Can you remortgage with bad credit?
Remortgaging can be a great way to reduce your monthly mortgage payments, switch to a more favorable interest rate, or release equity from your property. However, if you have a bad credit score, you may find it challenging to remortgage your property.
If you have a bad credit score, remortgaging can be a way to rebuild your credit and improve your overall financial situation. A remortgage involves switching your existing mortgage to a new lender or renegotiating your existing lender with your current lender.
A bad credit score is a common problem faced by many people, and it can be caused by various reasons, such as missed payments, defaults, or bankruptcy. Having a bad credit score can make it difficult to get approved for a new mortgage or remortgage, but it doesn't mean that you cannot remortgage at all.
By remortgaging, you can consolidate your debts, access better credit terms, and lower your monthly repayments, all of which can improve your credit score over time.
In this article, we will discuss how you can remortgage with a bad credit score.
Reasons For Having Bad Credit Scores
There are various reasons why you may have a bad credit score in the UK. Some of the most common reasons are:
- Missed payments
Missing payments on your credit card, loans, bills or even mortgage arrears can harm your credit score and credit history. Late or missed payments can lead to poor credit rating which indicates to lenders that you are not reliable when it comes to making payments on time, which can make them less likely to lend to you in the future.
A default occurs when you fail to pay back a debt, and the lender takes action to recover the money you owe. Defaults can stay on your credit report for six years and can make it difficult to get credit in the future.
- CCJs (County Court Judgments)
A CCJ is a court order that is issued against you if you fail to pay back a debt. CCJs can stay on your credit report for six years and can make it difficult to get credit in the future.
Bankruptcy is a formal insolvency procedure that can help you deal with unmanageable debts. However, bankruptcy can have a significant impact on your credit score, and it can take up to six years for it to be removed from your credit report.
- High levels of debt
Having high levels of debt can also harm your credit score. Lenders may be hesitant to lend to you if they believe that you already have too much debt and may struggle to repay any additional loans since you may have an adverse credit history.
- Applying for credit frequently
Applying for credit frequently can also harm your credit score. Lenders may see multiple applications for credit within a short period as a sign that you are struggling financially and may be less likely to lend to you.
- Not being on the electoral roll
Not being on the electoral roll can also harm your credit score. The electoral roll is used by credit reference agencies to verify your identity, so not being on it can make it difficult for lenders to confirm who you are.
Types of Remortgages Available
If you have bad credit in the UK, it can be challenging to remortgage your property. However, there are several types of remortgages available from mortgage lenders that are designed specifically for people with bad credit.
Here is an overview of the types of remortgages available:
- Bad credit remortgages
A bad credit remortgage is a mortgage designed for people with bad credit scores. These mortgages are provided by specialist lenders who are willing to lend to people with a history of bad credit. However, these mortgages often come with higher interest rates and fees than standard mortgages.
- Subprime remortgages
Subprime remortgages are another type of mortgage available to people with bad credit. These mortgages are designed for people who have been rejected for standard mortgages due to their bad credit history. However, these mortgages also come with higher interest rates and fees.
- Guarantor mortgages
A guarantor mortgage is a type of mortgage where a family member or friend acts as a guarantor for the mortgage. If you default on your mortgage payments, the guarantor will be responsible for making the payments.
Guarantor mortgages are available to people with bad credit as the guarantor's credit score is taken into account when assessing the application.
- Debt consolidation remortgages
A debt consolidation remortgage is a type of remortgage that allows you to consolidate your debts into your mortgage. This can be an option for people with bad credit who are struggling to manage their debts.
However, it's important to note that consolidating your debts into your mortgage can increase the amount you owe and the length of time it takes to pay off your debts.
Costs and Requirements Associated With Remortgaging with Bad Credit
Remortgaging with bad credit scores can come with additional costs and requirements compared to a traditional remortgage. Here are some of the key costs and requirements you may need to consider:
- Higher interest rates
One of the main costs of remortgaging with bad credit is the higher interest rates that you may be charged. Lenders may see you as a higher risk borrower and charge higher interest rates to reflect this. Higher interest rates can mean higher monthly repayments and potentially more interest paid over the life of the mortgage.
Lenders may charge additional fees for remortgaging with bad credit. These can include arrangement fees, valuation fees, legal fees, and early repayment charges. It's important to understand the fees associated with the mortgage and factor them into your calculations when deciding whether to remortgage.
- Equity requirements
Lenders may require a higher level of equity in your property if you have bad credit. This means that you may need to have a higher percentage of the property's value paid off before you can remortgage.
- Proof of income
Lenders may require proof of income before approving a remortgage with bad credit. This can include payslips, tax returns, and bank statements. You may need to provide additional documentation if you are self-employed or have irregular income.
