Buy to let Mortgages with Bad Credit
If you’re looking to buy a property to rent out as a source of income and as a long term investment, you’ll need a buy to let mortgage. If you have a history of bad credit however, this can affect your chances of getting the loan you want or make it harder to secure competitive rates.
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In this guide we’ll take a look at how buy to let mortgages work, how having bad credit can impact the process of getting a buy to let mortgage, and how you can improve your chances of success. We’ll also explain why using a specialist poor credit mortgage broker can help you to get the loan you need.
How do buy to let mortgages work?
A buy to let mortgage is a specific mortgage product that you will need to use if you are buying a house to rent out rather than to live in. Buy to let mortgages are different to residential mortgages in several ways, including:
- They are normally on an interest only basis, which means that every month you pay back only interest on your loan, not any of the capital. This makes the monthly repayments lower but is more expensive overall as you are never reducing the amount of interest payable, as the capital amount stays the same. At the end of the mortgage term you have to pay the initial loan amount back in full.
- In order to show the lender that you’ll be able to do this, you need to have a repayment vehicle in place - basically a plan for repaying the capital. With buy to let properties this is often simply selling the house and paying off the mortgage with the proceeds.
- You will normally pay a higher interest rate on a buy to let mortgage than on a residential mortgage. This is to reflect the higher risk associated with renting out a property rather than living in it. As a landlord, your buy to let repayments will be linked to how much rent you are able to charge and having regular tenants, so you will be subject to fluctuations in the rental market and have the added risk of periods where you don’t have anyone living in your property.
- As well as higher rates, buy to let mortgages also attract higher deposit requirements. You’ll normally need around a 25% deposit on average. Again, this is to mitigate the additional risk.
Can I get a buy to let mortgage with bad credit?
It’s possible, although it’s very hard to give a clear yes or no answer without a lot more detail about your personal circumstances. The good news is that it’s definitely not a deal breaker - there are a huge variety of lenders nowadays who are prepared to consider mortgage applications on their individual merits rather than simply discounting people because they’ve struggled to manage debt in the past.
What types of bad credit affect a buy to let mortgage?
The term ‘bad credit’ is used a lot when we talk about applying for any kind of finance, but what does it actually mean and how does it affect a mortgage application? Bad credit is essentially a catch-all term for any incidences in the past where you’re shown poor management for debts including credit cards, loans, overdrafts or other mortgages.
This poor management could be anything at all, from a single missed payment on a credit card five years ago all the way through to having your home repossessed last year. In between you’ll find issues like defaults, county court judgements, (CCJs), individual voluntary arrangements and more.
As you might guess, this wide range of issues mean it’s difficult to say for sure how your bad credit will impact your buy to let mortgage application, as there are so many variables. Not only does the severity of the issue play a role, but lenders will also look at how long ago it occurred, how much money was involved, and why the incident occured in the first place. Did you simply overspend on your credit cards and find yourself unable to keep up, or was it that you had an unexpected illness for a defined period and then got quickly back on track once you were able?
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What interest rates will I pay for a buy to let bad credit mortgage?
Unfortunately you will very likely have to stump up higher repayments every month initially, as you’ll probably be offered a higher than standard interest rate on your loan. This is to mitigate the perceived additional risk to the lender in handing over such a large sum of money to someone who has failed to meet debt commitments in the past. It makes sense - if a lender feels there’s a higher than usual chance that you’re going to miss payments, they want to put some extra security in place to protect themselves.
Using a broker is one easy way to make sure you don’t end up paying more than you need to on a bad credit mortgage. They’ll be able to compare rates across the whole of the market, including specialist lenders, to make sure you’re always getting the cheapest rates possible.
Will I need a higher deposit?
Again, this comes down to risk, so chances are that you may be asked to put down a slightly higher than average deposit for a buy to let mortgage if you have had credit issues in the past. That said, the standard deposit for a buy to let is already a lot higher than a residential mortgage at around 25%, so it might be that you can find a mortgage option at that level and just with a higher interest rate.
