Subprime Mortgages Explained

illustration of Subprime Mortgages Explained

What are subprime mortgages?

The term ‘subprime mortgage’ refers to a mortgage for people with bad credit. The phrase ‘subprime mortgage’ isn’t used much these days because it suggests the mortgage is in some way not as good as a mortgage for someone with a good credit score, which isn’t true. 

Nowadays, a mortgage is right for you and your individual situation because lenders work out what you can afford and how much interest they will charge you based on your affordability, income, outcome and credit history. 

But you might still hear ‘subprime mortgage’ used now and then to describe a mortgage offered to someone with a poor credit history.

The reason the term was coined is because Bad credit mortgages are typically less competitive than deals from mainstream lenders, or 'prime' mortgages. 

This is because borrowers with bad credit are seen as a bigger risk to lenders. However, they enable people who CAN afford a mortgage - but who would otherwise be turned down because of their credit score - to buy a home.  

Are subprime mortgages risky?

The mere mention of subprime mortgages can be a worry for many. The mortgage crisis of 2008 is still a fresh memory, when unregulated mortgages were a big factor in the housing crash. 

Today’s mortgage market for bad credit is much less risky and has way better regulation than before the crash. Gone are the flippant attitudes of the old subprime mortgage lenders. 

The mortgage process is much more in-depth than before, and your affordability will always be thoroughly checked. That means lenders are way more responsible than they once were, and will only give you a mortgage if they’re certain you’ll be fine paying it back. That’s good for you, and good for them. 

What caused the subprime mortgage crisis?

The subprime mortgage crisis was a time of financial collapse in 2008. Prior to this, mortgage applicants with bad credit were able to certify their own income without background checks or affordability tests. This means many people were borrowing more than they could afford.

Lenders approved mortgages as they expected borrowers would sell their house at an inflated cost rather than defaulting on their mortgage. But house prices fell, and many people were unable to make repayments. 

Nowadays, you can’t self-certify your own income. Lenders require a lot of information from you about your financial circumstances before they’ll agree to lend to you. That's why getting a mortgage today is a far different experience from what it was 20 years ago.

Why would someone need a subprime mortgage?

Life happens, and you can fall into bad credit for a number of reasons: illnesses, job losses and separations can all cause financial hardships. Even if a situation is temporary, it can make things more difficult when trying to get a loan further down the line, like a mortgage. 

This is where specialist lenders come in. They’ll look at your application on a case-by-case basis, and will check to understand the reasons for your adverse credit and your current affordability.

There are many other reasons why you might not fit the mould of a perfect mortgage applicant, meaning you’ll need a specialist mortgage lender:

  • A complex income - e.g. you’re a freelancer, contractor or limited company director

  • Adverse credit issues such as CCJs or defaults

  • No credit history - you've never taken out any sort of loan or credit card

We’re working to remove the misconceptions and stigma around bad credit. Nearly half of the specialist mortgages for people with difficult credit history or a complex income aren’t available to you directly as a borrower. They’re only available through specialist mortgage brokers. Our platform matches you with the perfect broker for your unique situation. See how it works. 

Do 100% mortgages still exist?

100% mortgages mean you don’t need to put down a deposit, so the mortgage is 100% of the property value. They’re not common at all. Some specialist lenders may offer them, sometimes. But at the moment, there are no 100% mortgages on the market. 

You’d probably need to have a perfect credit history to be considered if they ever do come back on the market. And they’re likely to only come onto the market in times of very strong national financial stability. 

If you don’t have a deposit and want a 100% mortgage, you could consider a guarantor mortgage. Which means someone else agrees to legally pay your mortgage if you can’t. This is a serious commitment, as your guarantor's home will be secured against a part of your mortgage. 

This means they’ll have to pay any outstanding costs if your house is repossessed and sold by the bank. Lenders see 100% mortgages as a risky investment, and if you're a first time buyer then you probably won't be approved. You'll usually have to pay much higher interest rates than a mortgage with a deposit. 

