Many individuals with unsecured debt fear that being in a debt solution will affect their future borrowing ability and make it difficult to make certain financial decisions, such as getting a mortgage, taking out a loan, and even opening a bank account.
However, almost every debt solution will have a negative impact on your credit rating and hurt your mortgage prospects for several years, and a Trust Deed is no different.
In this article, we’ll discuss how debt solutions like the Scottish Trust Deed can impact your credit report, how long your credit file will be affected, and how to rebuild your credit rating to enable you to get a mortgage or access other secured loans in the future.
What is a Trust Deed?
A Scottish Trust Deed is a legally binding agreement between you and your creditors to repay a portion of your unsecured debts over a set period (typically a minimum of four years).
Once you’ve made your final payment, any remaining debts will be written off and you’ll be free to move on with your life.
Generally, to qualify for a Trust Deed, you must be a resident of Scotland, have unsecured debts of over £5,000, and have enough income to allow you to make monthly payments towards your debt. If you live in England, Wales, or Northern Ireland, an Individual Voluntary Arrangement (IVA) is a common alternative.
Trust Deeds can only be arranged and managed by a licensed Insolvency Practitioner (IP) who will go on to act as the Trustee of your arrangement and distribute your payments among your creditors.
When you enter into a Trust Deed, your debts will be consolidated into a series of affordable monthly payments based on your income and expenditure and your creditors will be prohibited from contacting you or taking legal against you over the debt.
Are you considering a Trust Deed?
What is a Protected Trust Deed?
Put simply, the difference between a Trust Deed and a Protected Trust Deed comes down to whether your creditors agree to you entering into the arrangement at the proposed terms.
For example, as long as over 50% of your creditors or the creditors to which you owe a third of your debt agree to your proposal, your arrangement will be granted protection status.
This means your creditors won’t be able to take legal action against you and all interest and charges on the debt will be frozen.
Once your Trustee has drafted a proposal, they will send it to your creditors who will have five weeks to voice their objections to it going ahead.
If, for whatever reason, your creditors don’t respond, it will be assumed that they have no objections.
How will a Trust Deed affect my credit rating?
Like most debt solutions, a Trust Deed will affect your credit rating in several ways.
For example, it will be visible on your credit file for a total of six years from the date it was approved and your credit rating will be lowered as a result.
Because the average Trust Deed lasts four years, your arrangement is likely to still be visible on your credit file for another two years after you’ve been discharged and you will struggle to access further credit during this time.
However, there are various things you can to do improve your credit rating once you’ve been discharged and you should have no problem borrowing money after your arrangement has dropped off your credit file.
It’s also important to remember that your credit rating will already be damaged from the missed payments or defaults that led to you requiring a Trust Deed in the first place.
So the negative effect on your credit rating shouldn’t be a big enough reason to avoid getting the debt help you need.
Is it possible to get a mortgage with a Trust Deed?
Getting a mortgage while your Trust Deed is ongoing can be extremely difficult as your arrangement will be listed on your credit file and you can’t access credit valued at more than £500 without written permission from your Trustee.
Even after you’ve completed your Trust Deed, it will still show on your credit record for another two years and lenders will be wary of entering into another credit agreement with you.
However, while you’ll be subject to stricter eligibility criteria and higher interest rates, it’s not impossible to get accepted for a mortgage after a Trust Deed.
By this time, your unsecured debts will be cleared and you’ll be in a position to start rebuilding your credit score again.
This is a crucial time for your finances, especially if you want to get a mortgage, and it’s important to take steps to start to improve your credit, such as avoiding further debt, sticking to a budget, and making payments in full and on time.
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How can I increase my chances of getting a mortgage after a Trust Deed?
Gradually rebuild your credit rating
After being discharged from your Trust Deed, it may be a good idea to take out a credit builder credit card, which is a credit card designed to help those with a poor credit history rebuild their credit back to pre-debt levels.
This may sound counterintuitive and they tend to have high interest rates and a low credit limit, but it can be a good way to prove to your lenders that you can make repayments consistently.
