Finding it hard to secure a mortgage with bad credit? It’s tough, and we understand how overwhelming it can feel. But there are still options out there for you. Have you heard about Bad Credit Mortgages or Guarantor Mortgage? These could be the solutions you’re looking for.
In this guide, we’ll walk through them step by step so you can decide what suits you best. Let’s tackle this together!
Key Takeaways
- Bad credit mortgages suit people with poor credit but require a 20–25% deposit and have higher interest rates, ranging from 4% to 7%.
- Guarantor mortgages rely on a third person’s good credit and assets, often offering better rates and smaller deposits.
- Both options share terms like £75,000 minimum loan amount, up to 40 years term, and similar fees (£999).
- For bad credit mortgages, no payday loans in the past year is key; guarantor cases ignore these completely.
- Choosing depends on your finances—bad credit suits independence; guarantor needs trusted support but carries relationship risks.
What is a Bad Credit Mortgage?
A bad credit mortgage is for people with poor credit scores or past financial troubles. Lenders call these sub-prime mortgages. They fit those who have defaults, bankruptcy, or payday loans in their credit records.
Usually, borrowers need a deposit of 20–25% instead of the standard 5–10%, as lenders see them as higher risk.
Interest rates are also steeper, often between 4% and 7%. Borrowers might find limits on how much they can borrow based on their income and debts. Approval takes effort too. Expect to show documents like bank statements, proof of income, and expense details.
What is a Guarantor Mortgage?
A guarantor mortgage involves a third person, often a parent or close relative. This guarantor agrees to cover the payments if the borrower fails to pay. Lenders see less risk with this setup, so they may offer lower interest rates.
The third party needs a stable income, good credit score, and assets like savings or property. For example, someone who owns their home outright could stand as a guarantor without risking massive debt.
This type of mortgage can work well for younger buyers or those with little credit history. Even small debts up to £500 might not count against the applicant here. Satisfied bankruptcies older than three years are also acceptable in some cases.
But there’s a big catch: defaulting on payments affects both parties’ credit reports. It could strain personal relationships too! So before making this choice, we must weigh risks and benefits carefully; borrowing money always comes with responsibility for all involved!
Key Differences Between Bad Credit Mortgages and Guarantor Mortgages
Bad credit mortgages focus on your financial history, while guarantor mortgages lean on a trusted person’s backing—read more to see which suits you better!
Eligibility Requirements
Every lender has its rules. Let’s break down the eligibility requirements for bad credit mortgages and guarantor mortgages side by side. This will make it easier to see what fits best.
| Criteria | Bad Credit Mortgage | Guarantor Mortgage |
| Defaults | None in the last 6 years | Considered if older than 3 years |
| Bankruptcy | Satisfied after 2 years | Satisfied after 3 years |
| DRO/DPP | Satisfied at least 1 year ago | Satisfied at least 2 years ago |
| Payday Loans | No loans in the last 12 months | Ignored entirely |
| Minimum Loan Amount | £75,000 | £75,000 |
| Maximum Loan Amount | £500,000 | £500,000 |
| Minimum Property Value | £100,000 | £100,000 |
| Income Lending Multiples | 5x for £20,000 income, 6x for £50,000+ income | 5x for £20,000 income, 6x for £50,000+ income |
| Employment | Passed probation or 3 years of self-employment | Passed probation or 3 years of self-employment |
Nothing is black and white here. Requirements overlap in some areas but differ in others.
Interest Rates and Terms
Interest rates and terms play a massive role in deciding which mortgage works best for your situation. Let’s break down the numbers in a simple table for clarity.
| Aspect | Bad Credit Mortgage | Guarantor Mortgage |
| Variable Rates | SVR at 7.39% or 2-year discounted rate at 4.89% (2.50% below SVR) | Depends on guarantor’s creditworthiness, often lower than bad credit rates |
| Fixed Rates | 2-year fixed at 5.10%, 5-year fixed at 5.20% | Can mimic standard mortgage rates if guarantor’s profile is strong |
| Product Fee | £999 | £999 |
| Mortgage Term | 5 to 40 years | 5 to 40 years |
| Early Repayment Penalties | 3% in year 1, 2% in year 2/3, £100 closing fee | Similar, often matching that of bad credit options |
| Overpayment Allowance | Up to 20% of the capital balance per year | Up to 20% of the capital balance per year |
We see that bad credit mortgages often carry higher interest rates. Guarantor mortgages, on the other hand, may provide better options if the guarantor’s financial situation holds water. Both share similar fees, terms, and repayment conditions. The devil’s in the details here. Which option works better depends heavily on individual circumstances.
Pros and Cons of Each Option
Each choice has its perks and pitfalls, so weigh your needs carefully to pick the right fit.
