Buy to rent mortgage with bad credit
Summary of the case
- The property was a 3 bedroom terrace house
- Client only owned this buy-to-let property, no other property
- The client had previously had a CCJ and had missed payments on the loan
What we have achieved for the client
- The mortgage interest rate was 6.99%
- The new buy-to-let rate has become 2.89%
- Capital raised of £8,600 for personal use
The stakes of the case
This homeowner came to us as his home loan approached its renewal date. They were not owners, their three-bedroom townhouse was the only property the client owned.
In the past, the client had had a CCJ as a result of missed payments. The client’s interest rate was high and our job was to lower the rate to ensure lower monthly payments on the next transaction.
Another feature of this case was that the client was not the owner. You might wonder why that would even be a factor. There are a few reasons why this is a consideration for buy-to-let mortgage lenders.
Another consideration for us was the client’s desire to raise £8,500 from the property.
Can a first-time buyer obtain a rental mortgage?
Yes, first time buyers can get a buy to let mortgage, subject to the broader circumstances of the loan they need. However, not all lenders accept first-time buyers.
Where normally the affordability of a buy-to-let mortgage is based on the rent the property will attract, and not the applicants’ personal income, with first-time buyers personal income will be taken into consideration.
The reason to buy to let mortgage lenders assess personal income, when the applicant is a first-time buyer, is because the mortgage is the customer’s first, they want to give them extra protection.
A lender will want to ensure that the mortgage is affordable for the applicant in circumstances where rent is not paid or any other change occurs that puts pressure on repayment of the mortgage.
Can you buy buy-to-let with bad credit?
When lenders see evidence that an applicant has had difficulty repaying their debt, for whatever reason, many will be unwilling to offer that person new loans. However, this is not always the case, some lenders actively seek to help borrowers who have had credit problems.
The amount, recency and status of the debt will affect the lender’s decision to accept an applicant.
The following rules about buying bad credit to leave mortgage applications illustrate “the line in the sand” where it may/may not be possible for you to get a deal, based on the criteria more flexible ones available at the time of writing.
Can I get a buy to let mortgage with a DMP, DAS, IVA or bankruptcy?
You cannot obtain a rental mortgage if you have been subject to:
- Debt Management Plan (DMP)
- Debt Arrangement Scheme (DAS)
- Individual Voluntary Arrangement (IVA)
In the last 12 months. If any of the above items were settled more than a year ago, it may be possible to get a buy-to-let mortgage.
Can I get a buy to let mortgage with a CCJ or default?
You may still be able to get a buy-to-let mortgage even if you have been subject to:
- County Court Judgment (CCJ)
- Secured loan arrears
Within 12 months, subject to the criteria of the lenders. Unsecured loan arrears are accepted and not assessed against the most flexible criteria currently available.
A lender will generally mitigate the risk of non-payment of their debt by charging a higher interest rate. This can be difficult when trying to escape a historically bad or unfavorable credit situation.
You may choose to use a buy-to-let mortgage to consolidate your debt because the interest rate on a mortgage payment is lower than what you would pay by other means.
If you do, think carefully before securing other debts on your property. Your property can be repossessed if you do not continue to pay your mortgage.
And keep in mind that by consolidating your debts into a mortgage, you may have to pay more over the entire term than you would with your existing debt.
When does adverse credit begin to have less of an impact on a buy to leave application?
At the time of writing, it will take 12 months for a paid and satisfied CCJ, default or secured loan arrears to have less of an impact on a mortgage application. At this point, more lenders will consider an application, but not all.
Once you are outside of a three year period, most lenders will consider an application from you.
However, not all types of side effects have the same impact. For example, a CCJ for a parking fine may not be considered at all by a lender.
Do not underestimate or overestimate your situation
As a broker, clients come to us with very different pictures of their credit standing. Some may worry that a relatively small “low point” in their credit history is a huge barrier to borrowing, when that may not be the case.
Other customers may underestimate their position and overlook what, in the eyes of a lender, is a more serious credit profile problem. Sometimes it can be easy to forget that the administration of life is neglected, but when that results in an unpaid loan, it can lead to unexpected problems.
The best thing you can do is be very clear with your mortgage adviser about your position so they can advise you.
What we have achieved for this client
We were able to approach lenders who were comfortable with the client not owning any other property.
Fortunately, time had passed since the client had resolved his adverse credit issues, which meant we were able to approach a wider range of lenders who previously would not have been willing to consider this case.
The mortgage interest rate of 2.89% per annum that we managed to secure for the client was a huge improvement over the product that was previously in place at 6.99% per annum.
Additionally, we increased the £8,600 the client needed and still significantly reduced the client’s monthly mortgage outlay. Over 5 years, the reduction in customer spending on mortgage payments amounted to £5,989.