April 17, 2024

Despite a turbulent summer in 2022, mortgage rates have finally begun to fall in the UK, from the 14-year peak of 6% that was reported in October.

Given rampant inflation and the cost-of-living crisis, however, the remain concerns that homeowners could become burdened by their mortgages and face significant exposure in a challenging housing market.

But what specifically is mortgage risk and when does it occur? Also, what steps can you take to protect your home from this risk in the current economic climate?

What is Mortgage Risk and When Does it Occur?

There are different types of credit or mortgage risk, but generally speaking, these terms refer to exposure in a particular market and the maximum loss to a lender if a borrower ultimately defaults on their loan.

More specifically, one type of mortgage risk and exposure occurs when an applicant is awarded a ‘high risk’ mortgage. This type of offer is typically reserved for applications with a poor credit score (between 0 and 380) and an increased debt-to-GDP ratio.

Similarly, high-risk mortgages may be offered to applications with a particularly low deposit amount, with so-called “100% mortgages” considered to be incredibly high-risk financial products which played a key role in the subprime mortgage collapse before the 2008 financial crisis.

Another example of credit and mortgage exposure occurs specifically when an applicant borrows too heavily about their income. This can occur when an applicant has an outstanding credit score but a high debt-to-GDP ratio, creating a scenario where their repayments become unaffordable amid a mounting cost-of-living crisis.

This type of high-risk mortgage typically comes with higher rates of interest too, as lenders look to offset their increased risk and exposure in the marketplace.

How Can You Reduce the Risk Posed by Mortgage Exposure?

With these points in mind, the question that remains is what steps can you take to reduce the risk posed by mortgage exposure? Here are some ideas to keep in mind:

  • #1. Improve Your Credit Score Before Applying: If you want to apply for a mortgage but have a poor credit score, you may be eligible for an unattractive and high-risk offer. However, instead of accepting this, you may instead benefit by biding your time and focusing on improving your credit score over months or years. Even incremental improvements can make a big difference, helping you to reduce the risk of mortgage exposure over time. To aid this process, consider applying for a bad credit loan and repaying this to create positive credit transactions on your report.

 

  • #2. Save for a Deposit: During this period, you may also want to take the opportunity to save a cash deposit. Ideally, you should aim to save at least 10% of the total house price, but increasing this to 20% or more can have a huge impact on reducing the amount you have to borrow and your long-term exposure. This can also reduce the interest rate applied to the loan, as lenders can minimise and manage their own risk.

 

  • #3. Pay Down Your Debts: If you’re struggling with monthly debt repayments and experiencing late or missed repayments, it may also be wise to gain control of your finances and settle some of your liabilities before applying for a mortgage. This will improve your debt-to-income ratio over time and enhance your risk profile in the eyes of lenders, once again enhancing your access to competitive interest rates and a more appealing offer.