People searching for bad credit mortgages should be wary of products which advertise low headline interest rates. Quite often, the mortgages that seem the best value on the surface turn out to be the most expensive in the long run. Borrowers should assess each bad credit mortgage based on its overall cost and not just the rate of interest that they will pay in the first few years. This rate is often lowered so that the lender can advertise their product more favourably.
Such bad credit mortgages generally come with extended tie-ins that can overrun 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 unaffordable to a lot of borrowers which will prevent them from selling their home and force them to pay the SVR until the overhang period expires.
Some bad credit mortgages even come with interest rates that are discounted considerably in the first year before increasing to an extremely unfavourable rate after that. This can cause a payment shock to borrowers who may not have factored in the increased payment properly when first applying for the loan. Such discounts are obviously designed to entice borrowers to apply for those particular products and act as a deal sweetener.
This situation can be exacerbated if interest rates in general have increased during the discount period. The amount of interest rate shock could be too big for the borrower to afford so careful consideration must be given to mortgage products with discounted initial interest rates.
Borrowers must also factor in the cost of any application fees. Bad credit mortgages are famous for containing excessive fees and these can increase the overall cost of the mortgage considerably. These fees are usually charged as a percentage of the loan balance and can be as high as ten percent for heavy adverse credit clients.
Additionally, if the borrower uses a mortgage broker, they may incur a fee from the broker. Mortgage brokers who specialize in bad credit products often charge fees in addition to the lenders’ fees and these can be as high as two percent of the loan balance.
Similarly, exit fees should be assessed 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 expired.
Therefore it is difficult to ascertain the true cost of bad credit mortgages by simply comparing the initial interest rate. Borrowers should be aware that comparing products via a mortgage comparison website may be deceiving because they may not include future interest rates and application and exit fees in their assessments. Borrowers should also pay attention to the APR. This is a figure designed to indicate the true cost of the mortgage.
It is more advantageous to contact an independent mortgage broker and request quotes on several bad credit mortgages that may be suitable.
