer options available to you than someone with a perfect credit score, but it’s not impossible.

In this Guide, we’ll explore the different types of mortgages that could be available to you, along with how to get expert advice for your situation.

The different ways of repaying your mortgage

When it comes to paying back your mortgage, there’s two ways you can do it: ‘repayment’ or ‘interest-only’. Most mortgages on the market are repayment, but some interest-only mortgages have started to make a comeback.

What is a repayment mortgage?

Most homeowners have a repayment mortgage. Essentially, each monthly repayment will chip away at both your mortgage and the interest on it. At the end of your mortgage term, you’ll have paid off the total cost of everything - the original amount you borrowed plus the interest.

When you first start making your repayments, the bulk of the money will go towards paying off the interest. But this isn’t a reason to be concerned. The interest on mortgages is known as ‘front-loaded’, which means you're paying more interest at the start. Simply put, your interest is calculated on how much money you have left to pay back, so the interest will remain high until you start chipping away at your outstanding balance. The more you pay off, the less interest you'll be paying.

What is an interest-only mortgage?

It’s as it says. With an interest-only mortgage, you’re only paying off the interest on your loan each month, rather than paying back the money you’ve borrowed. So at the end of your mortgage term, you’ll still have the entire loan to pay back. 

The reason people opt interest-only is because the monthly repayments are a lot lower. It’s not a hugely common option for homeowners because it’s only cost-effective in the short term - you’ll still have to pay off the lump sum at the end of your mortgage term. Most people who opt for interest-only mortgages have chosen this for their buy-to-let properties. 

Choosing your mortgage interest type

Along with choosing how you pay back your mortgage, you’ll also need to consider the interest type on your mortgage. There’s a few different ones, and they can all affect your mortgage differently.

Fixed Rate

Fixed rate mortgages are very popular in the UK. Fixed Rate means the amount of interest you’ll pay won’t change for a fixed amount of time. Typically, this is between two and five years. When your fixed rate deal ends, your interest rate will switch to your mortgage lender’s ‘standard variable rate’ (SVR). 

If you want a longer fixed rate deal, you’ll normally have to pay a higher level of interest. When your deal is up, it’s a good idea to remortgage to get a better deal. 

Fixed rate pros:

  • You know exactly what your repayments will be every month.

  • Your mortgage interest will stay the same, even if rates increase.

Fixed rate cons:

  • If interest rates drop, you won’t benefit from the lower rate.

  • If you want to repay your mortgage early, you’ll usually have to pay a penalty fee.

Standard Variable Rate (SVR)

SVR mortgage rates follow the Bank of England’s base interest rate as it goes up or down. Interest rates are affected by changes to the UK economy. If interest rates go down, you’ll pay less interest on your mortgage. If it goes up, you’ll pay more. 

SVR pros:

  • You don’t have to stick with this rate, it’s usually for when a different deal comes to an end.

  • You usually won’t pay a penalty if you pay off your mortgage early. ‍

SVR cons:

  • If interest rates shoot up, your repayments could become very expensive.

  • If your repayments become more than you can afford, your home could be at risk.

Tracker Rate

Similar to the SVR, this type of mortgage interest follows trends from the Bank of England. Your interest rate will be set either under or over the base rate. Tracker mortgages follow (track) this external interest rate.

Tracker pros:

  • Your repayments will go down if interest rates drop.

  • You could get a good introductory deal, as trackers are riskier than other mortgages.

Tracker cons:

  • Your repayments will increase if interest rates go up, making budgeting more difficult.

  • Some tracker mortgages set certain lower limits (known as collar rates) meaning you won’t benefit from really low payments if rates drop below this limit.

Discount Rate

A type of variable rate, Discount Rate mortgages have a fixed interest rate set lower than your lender’s SRV for a period of time. Essentially a ‘discounted’ rate. 

Discount Rate pros:

  • You can grab a low interest rate at the right time.

  • Your arrangement fee may be lower.

Discount Rate cons:

  • Your rate could change at any time, making budgeting more difficult.

  • Just because the Bank of England changes their base rate, doesn’t mean your lender will change theirs. You might also have a cap on how low your repayments can go.

Capped Rate

Capped rate mortgages are a form of Variable Rate mortgage. However, they have an upper limit - or cap - for how much the interest rate can increase. They’re fairly rare these days.

Capped Rate pros:

  • Peace of mind; you know your payments can’t go above a certain level

  • You can benefit from the lower interest rates

Capped Rate cons:

  • Despite your cap, interest rates could still go up, making monthly budgeting harder.

  • Capped Rate mortgages are rare, so you may struggle to find one.

Offset

Offset mortgages help you to pay off your mortgage faster. This can be through cutting down your monthly payments or shortening your mortgage term. Offset mortgages can be either fixed rate or variable, but the difference is your savings are used to ‘offset’ some of the interest paid on your mortgage.

Offset pros:

  • You can get more interest on your savings than you would in a normal savings account.

  • It’s a popular option for parents getting their children kids onto the property ladder.

Offset cons:

  • You’ll probably have to pay a higher interest rate compared to other mortgages. 

  • If you don’t have a lot of savings, you may not see the benefits.

