Mortgage Deposit for Bad Credit

It can be difficult to get a mortgage with bad credit. With good credit, you’re more likely to have access to deals with lower deposit requirements and higher LTVs (loan-to-values) – e.g. 5% mortgage deposit on a 95% LTV mortgage. But home buyers with bad credit can be stung with upwards of 30% deposit requirements. While a larger deposit reduces the overall cost of borrowing and interest, it increases the initial cost which is difficult for most purchasers.

First-time home buyers and buy-to-let investors can discover what they need to know in our mortgage deposit for bad credit guide. Keep reading to understand how bad credit can influence deposit requirements and how to get the most from your mortgage despite having bad credit.

Banks Consider the Take Risks when Lending Mortgages

To understand mortgage deposits for bad credit, we need to discuss risk. There are a number of decisions banks make when assessing mortgage eligibility.

Banks lend money and apply interest over a defined contractual time period. To gauge creditworthiness, lenders use a combination of mortgage affordability checks and risk assessment tools. Their goal is to lend money and have it repaid, plus interest, to make a profit.

Consider this scenario:

• Buyer 1 – £100,000 home value, £25,000 deposit (75% LTV), excellent credit profile
• Buyer 2 – £100,000 home value, £20,000 deposit (80% LTV), excellent credit profile

If the bank could only choose one customer, the less risky proposition is buyer 1. Since their credit profiles are similar, the bank can assume that both buyers are equally reliable in making repayments. However Buyer 1 offers more security via the deposit, reducing the risk the lender will lose money in the case of repossession.

Another scenario:

• Buyer 1 - £100,000 home value, £25,000 deposit (75% LTV), good credit profile
• Buyer 2 - £100,000 home value, £5,000 deposit (95% LTV), excellent credit profile

This scenario is a bit more complex than the first scenario. Let’s explain why.

Here, Buyer 1 has a larger deposit. Let’s also assume the lender can see that their credit profile shows mismanagement of finances comprising of a few missed mortgage payments and the overutilisation of credit cards. Buyer 2 has a smaller deposit and a near spotless credit profile.

In this scenario, a high street lender may be more willing to lend to Buyer 2, whereas a specialist lender would be willing to lend to either buyer.

A high street lender would probably prefer Buyer 2 because their untarnished credit profile would be more likely to meet mainstream lending criteria.

A specialist lender would probably lend to either buyer because they have more flexible criteria which cater to a variety of borrowers.

For specialist lenders, a larger deposit can sometimes make up for a less than perfect credit profile because they offer products as higher rates than high street lenders.

This demonstrates the issue most first-time buyers with bad credit face. Even with a large deposit, a buyer with bad credit may find it more difficult to secure a low rate deal as they will likely require a specialist lender.

Credit Risk Factors that Influence Mortgage Deposit Requirements

Banks and building societies differ, in the maximum level of risk they're willing to take on when lending.

Here are some bad credit risk factors that can influence the deposit requirement for a mortgage:

• Existing credit agreements – if you have a vehicle hire purchase agreement and a maxed-out credit card, the bank may reject you based on existing debts. The concern is whether you can maintain existing repayments while taking on additional debt
• Defaults, individual voluntary agreements (IVA) and county court judgments (CCJ) – a default on credit is a red flag for lenders. If you took out a credit agreement and failed to stick to the contractual repayment terms, there'll be a default marker on your credit file. Banks will wonder whether you can repay a mortgage if you can't repay smaller creditors. Will I still be able to have a mortgage with CCJ's on my record?
• Timescales and severity of default – when a default is registered, it takes 6 years to drop off your credit report. New defaults are viewed less favourably than defaults from 5 years ago, as they demonstrate current credit habits. Unsecured loans and credit card defaults have a large negative impact and secured loans or mortgage defaults are the worst overall.
• Satisfied vs unsatisfied defaults - satisfied or settled defaults or accounts means, despite falling into arrears at some point, debts have been paid. This signals that you fulfilled your contractual obligations. Unsatisfied means any default on a debt that hasn't been paid in full. This shows you've fallen into arrears, which can be a red flag for lenders. Defaults, whether satisfied or not, are red flags but satisfied defaults can often be viewed more favourably

How Much Deposit for Mortgage with Bad Credit?

Many variables contribute to a mortgage application. We can offer a rough estimate for how much deposit you'd need for a mortgage with bad credit.

Below we’ve listed a few scenarios ranging from worst (Person 1) to best (Person 4):

• Person 1 - this person had their home repossessed and filed for bankruptcy around 5 years ago. They'd need a 30% to 40% deposit
• Person 2 - this person is working with debt management support services and submitted an IVA 2 years ago. They'd need a 15% to 30% deposit on their mortgage
• Person 3 - this person has missed 1 mortgage payment in the year and defaulted on a low-limit credit card. They'd need a 10% to 15% minimum deposit
• Person 4 -this person has a lack of credit history and a mobile phone contract with a late payment notice this year. They'd need a 5% to 10% deposit

Bear in mind these are just examples and your deposit requirements will vary depending on your situation.

In general, the better your credit history, the lower the required deposit amount.

How Much Deposit for Bad Credit Buy-to-Let Mortgage?

The criteria for bad credit buy-to-let mortgages tends to be more flexible than the criteria for bad credit residential mortgages. This is because buy-to-let mortgages are unregulated.

It’s unlikely bad credit on your personal credit profile will have a significant impact on your buy-to-let mortgage deposit requirements unless your bad credit is particularly severe.

A rental property valued at £100,000 would generally require a minimum of 25% deposit, or £25,000.