When singing up to a mortgage loan, it is best that you know the risks of your decision. Knowing these potential risks will help you avoid defaulting and hopefully lead to a happy and prosperous financial future. If you have bad credit and are resorting to a bad credit mortgage loan there are even greater risks that you must take into account and therefore, more reasons for you to be aware of them. However, these are far from insuperable and by taking preventive measures you will save yourself from financial stress.
Here are some indications of why you should be careful with bad credit mortgages, and what to do about them.
- Missing Payments
Avoid at all cost defaulting on your mortgage loan. Most experts agree that you should never miss a payment, as the typical result is repossession. If you fall back on your payments for a long enough period of time, your lender may require that you pay off the loan in full or commence repossession proceedings. The best way to avoid this is to obviously always keep on top of your monthly payments. If that is not possible, the next best option is to contact your lender and attempt to negotiate a deal before the situation worsens.
- Negative Amortization
This happens when you end up owing more than the amount you originally borrowed. Although it might sound impossible, it isn’t too uncommon. This occurs when the payments do not match the interest that is being charged. Thus, you begin to owe more and more with every passing month. Hence why you should ignore the suggested monthly payment and figure out the optimal amount on your own. Most lenders won’t lead you into this financial state, however, it is better to stay cautious. Don’t expect the lender’s best interest to be aligned with your own. - Low Interest Rates
People searching for bad credit mortgages should be wary of products which advertise low headline interest rates. Quite regularly, the mortgages that seem the best value at first glance turn out to be the most expensive in the long run. Borrowers are advised to assess each bad credit mortgage based on its overall cost and not just the rate of interest that they will pay in the initial years. Some lenders advertise the product more favourably by lowering the interest rate, which can be somewhat misleading.
These types of bad credit mortgages generally come with extended tie-ins that can continue after the period for which the interest rate is discounted. During the overrun period the borrower will usually be subjected to the lender’s Standard Variable Rate (SVR) which can be much higher than the initial discounted rate. During this period the borrower will be subjected to an early repayment charge if the loan is redeemed. This charge can be unexpected and unaffordable to a lot of borrowers which will prevent them from selling their home and force them to pay the SVR until the overhand period expires.
This doesn’t stop here. Some bad credit mortgages even come with interest rates that are considerably discounted in the first year before increasing to an extremely unfavourable one. This can cause a payment shock to borrowers who, most probably, may not have factored-in the increased payment when first applying to the loan. These discounts are obviously designed to persuade borrowers to apply for those specific products and act as a kind of perverse eye-candy.
This situation can be aggravated if interest rates in general have increased during the discount period. The amount of interest rate shock could be too high for the borrower to afford. Therefore, careful consideration must be given to mortgage products with discounted initial interest rates.
- Unexpected fees
The cost of application fees must also be considered. Bad credit mortgages are known for having excessive fees which have the effect of considerably increasing the overall cost of the mortgage. These fees can be as high as ten percent (for heavy adverse credit clients) and are usually charged as a percentage of the loan balance.
In addition, if the borrower uses a mortgage broker, they may collect a fee from the broker. Mortgage brokers who specialise in bad credit products can charge fees in addition to the lenders’ fees. These fees can be as high as two percent of the entire loan balance. Make sure you discuss this with your mortgage broker.
In the same way, exit fees should be considered for borrowers who are planning on remortgaging away from their bad credit mortgages in the future. This includes early repayment charges as well as exit fees that can be levied after the tie-in period has run out. If you ignore these fees, you may in fact incur hundreds to thousands of pounds’ worth of charges that you had not planned for and did not expect to have to pay. This kind of financial blindsiding can be devastating.
In Conclusion
It is therefore difficult to estimate the real cost of bad credit mortgages by simply looking at the initial interest rate. It is worth mentioning that comparing products of this sort using a mortgage comparison website may be misleading because they may not include future interest rates and application or exit fees in their brochures. Borrowers should also pay attention to the APR, a figure which is designed to indicate the true cost of the mortgage.
Now that you know some of the risks to be aware of, you are better equipped, and much more likely to successfully manage your mortgage loan and benefit along the way. Is it far more beneficial and safe to contact an independent mortgage broker and request quotes on several bad credit mortgages that may be suitable for you. If you want to receive online mortgage advice for free, please visit or contact https://imbonline.co.uk/bad-credit/benefits-of-bad-credit-mortgages/