Advantages and Disadvantages of Bad Credit Mortgages
Bad credit mortgages help people with poor credit scores secure a home loan. They come with both benefits and challenges.
- Lenders allow individuals with credit scores below 580 to qualify for a mortgage. This can provide relief for those rejected by mainstream banks or lenders.
- Regular, on-time payments on these mortgages can rebuild poor credit over time. Paying utilities, credit cards, or the mortgage itself helps improve your score.
- These mortgages offer a chance to own a home instead of wasting money on rent despite financial issues. It’s an opportunity many would miss otherwise.
- Higher deposit requirements apply, often needing 20–25% upfront. This makes it tough for those without savings to enter the housing market easily.
- Interest rates tend to be higher, ranging from 4%–7%. Borrowers may end up paying more in the long run compared to traditional home loans.
- Maximum loan-to-value ratios are lower, typically up to 70%. This limits how much you can borrow compared to the property value.
- The application process includes strict checks on income and expenses. You’ll need detailed paperwork, which takes time and effort to prepare properly.
Advantages and Disadvantages of Guarantor Mortgages
Guarantor mortgages can help those with bad credit get on the property ladder. A guarantor, usually a family member or friend, supports the loan by promising to cover repayments if needed.
Advantages:
- Higher chance of approval – With a guarantor’s good credit history and assets, lenders may approve the mortgage even if your credit score is poor.
- Better interest rates – Lenders often offer lower interest rates because the guarantor lowers their risk.
- Larger loan amounts – Borrowers may qualify for a higher loan-to-value ratio since the guarantor provides extra security.
- No need for high deposits – Some lenders accept smaller deposits because of the added security from a guarantor.
- Flexible eligibility – Minor debts under £500 and satisfied bankruptcies (after 2-3 years) might not affect eligibility.
- Helps first-time buyers – It’s useful for young buyers struggling due to income limits or lack of savings for large deposits.
Disadvantages:
- Risk to guarantors – If borrowers miss payments, it impacts the guarantor’s finances and credit record, straining relationships.
- Limited lender options – Not all mortgage lenders provide this type of product, reducing flexibility in choices.
- Complex process – The application requires detailed checks of both borrower and guarantor finances, taking more time.
- Restrictions on qualifications – No payday loans within one year and solid financial history are key conditions for acceptance as a borrower or guarantor.
- Liability issues – Guarantors remain tied until either refinancing occurs or significant equity builds up in the property over time.
- Personal stress factor – Being responsible for someone else’s debt can be emotionally challenging for many people involved in such loans.
Factors to Consider When Choosing Between the Two
Credit history plays a big role. A bad credit mortgage might suit those with poor scores but steady income. Lenders look at savings, expenses, and how well bills are managed. Correcting any errors on your credit report before applying can make a huge difference in approval chances.
A guarantor’s financial standing affects the decision too. If they own property or have strong finances, it may lower risks for lenders. Both options often come with higher annual percentage rates of charge (APRC).
Using a mortgage calculator helps estimate costs based on current terms and interest rates offered by various mortgage providers.
Conclusion
Choosing between a bad credit mortgage and a guarantor mortgage depends on your needs. Bad credit mortgages work better if you want to handle things alone, despite higher rates. Guarantor mortgages require trust from someone close but can offer lower costs.
Each has its perks and pitfalls, so it’s wise to weigh your options carefully. The right choice depends on your finances and future goals.
FAQs
1. What is a bad credit mortgage?
A bad credit mortgage is designed for people with poor credit histories. It helps borrowers who may struggle to get approved by traditional lenders due to issues like arrears or defaults.
2. How does a guarantor mortgage work?
A guarantor mortgage requires someone, usually a family member, to guarantee the loan. The guarantor agrees to cover payments if the borrower cannot pay.
3. Which option suits first-time buyers better: bad credit or guarantor mortgages?
First-time buyers might prefer a guarantor mortgage if they have limited savings but someone willing to support them. A bad credit mortgage could work better if their main issue is past financial problems.
4. Can I refinance an existing loan with these options?
Yes, both can be used for refinancing purposes depending on your situation and lender requirements like valuation and affordability checks.
5. Are there risks involved in choosing either type of mortgage?
Both carry risks. With a bad credit mortgage, interest rates are often higher than standard variable rates due to perceived risk by lenders. For guarantor loans, the guarantor’s assets or income are at stake if repayments fail.
6. Do I need advice from a professional before applying?
Yes, speaking with experienced advisers such as Revolution Finance Brokers or other licensed brokers can help you understand factors like loan-to-value ratios and underwriting processes while ensuring compliance with Financial Conduct Authority rules.
