Bankruptcy can and does have a hugely significant effect on the lives and financial statuses of those who pursue this serious debt solution. Many people who have been declared bankrupt in the past express understandable concern about whether their bankruptcy could have an effect on their chances of borrowing money and seeking credit in the future. Such worries particularly arise when former bankrupts explore the possibility of mortgaging or remortgaging a new or existing property.
It is important to acknowledge that bankruptcy and other debt solutions will have an impact on your credit report and therefore your ability to access future credit, but this doesn’t necessarily mean that you will be unable to make a successful mortgage application and there are many factors that hopeful homeowners and buyers should take into account.
In this article, we explore why a previous bankruptcy makes it more difficult to get a mortgage, how your ability to access credit will change as times goes on and whether there are any other major points to keep in mind.
Why is it difficult to get a mortgage when you’re bankrupt?
There is no doubt that it can be difficult to successfully apply for a mortgage either whilst you are bankrupt or in the period after you have been discharged from bankruptcy. There are many factors that influence mortgage decisions, but two that are key in relation to bankruptcy are the restrictions imposed on debtors by the process, along with the negative impact on personal financial records that going bankrupt causes.
Firstly, there are the bankruptcy restrictions that apply to debtors before their bankruptcy has been discharged and, in some cases, even afterwards. There is much to be said about the limits that are placed upon a bankrupt person’s activities, but perhaps the most important is that during bankruptcy you cannot usually borrow more than £500 without informing the person or company lending the money that you are bankrupt. For most lenders, news that you are currently bankrupt is likely to be a major red flag and could prevent them from taking your application any further, whilst failing to inform a potential lender of your status could involve committing a criminal offence.
Even when your bankruptcy has been discharged you can still generally expect to find a mortgage to be more difficult than if you had not been bankrupt – at least in the short term. When a bankruptcy order is made, your name will be added to the public Insolvency Register which in turn is inspected by credit reference agencies who will amend your credit file and score to reflect your use of this debt solution. When reviewing a mortgage application, lenders will base their decision in part on the contents of the applicant’s credit file and may decline applications due to a low credit score which could represent a higher level of risk for them. When going bankrupt, it is not unreasonable to expect your credit score to decline to a relatively low level and so finding credit of any kind may be a challenge until it recovers. In some cases, it may be possible to get a mortgage offer in the immediate period after being discharged from bankruptcy, but lenders are less likely to offer the best rates or most flexible deals.
How long after bankruptcy can I get a mortgage?
Although it can feel as if bankruptcy will affect your chances of taking out new credit forever, this is fortunately not the case and borrowers can often expect to see their choices increase as time passes since their bankruptcy was discharged. Whilst it is true that many mainstream and high street lenders are less comfortable with offering mortgage products to borrowers with a history of bankruptcy, your financial risk level and their concerns are likely to decline as time goes on provided that you are financially stable and can demonstrate responsible money management.
The date on which a mortgage applicant’s bankruptcy was discharged has a major influence on the availability of lending to them. Many lenders will consider an application made six years after discharge, and this will usually be enough time for the applicant to have taken steps to repair and improve their credit rating. More choice will open up to a former bankrupt as time goes on, and applicants can often expect a good degree of choice when applying just three years after discharge – particularly from specialist mortgage providers. In fact, some providers may even be willing to offer mortgage products to borrowers within the first year after their discharge, or even on day one.
It is worth keeping in mind, however, that specialist lenders dealing with mortgage applications very close to the bankruptcy discharge date are more likely to require borrowers to meet strict criteria which could involve larger deposits and much higher rates of interest to reflect the increased risk to the lender. As the bankruptcy process takes into account all of a debtor’s assets, it is unlikely that someone in this position would be able to raise a large deposit and may even have to contribute towards their debts on an ongoing basis through an Income Payments Agreement or Income Payments Order. It is not acceptable for debtors to keep money aside from the sum managed by the official receiver during their bankruptcy, and so raising enough money to meet the criteria of some lenders may not be possible in the short term
Can you remortgage after going bankrupt?
Borrowers attempting to remortgage their property after a bankruptcy can expect to face many of the same challenges as applicants for a standard mortgage. During bankruptcy, your chances of submitting a successful remortgage application are greatly reduced as both the bankruptcy restrictions and a damaged credit rating come into play.
Once you have been discharged from bankruptcy, and as your credit score begins to improve, your chances of being approved for a remortgaging product could well increase. As is the case with other mortgage products, a greater degree of choice will often open up to you as time passes since your bankruptcy discharge. In the immediate period after your bankruptcy, for example, any remortgage offers may be subject to higher interest rates and involve a higher level of equity within the property. These figures will generally decrease the further your application is from the date of your discharge, as lenders become more comfortable with your financial status.
Can I remortgage to pay off my bankruptcy?
