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‘Bad credit’ mortgages on the rise, but should you take one out?

We look at the pros and cons of this type of deal

The number of ‘bad credit’ mortgages has risen by 118 in the past six months, according to Moneyfacts.

The comparison site says that there are now 843 bad credit mortgages specifically aimed at people with poor credit scores.

But if you’ve had a County Court Judgment (CCJ) or defaulted on a loan payment in the past, should you take out a bad credit mortgage or wait to build your credit score back up?

Below, we explain how bad credit mortgages work and explore their pros and cons.

  • If you’d like advice on bad credit mortgages and help finding the best option for your personal situation, call Which? Mortgage Advisers on 0800 197 8461.

How do bad credit mortgages work?

Bad credit mortgages, formally known as credit repair mortgages, are designed to help those with poor credit scores get onto the property ladder or move house. They currently account for 17% of the mortgage market, according to Moneyfacts.

These mortgages are aimed at homebuyers who are at the more extreme end of adverse credit – such as those with CCJs, individual voluntary agreements (IVAs), or bankruptcies – rather than those who’ve missed the odd utility bill payment or simply not built up much of a credit history.

Bad credit mortgages tend to come with far higher rates than average, reflecting the increased risk to the lender. Moneyfacts says the average rate of a bad credit mortgage has increased by 0.17% over the past six months, currently standing at 4.52%.

The average rate of a two-year fixed-rate mortgage, meanwhile, is just 2.54%.

Which lenders offer bad credit mortgages?

While there are increasing numbers of mortgages specifically designed for people with bad credit, some lenders will consider giving normal residential mortgages to those with chequered histories.

It all depends on your individual circumstances and the reasons for your financial difficulties. As an example, some lenders will view your application more favourably if illness, divorce or bereavement contributed to your difficulties.

Bad credit mortgages are offered by specialist lenders such as Magellan Home Loans, plus a number of smaller mortgage providers (The Mortgage Lender and various building societies) and even a couple of high street names such as Metro Bank.

  • Find out more: our guide to bad credit mortgages has a detailed list of individual lenders’ policies.


What are the pros and cons of bad credit mortgages?

Pros of bad credit mortgages

  • They could potentially enable you to buy a home sooner, particularly helpful if prices are going up in your area.
  • An increasing numbers of lenders are entering this market, meaning you may be more likely to find a deal that suits your circumstances now than in the past.
  • You could potentially get a 95% or even 100% LTV mortgage with a less-than-perfect credit history, provided you’re at the less severe end of the spectrum.

Cons of bad credit mortgages

  • Bad credit mortgages have far higher-than-average rates.
  • They also tend to carry hefty fees.
  • If you have a very poor credit history you will need a deposit of at least 35%.

Keep in mind that taking out a mortgage is a major financial commitment. If you fall behind in your payments, your home may be repossessed, and your credit record will suffer. So before applying for a mortgage, make sure you can afford the repayments, both now and if your circumstances change in future.

How to build your credit score

While many lenders will consider you for a mortgage even with a low credit score, you’re more likely to be offered a good deal if your credit history is relatively good.

Here are a few steps you can take to improve your credit rating:

  1. Check your current credit score with Equifax, Experian and Noddle. If there are any errors on the reports, get them amended.
  2. Ensure you’re on the electoral roll. This is quick, easy and will allow agencies to better track your history.
  3. If you’re renting, pay your rent via the Rental Exchange scheme – this will count towards your Experian credit score.
  4. Don’t apply for too much credit, or multiple credit products in a short space of time if you’re getting turned down. This implies to lenders that you’re in financial difficulty.
  5. Ensure that you do have some credit, for example a credit card that you pay off in full every month, as this proves that you can be trusted to pay a loan back.

Professional advice on your mortgage options

Ultimately, whether you have a very complicated credit history or an unblemished record, it pays to take expert advice before applying for a mortgage.

The brokers at Which? Mortgage Advisers will look at every mortgage on the market, including those you can only apply for by going direct, and recommend the best deal for your individual situation.

You can contact them on 0800 197 8461 or fill out the form below for a free call back.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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