As increasing numbers of U.K. residents struggle to keep afloat financially against a background of stricter mortgage lending criteria, there has been significant growth in the subprime mortgage and re-mortgage markets. Many homeowners seeking to re-mortgage their home loans find that traditional lenders reject their custom due to bad credit. Their solution is to use adverse credit re-mortgages which are primarily available through brokers.
Homeowners look to re-mortgage for typical reasons which include debt consolidation; home improvements; to release cash; to buy a new car; and take holidays. Many on the brink of financial ruin opt for adverse credit re-mortgages to prevent their home being repossessed when they realise the payments are unmanageable. Debt consolidation is the most common reason.
Borrowers who are already serviced by a sub prime lender charging high interest rates may choose to re-mortgage to another adverse home loan to take advantage of an improved credit history which nevertheless still restricts them to the sub prime market.
Traditional mortgage lenders are not interested in high risk borrowers who have County Court Judgments, IVA’s, bankruptcies, repossessions and defaults in their credit history. Subprime lenders advertise that bad credit is no obstacle to re-mortgaging and present a solution to those with the aforementioned credit marks against them. In actuality those seeking to re-mortgage require a significant level of equity in their property to be considered.
The self-employed, short term contract workers and those who work on commission, also meet difficulties in obtaining traditional re-mortgages and often have to rely on the subprime market even though they do not necessarily have bad credit. The uncertainty of an irregular income is perceived as high risk.
Adverse credit re-mortgages, or non conforming problem re-mortgages, are an expensive choice though the interest rates levied are often lower than sub prime loans. Borrowers need to consider the re-mortgage fees, brokers’ fees and high interest rates levied in excess of standard mortgages rates. Full details of subprime re-mortgages are rarely advertised until enquiries are made, but the finance broker Ocean Finance does publicise details.
Ocean Finance offers adverse credit re-mortgages tailored to the level of bad credit and equity which borrowers have. A light adverse mortgage is available with a 2 year fixed rate of 8%, and no early repayment penalties. The loan to value is a maximum 50%. Borrowers may have up to £500 worth of CCJ’s and one missed mortgage payment in the previous 12 months.
This compares to heavy adverse terms of a 2 year fixed rate at 10.85% which allows for 4 CCJ’s worth £6000 and 3 missed mortgage payments in the previous 12 months. The loan to value is a maximum 60% and there are significant early repayment penalties.
If adverse credit re-mortgages are utilized then borrowers really need to factor in all the costs before selecting a lender. Lower interest rates are often used to lure customers but the fees can make them more costly than a higher rate. Brokers fees vary enormously: as an example Ocean Finance charges 3% of the total loan value against Pay Plan Financial Services £499. Borrowers should also ensure that both the broker and the mortgage lender are regulated by the FSA.
Adverse credit re-mortgages are best used only when financial circumstances dictate. They are useful for obtaining a lower than current interest rate or to clear down unmanageable debt. To release cash for non essential purposes it is more prudent to work on improving credit history in order to become eligible for a standard re-mortgage from a prime lender at lower rates.
Sources: Ocean Finance & Pay Plan Financial Services.