With a bad credit history, you’ve probably found it hard to be accepted for any kind of credit. Banks and building societies tend to have strict criteria when it comes to lending so your application will probably be declined. Unsecured loan providers and credit card companies also don’t favour applications from those with previous credit issues. Equity release, however, is different. Lenders usually agree to this despite your bad credit history because the loan is secured against your home.
How does equity release work?
Using equity release lets you access the cash that’s tied up in your property. For example, making mortgage repayments increases the amount of equity in your home as does an increase in the property’s value. You receive a tax-free lump sum (or smaller amounts on a regular basis depending on your chosen equity release product) and don’t make any monthly repayments. You continue to live in the property for the rest of your life and the loan is repaid when you either move into long-term care or die and your property is sold.
As there are no monthly repayments, you cannot default and your home is already provided as security. These factors mean lenders are usually willing to agree to equity release regardless of your bad credit history. With a lifetime mortgage, the most popular equity release product, interest is charged on the loan and this is usually compounded. This is also good for the lender, who receives a substantial amount as well as the repaid loan when your property is eventually sold. The downside to having an equity release plan with a bad credit rating is that the interest rate tends to be higher the more extensive your credit issues are.
What can you use equity release for?
Equity release can be used for numerous purposes, such as home improvements or paying for a wedding, a holiday or a new car. When you’re dealing with a bad credit history, though, it’s best to use it to improve your financial situation. Indeed, your lender may insist that your equity release funds are used to pay off any arrears. You will need to repay in full any debts that are secured on your property, such as a mortgage with arrears. Payment of unsecured debts, such as credit card arrears, may be a condition of the deal to prevent future action by the creditors via the courts.
If you have any CCJs on your credit report, these debts will need to be repaid. Depending on how much you owe, your lender may insist the debt is repaid before your equity release funds are released. Alternatively, your solicitor may be instructed to make the payment on completion before transferring the rest of the funds to you or you may be advised to repay the debt once you have received the funds.
Your lender will insist on an IVA being settled. When this needs to be done, such as before submitting your equity release application or upon completion of your equity release deal, varies between lenders.
How to prepare for your loan application
Obtain a copy of your credit report
First, get a copy of your credit report. You can do this online via one of the main credit reference agencies, such as Experian and Equifax. Make sure that your details are accurate. You should have one main address for the electoral roll and all of your accounts, such as your bank, credit card and shopping accounts. This is very important because providing your lender with inaccurate information could hinder your application.
Scrutinise any financial links
You already know that you have bad credit but you don’t want to make things worse by having links to other people’s bad credit rating on your credit report. For example, an ex-partner may have lived with you and had a history of bad credit. Now they’ve moved out, you need to ensure the credit reference agency removes the link to their name from your file. This can take about 28 days to complete so try to deal with this as early as possible.
Speak with your mortgage broker
It’s best to get help from your mortgage broker rather than trying to get approved for equity release on your own. Being specialised in adverse credit finance, your broker will know which lenders to approach for your particular situation. He or she will also ensure you get the best deal to suit your needs.
Does bankruptcy affect an application for equity release?
You have to be discharged from bankruptcy before a lender approves you for an equity release plan. This usually happens automatically after a year but it will remain on your credit report for 6 years. No matter when you declared bankruptcy, you need to notify your mortgage broker who, in turn, can inform the lender.
Is equity release the best finance option?
You may have got to the point where you’ve considered downsizing to make use of the sale proceeds. You could, for example, move from your home in Bexley to a smaller one in Bexleyheath and use the difference between the sale and purchase prices to consolidate your debts and help ease your financial position. Aside from having to leave a home you love, though, you may still run into issues with lenders over a new mortgage deal due to your bad credit rating.
It can be hard to be approved by a lender for other finance options too when you have a bad credit rating. If you’re struggling to make monthly credit card payments, for example, a lender will consider that when weighing up your ability to make monthly loan repayments. As equity release doesn’t involve monthly repayments, your credit card debts aren’t an issue.
Whilst fewer options are available with a bad credit history, lenders have varying requirements so it’s worth looking into what else you can apply for, such as an unsecured personal loan or a guarantor loan. Speak with your mortgage broker for expert and impartial advice before making your decision.