A reader asked:
My partner and I have a combined income of £54,000, We have a deposit of £20,000 (inheritance) and are looking to become first time buyers in a new build property at a price of £210,000. We have defaulted debts that are being paid off, and previous history of payday loans from over 2 years ago from a time when our financial situation was much more difficult.
The defaults are now about 6 months old as we started to try and tidy things up when we knew the money was coming to us. We currently owe around £6,000 on the defaulted debts between us, and we have no other debts or finance. I have an active credit card, and we both have a mobile phone contract in our own names, but that’s all.
What are the chances of us being offered any kind of mortgage?
If you want a mortgage right now
Most of the suggestions below will take some time to improve your mortgage chances. If you want a mortgage straight away, you are going to have to go to a “bad credit” broker. This will cost you more in fees – be very clear about what the fees are before you sign anything. Also the mortgage is likely to be at a much less good rate.
Some people are told:
“This will just be for a couple of years, then you can re-mortgage with a high street lender at a better rate.“
You can’t rely on that happening!
Your own financial situation may be more difficult in a few years – perhaps you have a baby on the way which will affect the mortgage affordability calculations.
And even if you are fine, who knows what the mortgage market will be like in a couple of years after the first lockdown? Will the economy and lending be back to normal? Will house prices have dropped so your 15% deposit is now only 5%?
Paying off the defaults
Paying off the defaults is the first key step towards getting a mortgage at a reasonable rate from a high street lender. You want to pay them off as soon as possible so a mortgage lender can see that your problems were all in the past.
These debts don’t have to be paid in full – a partial settlement may be acceptable to some mortgage lenders.
When the defaults have all been settled more than a years ago and you have had a year free of any credit record problems, you are more likely to be able to get an OK mortgage offer.
If you already have the inheritance in your bank accounts, then it would be best to use some of that right now and repay the defaults, then start resaving the deposit money that has now reduced.
Say you can afford to pay £400 a month off your debts – that would take 15 months to clear the defaults. If you clear them now and then save that £400 a month, in 15 months time you will have your current deposit back, but your credit records will be looking much better as you will have had 15 months clear of any problems.
Check the default date is correct
Paying off the defaults doesn’t actually help your credit rating and it won’t make the defaults disappear. They will stay for six years from the first default date.
So it’s worth checking if you think the default date is correct. If any of them should have been earlier, see if you can get the default date changed as that means the debt will vanish sooner.
It also helps if the defaults are older. A mortgage lender would rather see you had problems 5 years ago than problems last year.
Lifetime ISAs
The best way to build up your deposit again would be by regular monthly saving into a Lifetime ISA if you are aged 18-39 and this will be the first property you buy. MSE has a good guide to LISAs.
So get an LISA each to maximise the help you can get! Whilst you are saving there four good things happen:
- the defaults are getting older;
- your deposit is getting bigger
- you are getting a bonus from the government; and
- it is showing a future lender that your money problems really were in the past and you can afford to put money aside from your income.
Of course during this period you also need to be fanatical about making sure all your credit cards and bills are paid on time. The last thing you want is a new late payment showing on your file… Use your credit card every month and pay it off in full every month.
What about the old payday loans?
If the payday loans are already over two years old, most mortgage lenders won’t care that much about them. And if you are taking the next year to improve your general position then they are getting even older.
However, how much did you use payday loans? If it was a lot for a period, then you should read my article on Can I get a payday loan refund? and see if you might be able to get any compensation. If you do win a complaint about these, the lender will normally delete the record from your credit file – so that might even get rid of some of the defaults.
Any money you can get back will mean you have a bigger deposit – and the larger your deposit is, the more lenders there will be that may lend despite the defaults on your credit records.
Then talk to a broker
When you have saved your deposit up again and the defaults have got older, you need to talk to a mortgage broker.
Some high street lenders say they won’t consider a mortgage with defaults in the past three years. Some won’t lend to you at all with defaults – you need to avoid applying to these lenders. A broker will be able to advise you – at this point though you shouldn’t need to go to a bad credit broker.
In mid 2020, the deposit you need has gone up – there are no 5% deposit offers and very few 10% offers.
35-40 year mortgages – be careful!
Should you remortgage after a fix ends?
88 ideas that can save you money!
Steve says
Hi Sara,
Me and my partner are looking to get a help to buy mortgage on a house we have recently viewed. Her credit rating is very high, however mine is not so good. 5 defaults, the latest was Dec 2018 however they are all settled as of June 2019.
