Subprime Mortgages Explained

What are subprime mortgages?

The term ‘subprime mortgage’ is an outdated term that refers to mortgages for people with bad credit. The phrase, which originated in the United States, isn’t used much these days because it suggests the mortgage is in some way not as good as a mortgage for someone with a good credit score, which isn’t true. 

Nowadays, mortgage lenders work out what you can afford and how much interest they will charge you based on your affordability, income, outgoings and credit history. 

But you might still hear ‘subprime mortgage’ used now and then to describe a mortgage offered to someone with a poor credit history.

The reason the term was coined is because bad credit mortgages are typically less competitive than deals from mainstream lenders, or 'prime' mortgages. This is because borrowers with bad credit are seen as a bigger risk to lenders.

They're usually only available through specialist lenders, and enable people who CAN afford a mortgage - but who would otherwise be turned down because of their credit score - to buy a home.  Specialist lending is nothing like the sub prime mortgages that existed before 2008. They're just not as widely known as the big banks and mainstream lenders.

Are subprime mortgages risky?

The mere mention of subprime mortgages can be a worry for many. The mortgage crisis of 2008 is still a fresh memory, when unregulated mortgages were a big factor in the housing crash. 

Today’s specialist mortgage market is much less risky and has way better regulation than before the crash. Gone are the flippant attitudes of the old subprime mortgage lenders. 

The mortgage process is much more in-depth than before, and your affordability will always be thoroughly checked. That means lenders are more responsible than they once were, and will only give you a mortgage if they’re certain you’ll be fine paying it back. That’s good for you, and good for them. 

What caused the subprime mortgage crisis?

The subprime mortgage crisis was symptomatic of the financial collapse in 2008. Prior to this, mortgage applicants with bad credit were able to certify their own income without background checks or affordability tests. This means many people were borrowing more than they could afford.

Lenders approved mortgages as they expected borrowers would sell their house at an inflated cost rather than defaulting on their mortgage. But house prices fell, and many people were unable to make repayments. 

Nowadays, you can’t self-certify your own income. Lenders require a lot of information from you about your financial circumstances before they’ll agree to lend to you. That's why getting a mortgage today is a far different experience from what it was 20 years ago.

How has the mortgage market changed since 2008?

Straight after the credit crunch of 2008, getting a mortgage was very difficult as most financial businesses had less money available to lend. The market has since recovered and is heavily regulated to encourage responsible lending. 

Mortgages are stress-tested rigorously before an application is approved, and affordability checks are a crucial part of the application process. Pre-2008, anyone could certify their income simply by signing a piece of paper - credit checks weren’t often carried out. 

When you apply for a mortgage today, you’ll be asked to submit a large amount of paperwork evidencing your income, along with a credit report. Read more in our Guide: What Mortgage Lenders Look For In Applicants.

Before submitting an offer on a property, most sellers and estate agents will want you to have a Decision in Principle from a lender. This shows you’re a serious buyer and a mortgage company is happy to lend you money, in principle, before they do the extended and detailed checks on you. 

Why would someone need a specialist mortgage lender?

Life happens, and you can fall into bad credit for a number of reasons: illnesses, job losses and separations can all cause financial hardships. Even if a situation is temporary, it can make things more difficult when trying to get a loan further down the line, like a mortgage. 

This is where specialist lenders come in. They're set up differently from the high-street banks that take a 'one size fits all' approach. Specialist lenders look at your application on a case-by-case basis, and check to understand the reasons for your adverse credit and your current affordability.

There are many other reasons why you might not fit the mould of a perfect mortgage applicant, meaning you’ll need a specialist mortgage lender:

• A complex income - e.g. you’re a freelancer, contractor or limited company director

• Adverse credit issues such as CCJs or defaults

• No credit history - you've never taken out any sort of loan or credit card

We’re working to remove the misconceptions and stigma around bad credit. Our Mortgage Experts have seen it all and aren’t judgemental. If you’re worried about bad credit affecting your mortgage chances, make an enquiry to find out what your options are.

What is an affordability check?

An affordability check is an assessment that a mortgage lender makes to work out how much they’re willing to lend you on a mortgage loan. If you prove you can afford the repayments then there’s no reason you can’t get a mortgage - even if you have bad credit.

When progressing to a mortgage application, there's a great deal of paperwork that needs to be submitted - far more than ever used to be before the housing crash. 

You'll have to show:

• Proof of ID

• Recent utility bills for your current address

• A credit report

• Recent bank statements

• Payslips if you're employed

• Accounts if you're self-employed

A lender wants to know you can make the mortgage repayments without struggling. That's why the affordability checks are so in-depth. They'll see how you would cope if there was a drop in income or your debts increased.