Bankruptcy is a significant step that comes with some incredibly serious consequences, and so it follows that in some cases debtors who are able to repay their debts and bankruptcy expenses may wish to do so. The legal term for paying off and cancelling your bankruptcy is ‘annulment’, a process which returns you to the same status and position as before your bankruptcy was registered by the court.
Remortgaging your property can offer a simple route to raising the money needed to pay off your debts, and can help with the management of your finances by consolidating your liabilities into a single debt which could even have a lower interest rate. Despite the potential benefits of remortgaging, however, the practicalities of doing so may not be so straightforward. As outlined above, it may not be possible to successfully mortgage or remortgage a property whilst you are bankrupt, with more options only becoming available in the months and years after you have been discharged.
Some bankrupt or recently discharged former debtors may find that certain specialist second charge lenders can offer them tailored mortgage products even despite their financial status, but these lending products often come at an increased cost with strict terms and high-interest rates. This is a very niche and specialised area of the lending market, and formerly bankrupt mortgage applicants may benefit from the expert advice of a mortgage broker or financial adviser.
Can you get a buy-to-let mortgage after bankruptcy?
A buy-to-let mortgage is a specialist product that brings its own challenges and features beyond those that can be expected when taking out a standard mortgage. Typically, buy-to-let mortgages can only be accessed and applied for with the assistance of an expert mortgage adviser and it will be necessary to provide even greater detail relating to your income and financial status than would usually be the case.
Whilst the criteria for a successful buy-to-let mortgage application are slightly different than for a more traditional mortgage, this doesn’t mean that a history of bankruptcy will prevent you from making such an investment. Whilst your personal income will be relevant to some extent, many lenders will also assign a high level of importance to the expected rent income from the property and so a less than perfect personal financial history will not necessarily put a stopper on your plans. That being said, buy-to-let lenders are often concerned to learn whether a borrower has the financial stability and wherewithal to continue paying for the upkeep and mortgage of the property should they be unable to find a suitable tenant for any period of time.
As mentioned, buy-to-let mortgages are highly specialised and come with their own complexities even without the added concerns brought about by a history of bankruptcy. Before making any decisions, therefore, you may find it useful to research what’s on offer and seek the guidance of an expert financial adviser.
Who are the best mortgage lenders after bankruptcy?
Unfortunately, as with the majority of financial matters, there is no one-size-fits-all solution to getting a mortgage after bankruptcy. Whilst it is true that certain lenders, and mainstream high street companies in particular, are usually less inclined to accept mortgage applications in the immediate period after your bankruptcy has been discharged, the selection of providers that will give you the best deals and interest rates at any time will be highly dependent on your personal circumstances.
Unlike many types of personal loans, mortgages are not an ‘off-the-shelf’ borrowing solution and instead are generally tailored to reflect the individual details of the people and provider involved. Only by conducting thorough research and in some cases seeking expert advice can you find the best mortgage lender to suit you after bankruptcy.
How to improve your chances of getting a mortgage after bankruptcy
If you have a history of bankruptcy, it is to be expected that getting a mortgage may be more difficult than perhaps it would be for borrowers with a better financial past. Even so, there are a number of things that can be done to increase your chances of submitting a successful mortgage application and whilst these will not provide the answer to all of your problems, they will go some way to supporting your hunt for the perfect mortgage or remortgage.
Accepting that you may need a higher deposit than if you did not have a recent history of bankruptcy
Mortgage lenders are often more willing to lend to borrowers who are able to contribute a large deposit towards the purchase of a property. This is because homebuyers with a larger deposit will not need to borrow quite as much via a mortgage and so represent less risk to the lender. The more money you are able to save up, the less risk you are likely to be to your mortgage provider and so they may be more inclined to offer you a better rate or a favourable deal.
Improve your credit score
Bankruptcy will undoubtedly have a negative effect on your credit score, and it can be frustrating to learn that this rating is often used by mortgage providers when deciding whether or not they can accept an application. There are many steps that you can take to improve your credit score but a good starting point is to ensure that you pay off the balance of any credit cards when it falls due and ensure that you keep up with all repayments that you must make in the most consistent way you can. Other considerations that influence your credit score include whether you are on the electoral register and how much credit is available to you, so it is worth exploring what could be affecting your score.
Wait for time to pass
Although it is not the most active approach that can be taken, waiting for time to pass can be one of the most effective ways to allow your credit score to recover from bankruptcy. The longer it has been since your bankruptcy was discharged, the more lenders that are likely to be willing to deal with you and, provided that you remain financially stable, the better your credit score will become.
Conclusion – is it possible to get a mortgage after bankruptcy?
Getting a mortgage after bankruptcy is certainly a challenging thing to do, but it is by no means impossible. There are many factors that effect the decisions of specialist lenders and mortgage providers and it is likely that most borrowers will need to seek the guidance of an expert mortgage broker or financial adviser in order to access the lending product that is most suitable for them. Whilst in most cases bankruptcy will make it more difficult to get a mortgage for a while after discharge, as time goes on the options, rates and deals that are available to you will often increase and so your financial past need not control your future.