The Bad Credit Remortgage Process
A bad credit remortgage process for borrowers is similar to any other financial arrangement, only there’s a bit more legwork involved when you’re shopping around for the best deals. There are rates, fees and the lenders lending criteria to find out before putting in a formal application.
The typical scenario with a remortgage is a homeowner finds themselves with a mortgage that’s run past a fixed term discount rate and later reverted to a standard variable rate (SVR). A lot of the time, that SVR pushes the interest payments higher resulting in a higher monthly repayment to the existing mortgage.
When that happens, you can approach your current lender and discuss alternative finance options. Your existing lender doesn’t have to agree to provide refinance though and if your credit reports change from the time you were approved to the time you want to refinance your home; the lender may not accept your current level of risk as indicated by your credit history.
This can happen if you have any negative entries on your credit files such as missed payments, credit accounts in default, or you or someone you’re financially associated with has been issued with a CCJ or other similar negative debt entries since the time you took your mortgage with your existing lender.
When that happens, they can refuse to alter your mortgage terms, or they could push interest higher if they were to offer a remortgage.
It is best to work with your current lender first so you can know the rates they’re prepared to lend to you. That gives you a base rate to compare against other products.
You will need to know the valuation of your property. Lenders need to know what your property is worth because the total amount you can borrow is based on your property’s valuation. Lenders will have fees for this. Some include it, others don’t.
Remortgage finance is approved based on a loan to value ratio. That’s the amount of the loan you’re asking a lender to secure against the value of your property.
Should you have your current property valued and the valuation is less than what you owe on the mortgage, it would mean you’re in negative equity. That’s not an immediate concern if you’re only refinancing because all you’d need is a higher loan-to-value (LTV) to cover the shortfall and there are specialist lenders that cater to this.
When it is a problem though is if you plan to sell your home because that would mean that in the event of the sale, you wouldn’t raise enough to repay the original loan amount.
Prior to researching remortgage rates, you need to know how much remains outstanding on your existing mortgage and what your home is currently worth.
To find that out, you would need to have the property surveyed. Lenders can arrange this for a fee, or a local estate agent can help you with this stage, but there will usually be fees to pay.
About income and debt considerations when applying for refinancing
As a remortgage is a secured loan, the process will involve taking into account the amount of income there is. Mortgages are based on income multiples, usually 3x the household income, sometimes four times, and on rare occasions when there’s a high income and it’s considered a Professional Mortgage Product, the income multiple can go as high as five times. That’s rare though.
When planning for a remortgage, it’s crucial to have your figures ready for the application process. Lenders will want proof of household income, and the monthly expenses to come off that, which includes all debt repayments and living expenses.
Your level of debt will be considered in the remortgage process too. Add your total amount of outstanding debts up. That total shouldn’t be above 45% of your household income. If it is, you will be considered by lenders as a high-risk due to a lack of disposable income.
It should also be noted that if you expect your household income to rise during the term of your remortgage deal, you’d need some flexibility if you intend to make more capital repayments. What to ask about are early repayment fees, and the option to repay more capital towards the mortgage, without incurring any financial penalties.
Assessing the types of remortgage options
The type of remortgage you take matters too and there’s a lot to choose from. Fixed interest, capped interest rate remortgages, standard variable and discount rates that revert to a standard variable rate after the terms expire. All types of typical mortgages are available to applicants with bad credit. It’s just a narrower selection of lenders that will approve the refinance.
In the case of remortgaging with bad credit, tracker mortgages differ by lender with the majority of subprime lenders using LIBOR rates, and the high street lenders using the Bank of England rate. These are used for bank to bank lending and it’s reflected in the interest rate you’re offered. Subprime lenders tend to use LIBOR rates that tend to be in the region of 2% to 3% above high street lender mortgage rates.
When you compare remortgage rates and fees using comparison websites, look to see what rate the lender uses when they revert to tracker rates. They will state if it’s BoE or LIBOR.
Then compare the costs of arranging the mortgage, because it can easily cost over £1,000. Some lenders allow you to add some or all of the costs associated with remortgaging onto the total loan amount. Others will insist the fees are paid pre-arrangement.