The house is well within our affordability. 216k house and a joint income of 76k a year. Any advice would be most welcome.
Thanks and keep up the good work
Steve
Sara (Debt Camel) says
I’m sorry, the HTB mortgage market is a small group of lenders, you need to talk to a broker who specialises in this market.
Steve says
Hi Sara thanks for the speedy reply!
We’re using a local one at the minute but becoming more and more frustrated with them.
Do you have any recommendations of a national one perhaps you have heard good things about?
Regards
Sara (Debt Camel) says
I’m sorry, not for HTB. all I can suggest is googling and then phoning up and talking to them. But if you are changing broker, make sure you won’t have to pay the current one a fee :(
A says
Hi Sara
Please can you help! We are at a lost spoken to two mortgage advisors and getting no where. My partner credit is perfect score of 999! Mine on other hand I have 5 defaults from October 2018 all paid off and never had any trouble since! We have a good deposit of around 25k a joint income of over 46k and can’t seem to find a mortgage! Anywhere do you have any recommendation. Thank you
Sara (Debt Camel) says
how much do you want to borrow?
when were the defaults paid off?
A says
Between 190-220
They was paid off around June 2019
Sara (Debt Camel) says
There are very few 10% deposit mortgages around at the moment.
Before the current situation, many lender had a rule that they didn’t mind about defaults paid over a year ago – you just squeeze past that – where the defaults are more than 3 years old. Which yours aren’t.
I’m not sure you can do much except come back when the mortgage market improves.
A says
Thank you
Yes that’s what we are getting really maybe in 6 months we have a chance. Just feel like hitting a brick wall as we have a deposit ect
Sara (Debt Camel) says
People with a spotless credit record are finding it very hard to get a mortgage at only 10% deposit. Tough times.
Rosie says
Hi Sara
I currently own my £400k home and have a mortgage of £154k on it at 2.5%.
I am due to remortgage next month and my now husband wants to join me so that we can borrow around £130k to do some works to the house.
He has a great credit history with just a loan on a car and a small balance on a credit card o/s (which he plans to clear with some of the above cash).
I however have a very poor credit rating – mainly from 2 defaults back in 2018 on overdraft fee’s. I have since paid these off in full and also only now have 2 credit cards one with a £3k balance that I plan to clear with the cash and also one with a £0k balance that I have kept opened.
Please could you advise what you think our chances are of getting accepted – do the rules for remortgaging differ.
Our joint income is over £80k a year.
Thanks in advance.
Rosie
Sara (Debt Camel) says
This is a very difficult mortgage market at the moment. I suggest you talk to a broker about your options. If your fix is now ending, find you what the standard variable rate would be.
If the broker is not optimistic about your chances at the moment, a sensible choice for you wmay be to just change to the SVR and concentrate on clearing your credit card db=ebts. You have a good combined income and a very low mortgage so it shouldn’t be hard. Then in 6 months come back again – at the point your defaults are older, you have both cleared off debt and you will need to borrow a little bit less as well.
Matt says
I’ve managed to get my credit score up to 995 after years of sorting myself out. Just had my first year accounts bk, looking at 44k profit. Would this be enough to go for a 190k mortgage with a 10% deposit, no debt as all has been paid? Cheers
Sara (Debt Camel) says
Probably not just at the moment…
a) there are almost no 10% deposit mortgages on offer
b) many lenders want more than a years accounts fro the self employed, or will only take into account 80% of their profit or have other obstacles.
You can talk to a broker, but the best advice may be to wait 6 months or a year.
Matt says
Hi
I still have an ongoing debt management plan after 8 years which I pay a small nominal amount. £3k left to pay. All defaults and history has now dropped off my report. My credit score is excellent now.
How will this affect a mortgage application? I have plenty of disposable income but have been using this to save for the deposit…
Many thanks
Sara (Debt Camel) says
You won’t be able to get a mortgage at a reasonable rate from a high street lender until tour debts are settled. the lender will ask to look at probably 3-6 months of bank statements and will see the payment to your DMP even though the debts are not on your credit record.
You don’t have to settle the debts in full – a partial settlement, also known as a full & final settlement is fine, see https://debtcamel.co.uk/dmp-partial-settlement/
Hyal says
Where can I find a mortgage broker as I have a recent default and am looking to get a shared ownership mortgage,
Sara (Debt Camel) says
Sorry, I can’t recommend a bad credit mortgage broker.