Bad Credit Buy to Let Mortgages

What is a bad credit buy-to-let mortgage?

This is a question of two halves. First, we need to understand a buy to let mortgage. This mortgage is used to invest in rental property, occupied by paying tenants who are not related to you. This is an important distinction, as choosing to reside in a property that is attached to the buy to let mortgage will be a breach of your mortgage contract.

Now, the next question – what is bad credit? The answer lies within your personal credit score, which is based on how you have managed debt in the past. While it could be argued that every lender has their own definition of what is considered a low credit score, mortgage lenders are particularly attentive to any problems you may have experienced in the past.

Financial issues that can contribute to a bad credit score include:

• A substantial amount of unsecured debt, especially if you are utilising more than 50% of your available credit. 
• Regular use of short-term credit such as payday loans. This suggests that you are reliant on borrowing to make ends meet, which will make mortgage lenders nervous. 
• Late payments on unsecured debt, such as loans, credit cards, and buy now pay later store agreements.
• Missing a monthly payment on unsecured debt agreements – this will be judged harsher than a late payment.
• Defaults on your unsecured loans. Defaults are assigned when you fail to make a minimum contracted payment on a debt for three to six months, and will have a big impact on your credit rating for six years.
• CCJs –  a county court judgement is considered to be a significant credit issue and can impact borrowing, especially if it is recent.
• Mortgage arrears – mortgage arrears are missed payment on a residential mortgage or buy to let mortgage. Recent mortgage arrears will make borrowing at a reasonable rate or high loan to value much more difficult.

While on the face of things bad credit BTL mortgages are essentially the same as a normal buy to let mortgage, you will need to brace yourself for a more challenging application. A low credit score will spook many mainstream lenders, so your best option will be to team up with a professional that has experience in sourcing a loan for customers in your position.

More significant credit concerns, such as open County Court Judgments (CCJs,) Independent Voluntary Agreements (IVAs,) and bankruptcy will have a huge impact on your creditworthiness in the eyes of a mortgage lender.

You may find that these issues will automatically exclude you from applying for a traditional, residential mortgage from the high street banks. A bad credit mortgage may be within your reach, but there is still no guarantee that you will be approved.

Who is eligible for a bad credit BTL mortgage?

Anybody can be eligible for a bad credit mortgage. The key is finding the right lender for your circumstances. To do this, it is a good idea to work with a specialist buy to let mortgage broker who understands the market.

A good broker will be able to quickly and easily find the best mortgage lender for your needs, understand the interest rates, fees and costs. Brokers also manage the application on your behalf, so will be able to help with any difficult questions about your adverse credit.

Be aware that a basic mortgage calculator online will be less effective when calculating affordability and eligibility. When these guides make estimates related to the affordability of mortgages, bad credit is not taken under consideration – you will likely be provided with suggested payments based on a best-case scenario.

If you are wondering if you will meet the criteria for a bad credit mortgage, seek out the advice and support of a professional advisor. You will find plenty of helpful experts online, including ABC Finance – our friendly and experienced team is always happy to discuss your needs. 

Are bad credit buy-to-let mortgages a good idea?

While there will be obvious drawbacks to bad credit mortgages, most notably higher interest rates and a larger deposit, meaning a higher loan-to-value (LTV) ratio, there can also be some compelling arguments to take out a mortgage of this type.

As long as your bad credit buy to let mortgage still allows you to invest in property in a sustainable and profitable way, then they are a good idea.

Of course, the hope is that your credit history will improve over time, allowing you to access the best rates when the time comes for a buy to let remortgage.

Keep reading – Let to buy mortgages or Green buy to let mortgages.

What types of adverse credit are acceptable for these mortgages?

Every lender will have their own criteria for who will qualify for bad credit mortgages. This is why it’s best to call on the services of an expert, such as a broker with connections with lenders that specialise in this type of loan, to find a specialist.

As a general rule, the following types of credit issues may be overlooked if you have a good explanation.

