BUYING a house is hard enough at the best of times, but if you have a poor credit score, it can be even more difficult and expensive.
David Adams, 36 and his wife Stephanie, 34, were gutted when they weren’t able to secure a mortgage for their £170,000 first home because of old debts.
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The couple, who live in Northern Ireland, had both taken out credit cards and loans when they were students, which they had missed payments for.
When they had their son, Noah, now eight, the pair realised they needed to sort out their finances, so worked on clearing their debt and finally became free of it in 2019.
However, that wasn’t the end of it. Several missed payments stayed on their credit file and as a result, they were turned down for a mortgage with their own bank.
Your credit score is used by lenders to help them decide whether to lend money to you.
A low credit score can mean banks deem you too risky to lend to, which can stop you getting a mortgage.
Or, if they will lend to you, you’re typically locked out of the best deals, meaning you have to pay significantly higher interest rates.
David, a civil servant, and Stephanie, 24, a regional recruitment manager, didn’t think it would be possible to get a mortgage until at least 2027, when the defaults would have finally disappeared from their credit file.
But when their dream home came on the market, the couple spoke to a mortgage broker to discuss their options – and that’s when they discovered “near-prime” mortgages.
Near-prime mortgages are aimed at borrowers who are considered to have less-than-perfect credit scores, but aren’t “sub-prime”, where they have poor credit scores.
They tend to have higher interest rates than prime mortgages, the ones you would typically associate as normal mortgages from high street banks or building societies.
A total of 16 lenders now offer these products.
David and Stephanie were advised by their broker to try specialist lender Atom Bank, which gave them an offer within three days.
The couple took out a mortgage of £145,000 with a two-year fixed interest rate of 6.84% and moved into their dream three-bedroom semi-detached home in February this year, putting down a 15% deposit of £25,000.
David said: “It’s been an absolute dream. We always knew that our debts would be a problem, but we threw everything we could at getting them cleared.
“We really wanted somewhere of our own for our son, so it really is a dream, it’s been life-changing.
“We’re so far ahead of where we thought we would be and it’s great knowing that we don’t have to pay £800 a month in rent anymore.
“Our monthly mortgage repayments now are £913 – which is just £113 more than we were paying in rent.”
And David was delighted when he found out he may be able to move to a prime product in the future, which would offer better interest rates.
Make sure to speak to a broker before taking out a mortgage to ensure it’s right for you and that you can afford the repayments.
What is a near prime mortgage?
A near-prime mortgage is designed to help people get a mortgage when their credit history has some issues, but it isn’t terrible.
Many lenders would automatically categorise this as bad credit, which could stop them from being approved for a loan.
But these relatively little-known loans allow those people to get on the property ladder by paying slightly above-average interest rates, and they may be able to move onto a better product in future.
Nicholas Mendes, mortgage technical manager, at John Charcoal, explained: “For borrowers with impaired credit history, near prime mortgages provide essential access to mortgage finance that might otherwise be unattainable through prime lenders.
“These mortgages are particularly valuable for those who have faced financial difficulties, such as missed payments, defaults, or minor County Court Judgments (CCJs).”
They are different from prime mortgages, which is what you would typically associate as normal mortgages from high street banks or building societies.
Karen Noye, mortgage expert at Quilter, said: “They are generally for borrowers who have a good credit history and score.
“Applicants who are deemed to have low default risk can generally get better rates and terms, and there are considerably more prime mortgage lenders than those offering near or sub prime mortgages.”
Sub-prime mortgages are designed for borrowers with a poor credit history and a low score.
These tend to have much higher interest rates than typical loans.
“Sub prime mortgages come with higher interest rates and often potential fees for borrowers as the lender is taking more of a risk by lending to them due to their credit history and chance of default in the future given that history,” Karen said.
“Many lenders in this area will have far tighter terms and conditions which includes the level of deposit.
“For example, the greater the adverse credit history, the higher deposit level the lender will require to help reduce their risk.”
Lenders that offer near-prime Mortgages
In general, mainstream lenders such as high street banks refuse to lend to near-prime borrowers due to the higher risk.
This means you’ll need to try specialist lenders, which tend to offer products tailored to a specific market.
Some of these lenders are willing to offer solutions for borrowers with poor credit histories – here’s the full list:
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What should I consider before applying for a near prime mortgage?
If you’re taking on a near prime mortgage, you should be prepared for higher interest rates – which means higher monthly payments – as lenders compensate for taking on more risk.
While this can seem off putting, taking on a near prime mortgage could unlock better deals for you in the future.
David Hollingworth, associate director of L&C Mortgages, said: “Although you are paying a little more in the near term, it could give enough time to build up the necessary track record to be able to re-enter the mainstream.”
If your credit score improves over time, you may be able to remortgage for a better rate.
Just remember to budget for the extra cost in the meantime.
If you have more savings, a larger deposit will also make you appear less risky to lenders, which may give you access to better rates.
A larger deposit also means a lower Loan-to-Value (LTV) ratio and less interest paid overall.
How can I increase my chances of getting a near prime mortgage?
Improve your credit score
Before applying, check that all the information on your credit report is accurate and up to date.
Pay off any outstanding debts and avoid taking on new debt or defaults.
Just making small changes, like making sure you’re on the electoral roll, can help to build a stronger credit score.
Making small tweaks like this will help to show that you can successfully manage your finances, which will enhance your application.
Find a specialist lender
“There are lenders who specialise in near prime mortgages,” Nick said.
“If your application is rejected by one provider, don’t give up.
“Seek advice from an independent broker who can guide you to the most suitable lenders for your circumstances.”
Some brokers charge a fee up front, while others will instead earn commission from the lender.
But make sure you know your fee before going ahead with any advice they are offering.
Be honest and transparent
When you apply for a mortgage, you must be truthful and honest to the mortgage adviser and the lender.
Nick explained that withholding information, or not disclosing information, can result in a lender pulling the mortgage at the last moment.
He said: ” Near Prime lenders will want to understand the reasons behind any defaults or CCJs.
“Be open and honest about these, as well as any other factors that may have impacted your credit score.
“Don’t forget to mention any positive financial steps you’ve taken since then.”
How to get the best deal on your mortgage
IF you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
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