Alternatives to 100% mortgages

If you can’t save up for a big deposit, there are alternatives to the 100% mortgage:

Help to Buy

The Help to Buy scheme is a government scheme for first time buyers. It enables you to get on the property ladder with a 5% deposit. The government gives you an equity loan to put towards the cost of a new build home. The loan ranges from 5-20% of the property value (40% in London), and you'll need to purchase your home from a registered Help to Buy homebuilder. Read more about Help to Buy. 

Shared Ownership

Shared Ownership means you buy part of a property and rent the rest. You take out a mortgage on the bit you're buying, then pay a reduced rent on the bit you don't own. You’re able to buy between 25-75%, and can buy some or all of the remaining share when you can afford to. Read more about Shared Ownership. 

Right to Buy

Right to Buy was set up in the 1980s, and gives you the opportunity to buy your council home for a discounted price. Most lenders will accept your discount in place of a deposit, but it's only available in England. Read more about Right to Buy

How has the mortgage market changed since 2008?

Straight after the credit crunch of 2008, getting a mortgage was very difficult as most financial businesses had less money available to lend. The market recovered and is heavily regulated to encourage responsible lending. 

Mortgages are stress-tested rigorously before an application is approved, and affordability checks are a crucial part of the application process. Pre-2008, anyone could certify their income simply by signing a piece of paper - credit checks weren’t often carried out. 

When you apply for a mortgage today, you’ll be asked to submit a large amount of paperwork evidencing your income, along with a credit report. Read more in our Guide: What Do Lenders Look for in Mortgage Applicants?

Before submitting an offer on a property, most sellers and estate agents will want you to have a Decision in Principle from a lender. This shows you’re a serious buyer and a mortgage company is happy to lend you money, in principle, before they do the extended and detailed checks on you. 

What is an affordability check?

An affordability check is an assessment that a mortgage lender e.g. a bank does to work out how much they’re willing to lend you on a mortgage loan. For this reason, if you prove you can afford the repayments then there’s no reason you can’t get a mortgage - even if you have bad credit. Read more in our Guide: How to Get a Mortgage With Bad Credit

When progressing to a mortgage application, there's a great deal of paperwork that needs to be submitted - far more than ever used to be before the housing crash. 

You'll have to show:

  • Proof of ID

  • Recent utility bills for your current address

  • A credit report

  • Recent bank statements

  • Payslips if you're employed

  • Accounts if you're self-employed

A lender wants to know you can make the mortgage repayments without struggling. That's why the affordability checks are so in-depth. They'll see how you would cope if there was a drop in income or your debts increased.

Professional advice from someone who lives and breathes the mortgage industry is a good idea, especially if your situation isn't straightforward. The brokers we work with have seen it all, so they’re never judgemental and always helpful. 

Whether or not you’ll be able to get a mortgage will depend how serious your credit issues are, and how recently they happened. But just because you have bad credit issues, doesn’t mean you can’t get a mortgage. Read more about mortgages for bad credit.

COVID’s impact on mortgages

The Coronavirus pandemic has had a huge impact on the mortgage and housing markets. We went into lockdown in late March 2020 and couldn’t view properties, then when national lockdown was lifted in May 2020, the property market boomed. As of January 2021, we’re back in a national lockdown. 

There’s been many changes to the mortgage and property industries caused by the pandemic, some good and some bad. 

Read more in our Guide, it’s updated all the time, so is always up-to-date with the latest news about mortgages and the pandemic: How is the Coronavirus Pandemic Affecting Mortgages?

What is Haysto doing to help?

We’re working hard to remove the stigma and misconceptions around bad credit. You can end up with a bad credit history for many different reasons: a late credit card repayment,  payday loan, or life events such as job loss or illness. Having a bad credit history can make it more difficult to get approved for a mortgage, but it’s still possible. We want more people to know that. 

There are specialist lenders who have more experience giving mortgages to people with bad credit than others. You just need the right broker to get you to the right lenders. We know first-hand how being rejected for a mortgage can affect your mental health - so we came up with a solution.

Our platform uses a clever algorithm to match you to the perfect mortgage broker for your unique situation. Someone who’s up for the challenge, and has a proven track record of making mortgages possible for people like you. Get started.

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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