- Guarantor requirements
Some lenders may require a guarantor for a remortgage with bad credit. A guarantor is someone who agrees to take on the responsibility of repaying the mortgage if you are unable to make the payments. The guarantor will need to have a good credit score and be willing to take on this responsibility.
How can you remortgage with bad credit?
- Understand your credit score
The first step to remortgaging with a bad credit score is to understand your credit score. You can get a free credit report from any of the credit reference agencies like Experian, Equifax, or TransUnion. Review your credit report carefully and check for any errors or inaccuracies. If you find any errors, you can contact the credit reference agency to get them corrected.
- Speak to a mortgage advisor
If you have a bad credit score, it's always a good idea to speak to a mortgage advisor. They can provide you with expert advice and help you find lenders who are willing to lend to people with bad credit scores. A mortgage advisor can also help you understand your options and find a mortgage that suits your needs.
- Improve your credit score
If you have a bad credit score, it's important to take steps to improve it before applying for a remortgage. You can improve your credit score by paying off any outstanding debts, ensuring that you make all your payments on time, and avoiding applying for credit unnecessarily. It's also important to ensure that you are on the electoral roll.
Consider a specialist bad credit mortgage lender
There are specialist mortgage lenders who offer bad credit mortgages.They may charge higher interest rates and fees than traditional lenders, but they can provide you with the opportunity to remortgage your property. A specialist bad credit mortgage lender can help you find a mortgage that suits your needs and circumstances.
- Consider a guarantor mortgage
If you have a bad credit score, you may be able to get a guarantor mortgage. This type of mortgage requires a family member or friend to act as a guarantor, who will be responsible for the mortgage payments if you are unable to make them. A guarantor mortgage can provide you with access to mortgage finance that you might not be able to get on your own.
How Can Remortgaging Help Boost Your Credit Reports
Advantages of using a remortgage to rebuild credit and improve credit score:
Opportunity to consolidate debt
Remortgaging can provide an opportunity to consolidate other debts, such as credit card debts and personal loans, into one monthly repayment. This can make managing your finances easier and improve your credit score by reducing your overall debt level.
Lower monthly repayments
If you are currently on a high-interest rate mortgage, remortgaging could give you access to a lower interest rate, resulting in lower monthly repayments. Making consistent, on-time repayments can help improve your credit score.
Access to better credit terms
A remortgage can give you access to better credit terms, such as longer repayment periods and lower interest rates. This can help you to pay off your mortgage faster and improve your credit score in the long term.
Improved credit utilisation ratio
Remortgaging can help improve your credit utilization ratio, which is the amount of credit you use compared to the amount of credit you have available. By consolidating debts into one repayment, you may reduce the amount of credit you are using and improve your credit score.
Calculating how much you can remortgage with bad credit
This involves considering several factors, such as your income, debts, and credit score. Lenders will typically use these factors to assess your affordability and determine how much they are willing to lend you. Here's an example:
Let's say you have a property worth £300,000 and you currently have a mortgage balance of £200,000. You want to remortgage to release some equity for home improvements and to consolidate some debts.
Your credit score is poor, and you have some outstanding debts, including a credit card balance of £5,000 and a personal loan of £10,000. Your monthly income is £2,500, and your monthly expenses, including your existing mortgage, credit card, and loan payments, are £1,500.
To calculate how much you can remortgage, you'll need to consider your income, expenses, and debts:
- Income: Lenders typically use a multiple of your income to determine how much they are willing to lend you. In this example, let's assume the lender uses a multiple of 4. This means they are willing to lend you up to £10,000 (4 x £2,500) per year or £833 per month.
- Expenses: Lenders will also consider your monthly expenses, including your existing mortgage, credit card, and loan payments. In this example, your monthly expenses are £1,500.
- Debt-to-income ratio: Lenders will calculate your debt-to-income ratio, which is the percentage of your income that goes towards debt repayments. In this example, your debt-to-income ratio is 60% (£1,500 expenses divided by £2,500 income).
Based on these factors, the lender may be willing to lend you up to £833 per month. This could be used to pay off your existing mortgage balance of £200,000 and release £133,000 (£833 per month x 12 months x 10 years) for home improvements and debt consolidation.
It's important to note that this is just an example, and the actual amount you can remortgage with bad credit will depend on your individual circumstances and the lender's criteria. Working with a mortgage advisor who specializes in bad credit mortgages can help you understand your options and find the best deal for your circumstances.
In conclusion, remortgaging with bad credit can be a viable option for those looking to rebuild their credit score and improve their financial situation. By consolidating debts, accessing better credit terms, and lowering monthly repayments, you can gradually improve your credit score over time.
However, it's important to carefully consider your individual circumstances, including your income, debts, and credit score, before deciding to remortgage.
Working with a mortgage advisor who specialises in bad credit mortgages can help you navigate the process and find the best deal for your situation.