If you have other rental properties in your portfolio already, it may be possible to use these assets as additional security against a new mortgage, but keep in mind that this then could put these properties at risk should you default on your new mortgage.
Should I get a broker?
Yes, it’s always worth using a broker when you get any kind of mortgage, but if you have a very complex case then it’s especially important. The first step is to find a broker who has direct experience of securing the type of mortgage you need, so a broker with buy to let experience and someone who has a good knowledge of the specialist bad credit lenders out there.
Next, be prepared to give them as much information as possible, including copies of your credit records and any additional information that may no longer be shown on your credit report, such as historical repossessions. The more information you can give them and the more honest you can be, the better chance they will have of finding a mortgage for you. Even if you think your credit issues are too serious to qualify for a mortgage, they may be able to work out a solution for you as long as they have all the facts.
Once they have a full and clear picture of your financial circumstances, your broker will get to work researching and comparing mortgage deals for you. This can save you a huge amount of time and stress, as rather than having to trawl individually through the lender's website or literature, they will have access to central points of information and all the latest rates and terms. Once they’ve identified a potential lender for you they can guide you through exactly what you need to include as evidence around your income and business workings.
Will I need a bad credit lender?
This depends on the severity of the issues you’ve had in the past, although it’s likely that with the double layer of complexity from bad credit and buy to let, that many of the high street banks might be more difficult to get a mortgage from.
There are plenty of specialist lenders that could work for you though, lenders who wouldn’t necessarily call themselves ‘bad credit lenders’, but who appreciate that life nowadays isn’t always straightforward and that your circumstances may warrant a more personal assessment. If you’re worried about where to start finding these kinds of lenders then don't worry, your broker will be doing all of this research for you, so you don’t have to spend hours trying to read the small print.
How can I improve my credit score?
You might decide that you don’t want to be paying over the odds and instead want to take a bit of time to improve your credit score before you buy your rental property. This can be a very sensible approach, as it gives you time to save a bigger deposit and it might mean you qualify for a better deal.
Time itself too can be a great healer in terms of your credit report. The longer it is since your credit issues happened, the more favourably they’ll be treated, so the simple act of waiting can be one way to improve your credit score, as long as you are managing everything well in the meantime.
On top of this, there are other things you can do to boost a low credit score. Check for inaccuracies for starters, and add notes of correction to any recorded credit problems if you think that having context will help your case. Keep up regular repayments on all of your current credit commitments, and if possible, try to reduce the balances on your credit cards. Lenders will look at your credit utilisation ratio - the amount of credit you have as a proportion of what is available to you - as one indication of how well you manage credit, and so keeping this as low as possible can have a positive effect.
Can I remortgage a buy to let with bad credit?
Again, this will depend on your individual situation, but it’s definitely not off the table. In fact, it can often be easier to remortgage with bad credit than to get a new mortgage from scratch, as you’ll hopefully have built up a good payment history and shown that you are a reliable lender. You may also have a large amount of equity in the property if you’ve had the mortgage for a while. It won’t be quite the same as with a repayment mortgage, where you’ll have been reducing the amount of capital owed, as an interest only mortgage doesn’t touch the capital, but hopefully the value of the property at least will have increased over time and reduced your LTV.
One factor that could influence your chances is whether you’re simply looking to remortgage at the same level but to a better deal, or if you’re hoping to release additional equity. If it’s the latter, then this may be slightly harder as you won’t benefit from that lower LTV, but it’s by no means impossible. Speak to your broker about what you’re hoping to achieve and they will be able to help you find the right remortgage deal for you.
Conclusion
Hopefully this article has given you plenty of food for thought and reassured you that just because you may have struggled with managing your credit in the past, doesn’t mean you have to live with the consequences of that forever.
With the right broker support, an honest and open minded approach and a realistic idea of what you want to achieve, it's very possible to get a bad credit buy to let mortgage.
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