Bad Credit

Bad Credit

Having a bad credit history can feel like a weight on your shoulders – especially when you want a mortgage. It can be a worrying time, not knowing if your application will be successful and you’ll get the mortgage you need.

But it doesn’t have to be that way. Even with bad credit, you can still get a great mortgage.

We can find one that’s right for you, no matter what financial problems you might have had in the past.

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A bad credit mortgage is a mortgage that is offered to people who have poor credit profiles, adverse credit, or a history of financial difficulty. Although some high street lenders will consider people with bad credit, bad credit mortgages are mainly offered by specialist lenders.

Bad credit (sometimes also referred to as adverse credit) is a catch-all term to describe debt or a credit history that has a negative impact on your credit profile. This can include:

  • Missed and late payments.
  • County Court Judgments (CCJs).
  • Individual Voluntary Arrangements (IVAs).

Although not technically adverse credit (as you may have managed your payments and kept the accounts up to date), lenders can sometimes view the following items as bad credit:

  • Having pay day loans.
  • Having too much debt (having a high debt to income ratio, or consistently using all your credit cards to their limits).
  • Having a “thin” credit file (not having much credit history, which makes it difficult for the lender to see your track record of managing debt).

When it comes to deciding on whether to lend, different lenders will look at these items in different ways. Some items are seen as more worrying to the lender than others – for example, having missed mortgage payments or pay day loans can lead to an application being rejected, depending on how much time has passed since it happened. Other items, such as a late payment for a mobile phone, might not even be considered.

A bad credit mortgage works in exactly the same way as a regular mortgage – the differences are with the interest rate and mortgage amount.

The amount you can borrow is lower, generally 75% loan to value (LTV) or less. This means that if you are buying, you’ll need a larger deposit, and if you’re remortgaging, you’ll need sufficient equity in your home.

Interest rates tend to be higher – this is because the lender views customers with bad credit as a higher risk. That said, they are still very competitive, with some of the best bad credit mortgage rates being less than 1% more expensive than regular mortgages.

As we mentioned above, not all bad credit is seen the same way – some items cause more concern for the lender than others. Each lender has their own criteria and approach things in different ways. Some have hard and fast rules, others look at applications on a case-by-case basis.

In general, however, lenders will consider the following points:

  • The type. Missed mortgage payments are often seen as the most serious items – if you’re having trouble paying your current mortgage, the lender is unlikely to give you more money, which could potentially make the situation worse. Bankruptcy and IVAs also have a big impact – most lenders will want these to have been discharged or settled for anything from 3 to 6 years before giving you a mortgage. For most high street banks, having a pay day loan in the last 12 months is a deal-breaker. Most lenders will allow some missed or late payments on credit cards or loans, providing the account is up to date at the time of your application. Missed payments on a mobile phone contract are sometimes ignored altogether.
  • The amount. The amount owed will be considered by the lender – a £50 default is going to be viewed as less of a problem than a £5000 CCJ. Some lenders have monetary limits on what they are prepared to accept when it comes to bad or adverse credit, either individually or as a total amount. For example, when it comes to defaults, a lender’s criteria might say something along the lines of “defaults up to £1000 in total, with no individual default amounting to more than £300”.
  • The time that has passed. Older items of bad credit are likely to be less of a problem for a lender, especially if your circumstances have changed for the better since then.
  • The status. “Status” refers to whether or not the item of bad credit has been “satisfied” or “settled” (paid off) or is still outstanding, and this can have an effect on the lender’s decision. In general, bad credit that has been settled will be less of a problem for the lender.
  • The reason. Lenders understand that life isn’t always plain sailing and that there are a variety of reasons why people might have bad credit. They’ll want to get as much detail as possible about why it happened, so they can understand your situation. They’ll also want to assess the likelihood of it happening again – lenders don’t want to make things worse for you, so if the problem that led to having the bad credit hasn’t been resolved, they might not offer you the mortgage. As with all mortgage applications, honesty is always the best policy and being open about your situation will make sure you get the most suitable product.

If you have the time and the financial resources, then you might be able to repair your credit profile enough to be able qualify for a regular mortgage. Paying off problem debt, bringing accounts up to date or settling items such as CCJs will always be a good thing – not only does it start to repair any damage done to your credit file, but it also shows that you are a responsible borrower.

But bear in mind, even if you settle or pay off your bad credit, some lenders will require a period of time to have passed before approving a mortgage – as mentioned above,  anything up to 6 years following a settled IVA, or 12 months following a pay day loan.

You need to consider whether you can wait to apply for a regular mortgage in the future, or whether it’s better for your overall circumstances and goals to apply for a bad credit mortgage now.

Depending on your situation, and how much adverse credit you have, it might be better to apply for a bad credit mortgage, to stop things from getting any worse. In this case, the mortgage can act as a form of credit repair itself – providing you make your repayments on time and in full, your credit profile will improve over time. Sometimes, these mortgages can include an element of debt consolidation – putting an end to any problem debt, cleaning up your credit file, and making the mortgage more affordable in the process.

In this case, the lender will still assess your partner’s bad credit, but they will also take your credit profile into account. Generally speaking, when you make a joint application and one of you has bad credit, the lender will look at the application as a whole.

Depending on how much you want to borrow, and whether it’s affordable, the person with the better credit profile might be able to make a single application, and qualify for a regular mortgage.

Because of the different ways in which lenders approach bad credit, the best thing you can do is speak to our friendly team. We’ll discuss your options, answer any of your questions, and help you take the next steps to get a mortgage that’s right for you.

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Representative example: A mortgage of £187,500 payable over 25 years, initially on a fixed rate of 2.5% for 2 years and then a standard variable rate, currently 5.23%, for the remaining 23 years. This would require 24 monthly payments of £841.29 and then 276 monthly payments of £1100.37 (this includes a broker fee of £1495 to be paid upon completion). The overall cost for comparison is 4.90% APRC.