Friday, November 5, 2010

Adverse Credit Remortgages : The Disadvantages

The main benefit of the adverse credit remortgage (ACR) is that it offers a credit facility to those with poor credit. While the ACR combines the merits of debt consolidation and remortgaging, it has attendant demerits as well. These must be considered in tandem with the merits to determine if the ACR option is the right solution for your poor credit rating or other debt problems.

Different terms from a standard remortgage

Since lenders offer the adverse credit mortgage to persons with bad credit, they do not offer it on the same terms as a standard remortgage. This means that the interest rate could be higher or the repayment period is shorter because of the increased risk to the lender. As such, this should be a major consideration when assessing the value of the ACR.

Loss of home because of inability to repay the remortgage

The adverse credit mortgage is a secured loan; it is secured against your home. This means that if you default on loan repayment, you might find yourself on the curb. While having security for this loan ensures that you get lower interest rates compared to other loans, the risk of defaulting is far greater than in other cases. In choosing a secured loan to repair bad credit or consolidate debt, you stand to lose more if you are unable to keep up with your new payment.

You typically have to pay off the existing mortgage, which leaves only the equity

Part of the provision of the ACR is that you pay off your existing mortgage. This is typical of any remortgage arrangement, but it leaves you with only the equity. As such, it is important to have sufficient equity to take advantage of this credit facility. In addition, while it might be tempting to get a less conservative valuation of your property, it might be better if the valuation is conservative or prudent.

If you took out your previous mortgage when your credit was good, the ACR could increase your mortgage repayment rate.

Your credit rating fluctuates, so it is very likely that persons who previously had good credit ratings could end up with an adverse credit rating. Let us assume that you have an existing mortgage loan that was negotiated based on a good credit rating and want to use the remortgage to manage other debt. Your adverse credit remortgage might actually be far less favourable than your existing mortgage. However, on this same note, the ACR works well for those who had their original mortgage negotiated on a worse credit rating.

The adverse credit mortgage might not be available to everyone. In addition, for some persons with bad credit, it might be more prudent to improve credit and seek a standard remortgage. While having a credit facility even though you have bad credit is enticing, make sure that the benefits and merits of such a move far outweigh the costs and risks.


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