Are there any guaranteed mortgages for bad credit?
The quick answer is no. There’s no guaranteed mortgage of any sort. Every financial product is risk assessed. For mortgage products, you also need to prove you can afford the repayments. This is called the affordability test and it’s something you must be able to prove to have any chance of being approved for a mortgage.
To find out how much you can (theoretically) afford to borrow, you can use this Mortgage Affordability Calculator.
Is there a remortgage bad credit calculator I can use?
None specifically but of the wide variety there are online, for bad credit, it’s imperative to use an online mortgage calculator that lets you alter the input for the interest rates and the term of the mortgage.
One example is the Rightmove Mortgage Calculator. Use the tab for “how much will my mortgage cost?” just above the “calculate” button, you have the option to “change this”. This is to change the current “annual rate of 3.90% over 25 years, based on a repayment mortgage” to whatever figures you want to use. In the case of bad credit remortgages, increase the interest rate by around 2% or 3% to get an average and use whatever loan term you plan to apply for such as 10 years, 15 years or longer.
That can give you a rough estimate of how much a lender will approve a home loan for. Not the exact amount…
The reason being that to approve a loan, the risk assessment varies by lender.
Some will take into account other assets you own, the type of product you’re applying for such as interest only with bad credit, or a repayment mortgage.
For remortgaging, lenders also take into account the amount of equity you hold in the property because the higher that is, the more of a guarantee they have that if you default, they can repossess and sell the home to get the full amount of the loan repaid.
How arrears affect the remortgage process
The process of getting a remortgage with bad credit and arrears can be tricky, but it’s not impossible. Where it gets really difficult is when you’re in mortgage arrears because that’s a secured loan you’re defaulting on.
Specialist lenders do consider mortgage arrears, but they are going to want to see that you’re taking responsibility and trying to make your payments on time. Should you continue to miss payments on an existing mortgage, your lender can issue you with a default notice, which is an indication that they’re considering taking legal action. It’s not always the case that they will, but you can’t take it for granted they won’t.
When a default notice is issued for mortgage arrears, you’ll have 7-days to respond to it
That notice will give you the details of what your lender wants you to do to remedy the missed payments. Should legal action be taken by your current lender, it will see your case going to the district court and you could be issued with a CCJ. For that reason, as soon as a default notice is issued, you can’t delay the process. Specialist lenders can work with you to arrange amicable repayment options for remortgages before your situation leads to legal action.
For arrears that aren’t on secured loans, they are considered less severe because your home isn’t at risk. Secured loans that are a first charge on your property that go into default status are severe and will need a specialist lender for remortgaging. Especially if things escalate to legal action being taken, or having a County Court Judgement issued.
The majority of people with bad credit will have online finance applications rejected based on credit reports showing negative entries. One way to mitigate that risk is to have a Notice of Correction added to your credit reports as that will mean your assessment will need manually reviewed as software can’t interpret NOCs. Manual reviewers can. However, that needs to be done carefully because lenders will see right through it if your correction notice doesn’t give a satisfactory explanation.
To ensure you stand the best chance of successful remortgaging when negative credit entries are on your credit files, it’s imperative you get professional advice from an adverse remortgage broker specialist. They’ll be able to advise on what options are and aren’t available, and which lenders are in a position to offer you finance.
Many applicants believe that it’s next to impossible to remortgage with a low credit score. The reality is that your credit score is irrelevant. What’s used by lenders is the information that’s contained on your credit report. The score you’re assigned by the Credit Reference Agencies is only a ball point figure for your personal use. Creditors assess the information on it using their own scoring criteria. That’s based on the risk level that’s acceptable to them and that varies from one lender to the next.
Adverse credit mortgage lenders are more willing and able to cater to a magnitude of personal circumstances. When you add a bad credit remortgage broker into the mix, you have an expert on hand to represent your interests to the lenders and work with underwriters to get you the finance you need, when you need it. Preferably before any mortgage arrears reflect the need for an existing mortgage lender to take legal action, but even if the worst has happened and you’ve been issued with a CCJ, there are lenders still able to offer you a remortgage with very bad credit.