Knowing what mortgage to go for can be confusing, especially if you have a bad credit history. It’s a good idea to work with a specialist mortgage broker. A broker will look at your unique situation and find the best mortgage for you. They’ve seen it all, and aren’t judgemental. Make an enquiry to get matched to a broker.

Bad Credit mortgages to look out for

Flexible mortgages 

Like the name suggests, flexible mortgages are flexible with how you make your repayments. You can choose to make overpayments or underpayments when needed. Though some standard mortgage deals will allow you to overpay up to a certain amount per year. Flexible mortgages can be more expensive than traditional deals, so it’s a good idea to check if you’ll actually use the features before applying. 

Cashback mortgages

Some mortgages will give you cash when you take them out. This can be appealing when you need to pay for moving costs and other expenses. Be careful, as some cashback mortgages aren’t always the cheapest when it comes to fees and interest. It’s best to speak to a mortgage advisor who can weigh up your options. 

Specialist mortgages for bad credit

If you have bad credit, you might have been told you can’t get a mortgage. But that’s not always true! You may just need to apply for a bespoke mortgage with a specialist lender. If you’re struggling to remortgage or get on the property ladder, there are some specialist options you could explore. 

Guarantor mortgages

A guarantor mortgage is where someone else agrees to pay for your mortgage if you can’t. They're a popular option for people with bad credit, low income, or a small deposit. 

Having a guarantor means that you’re more likely to be accepted for a mortgage than if you were applying alone with bad credit. You could even borrow more than you would on your own, or unlock the lower interest rates.

A specialist mortgage lender will look at your individual circumstances when assessing your application. Lenders will want to know what caused the bad credit, how long ago it was, and how much money was involved. If you've been working to improve your credit since your credit issues happened then lenders will look more favourably on your application.

A mortgage lender will need to secure your mortgage against your guarantor’s home or their savings. This means they can repossess your guarantor’s home if your mortgage doesn’t get paid. Because of this risk, it’s a good idea to get advice from a mortgage broker before applying for a guarantor mortgage. 

Joint Borrower Sole Proprietor mortgages (JBSP)

A Joint Borrower Sole Proprietor mortgage (JBSP) is a mortgage that you take out with your parents or family member. You’re all responsible for paying the mortgage, but you’ll be the sole owner of the property. 

Mainly designed for younger people, JBSP mortgages are a good option if you haven’t built up a credit history, or have a bad credit score. You can work on building your score once your mortgage is approved, and you’ll be in an easier position when it comes to remortgaging if you’ve kept up with your repayments.

You might also consider a JBSP you’re just starting out in your career/have a low income currently, but expect your earnings to increase. It’s also good if you have your eye on a bigger home or a property in a better location.

JBSPs are bespoke mortgages that require carefully crafted applications, and only certain lenders offer them. If you’re thinking of taking out a JBSP, it’s best to speak to an expert mortgage broker. That’s where we come in! Make an enquiry to speak to an advisor - it only takes 60 seconds and won’t affect your credit score.

Help to Buy mortgages

Help to Buy is a government-backed scheme helping first time buyers get on the property ladder with a 5% deposit.

The scheme provides you with a government equity loan to put towards the cost of a new build home. Because of this, you won’t need to borrow as much on a mortgage, so you could get cheaper rates than if you were otherwise taking out a 95% LTV mortgage. 

Getting a Help to Buy mortgage when you have bad credit will be trickier than someone with a perfect credit score. You'll need to find a mortgage lender who specialises in lending to people with bad credit. The best way to find them is to use a specialist mortgage broker, who knows the market, will be able to find the best deal for you, and who'll make your application look as good as possible to potential lenders.

Shared Ownership mortgages

Shared Ownership mortgages help people who can’t afford 100% of the cost of a home to purchase a share of a property and rent the rest. Shared Ownership is a good option for people who can't save up a big deposit. You'll generally put down between a deposit of 5-10% of the share you're buying.

Having bad credit can make things more difficult compared to someone with a good credit score, but it doesn't make homeownership impossible.

If you have adverse credit history then you may be asked to pay a higher interest rate or put down a bigger deposit. That's why it's a good idea to work with a specialist mortgage broker - someone who's experienced in Shared Ownership and bad credit mortgages, and who'll find you the right lender and the best rate.

Right to Buy mortgages

If you're a council tenant in England, the Right to Buy scheme could offer a big discount on the price of buying your home. The maximum discount you can get through the Right to Buy scheme is £84,200 or £112,300 if you live in London. This is regardless of how long you have lived in your home, or how much it is worth. 

Once your landlord has agreed to sell your council home to you, the Right to Buy mortgage application process is basically the same as it would be if you were buying a house on the open market. 

Mortgage lenders will look at your credit history when you apply for a Right to Buy mortgage. Issues like CCJs or defaults will be more concerning to a lender than missed or late payments. 

Lenders will also look at the circumstances around your credit issues, like how much money was involved and how long ago it took place. You can get an idea of how much you could borrow on a mortgage with our Bad Credit Calculator.

WE MAKE MORTGAGES POSSIBLE

Over 50% of mortgages for people who are self-employed or have bad credit aren’t available directly to you. They’re only available through specialist brokers. Using our platform guarantees you’ll be matched with a broker who has a proven track record of making mortgages possible for people like you. Less processing, more understanding.

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