• Late payments on a loan or credit card, assuming your catch up quickly.
• Arrears on existing buy to let mortgages due to lack of rental payments from tenants.
• Higher use of unsecured debt, as long as you are managing the accounts sensibly and keeping up with payments.

Other credit issues, especially defaults, CCJs and IVAs, are harder – but not impossible – to overcome. The longer ago these problems arose, the more flexible a lender is likely to be. Problems from several years ago are much likelier to be forgiven than those from just days ago!   

How do I know if I have bad credit?

If you want to know whether you have bad credit, you should check your credit report. This can be done by requesting a credit report online through one of the leading providers. The main providers of credit reports in the UK are Experian, Equifax and Credit Karma.

Being a date or two late with one or two repayments on a loan or credit card over the source of several years should not impact your application toomuch, especially if you have a good reason. 

If you have experienced regular issues with your credit agreements, your total score is much likelier to fall into the adverse category. As discussed, this will make it more difficult to obtain the finance you need for a BTL mortgage. It may not be fun, but check your credit file before you make your application so there are no nasty surprises further down the line. 

Your credit file will be held by a Credit Reference Agency, or CRA. Lenders typically use one of three CRAs for credit applications in the United Kingdom – Equifax, Experian, or TransUnion.

Learn which CRA your mortgage lender of choice prefers to use and obtain a copy of your credit file, assessing it thoroughly for any issues that have been recorded in the last six years. If you consider any of them to be inaccurate or unfair, query these problems with the lender and see if you can get them removed.  

You may be able to get an idea of your credit ranking from a free service like ClearScore, but this will not be quite as accurate or detailed as that which comes straight from a CRA. 

Head to the website of the CRA your broker or lender recommends and download a copy of your file. You’ll likely need to pay a subscription fee for this, but most CRAs offer a free trial for a month. If you sign up and cancel your subscription before the first billing period, you will not be charged.

Loans issued to borrowers with bad credit will invariably attract higher interest rates than the base level. This is because you will be considered a higher-risk investment than somebody with a perfectly clean credit history.

You may also need to pay a higher deposit, especially if you are looking for a mortgage on a commercial property. 

In addition to higher interest and deposit rates, you may find that specialist lenders charge set-up fees.

You will also need to pay a broker fee if you choose to use a broker. Of course, broker fees can often be repaid several times over if your broker manages to secure you a better deal than you’d get by taking on the application process alone.

While getting a mortgage with bad credit is possible, your application will almost certainly be rejected out-of-hand by a high street lender. Buy to let mortgages are challenging to find from such lenders anyway, and these loans are almost never issued to customers with credit issues in the last few years.

This means that you will need to apply through specialist lenders that make loans of this type their core business model. You may find adverts online for lenders that claim they don’t use your credit score to assess a mortgage request, but take these with a pinch of salt. It’s best to apply through a broker, who will pair you with an appropriate lender. 

How is affordability calculated on a bad credit buy-to-let mortgage?

The primary consideration when applying for a buy to let mortgage in any instance, bad credit or none, will be affordability.

This will be assessed according to the rental yield that your property brings in. If this rent intake exceeds the mortgage repayments, you’re likelier to be accepted. Most lenders will look for a monthly rental yield of around 150% of the mortgage payment due.

How do I apply for a bad credit buy-to-let mortgage?

As discussed throughout this guide, you should team up with a broker to take out a loan of this type. Online calculators and high street lenders are of limited use when it comes to adverse credit mortgages. 

When you discuss your application, it’s vital ​​firstly to be honest and face facts. However embarrassed or worried you may be about your financial issues in years gone by, industry professionals will want to help you and will empathise. They have seen it all, and understand that financial problems can befall anybody.

Once your broker has an understanding of your circumstances, and a copy of your credit file to review, they will seek to find a mortgage lender willing to provide you with the finance you need and the application process can begin in earnest. 

Brace yourself for an abundance of paperwork, and a range of questions from underwriters surrounding your finances. These will not be intended to be nosy or judgmental – simply a quest for assurance that you will be able to keep up with scheduled payments.