The best way to use a credit builder credit card is to use it for a monthly expense you know you’ll be able to afford, as this can guarantee you’ll be able to pay off the balance in full each month.
Save for a deposit
Because your credit rating will still be affected for some time after your Trust Deed ends, this can be a good time to save for a substantial deposit.
This can increase your chances of getting approved for a mortgage as you’ll likely need to borrow less money and will therefore pose less of a risk to the lender.
Continue on the same or a similar budget that you followed while you were in your Trust Deed and put the extra money into a savings account.
If you’ve never owned a home before, you should also consider one of the many government schemes designed to help first-time buyers purchase their first home.
Be proactive about your poor credit history
Once you’ve been discharged from your Trust Deed, you should obtain a free copy of your credit report from one of the main credit reference agencies in the UK (Experian, Equifax, or TransUnion) to ensure your details are up to date and your debts have been marked as paid.
Some people just assume that their credit file will automatically update once their final payment has been made, but this isn’t always the case.
Even if it’s been a while since you exited your arrangement, regularly checking your credit history can help you maintain a healthy credit score.
Your credit file is one of the main points of reference for mortgage lenders so keeping an eye on it can protect you from unfair rejections and scrutiny.
Contact a specialist mortgage broker
When applying for a mortgage, most people approach their local high-street banks first. However, banks tend to be risk-averse and if you have any evidence of a debt solution on your credit record, they will most likely see you as high risk and not lend to you or, at the very least, offer you very high interest rates.
Instead of visiting a high street bank, an independent mortgage broker may be a better option for your financial situation.
They tend to have access to a wider variety of market lenders who typically have greater flexibility and will be more willing to lend to you.
Remember to inform your mortgage broker of your Trust Deed and the factors surrounding your financial situation when you first approach them.
Even if your Trust Deed is still visible on your credit record, being open and upfront about it can prevent any confusion and some mortgage brokers may be more willing to offer you a mortgage if they know the reasons behind your financial troubles.
Why will I be subject to higher interest rates after a Trust Deed?
When you apply for a mortgage after a Trust Deed, you’ll more than likely only be approved if you agree to higher-than-normal interest rates. But why is this the case?
Put simply, having evidence of a debt solution on your credit file indicates that you’ve struggled with making repayments in the past and could potentially default on any future credit agreements, which can make lenders wary of approving you for a mortgage.
To balance this risk, lenders will increase the interest rate they offer you so that, in the event you stop making payments, they won’t be left out of pocket.
Some lenders also request that you have a guarantor to cover your repayments if, for whatever reason, you’re unable to continue with your payments as agreed.
However, if you can demonstrate that you can maintain a regular payment schedule on your mortgage over time, this should improve.
Here’s an example of how we can help.
Let's say you owe...
Credit Card
Bank Loan
£13,420.00
Collection Agency
£4,715.00
Payday Loan
£1,152.67
Rent Arrears
£477.00
Council Tax
£279.04
Total amount owed:
£22,707.91
After a Trust Deed
Example case completed in 2023. Repayment calculated using income and expenditure data. Monthly payments and write off percentages are based on individual circumstances.
What else should I know about getting a mortgage after a Trust Deed?
Getting a mortgage is a big decision that shouldn’t be taken lightly, and your past debts shouldn’t be a deterrent to moving on with your life and making positive financial decisions.
However, the process of getting a mortgage after a Trust Deed is different to the standard mortgage process and it’s important to do your research before you apply.
For example, when you apply for a mortgage, the lender will search your credit report to determine your ‘creditworthiness’ (how likely you are to make repayments in full and on time).
This will leave a ‘mark’ on your credit file which, if your application is refused, can hinder your chances of being approved by other lenders.
Because of this, it’s a good idea to approach specialist mortgage brokers who are experienced in helping people in similar situations find the right mortgage for them.
They will review your circumstances and offer realistic solutions, which can limit any further damage to your credit record.
Finally, any steps you can take to improve your credit score will greatly improve your chances of being approved – especially if your Trust Deed is still visible on your credit file.
From registering to vote to paying your bills in full and on time, small changes can make a significant difference to your mortgage prospects.
