Three years ago in 2014 the mortgage market in Britain changed. Mortgage lenders now have to assess in detail whether a loan is really affordable for the borrower. You may think “well the mortgage is going to be the same as my rent, so obviously I can afford it“, but the mortgage lender will be thinking ahead to when interest rates go up.
Before 2014 many lenders only looked at the size of your deposit,credit rating and income. Now these “affordability calculations” look into your outgoings in detail and your debts are an important part of this: credit card repayments, any bank loans, car finance payments, the size of your overdraft etc.
This doesn’t mean you can’t get a mortgage if you have debts, but it is more difficult than it used to be.
Let’s look first at the three things that are most important for the mortgage lender’s decision and then at what you can do now and over the next six months to a year to improve your chances.
1) Your deposit
This is the one that everyone thinks of first and in many ways it is still the most important. With a large deposit, a bank will feel much happier about minor credit history problems; with a low deposit everything else has to be looking great to get a good mortgage deal.
People often ask if it’s a good idea to get a loan so they have a larger deposit. No! Although having a 10% deposit rather than 5% may mean more of the “best buys” are in theory available to you, in practice the extra borrowing is likely to mean that you will fail the affordability calculations.
2) How affordable will the mortgage be?
Lenders used to use loan-to-income ratios as a rule of thumb to decide if you would be able to manage the amount you want to borrow. Now the mortgage lender is going to be asking about your childcare costs, your commuting costs, and a lot more, including debt repayments. Most lenders ask for three to six months bank statements as evidence of your expenses.
If you need an idea of how much you may be able to borrow, this Nationwide calculator may help. But each lender has their own rules and these can differ a lot as discussed in this article: The dark art of mortgage affordability.
It’s your current debts I focus on here, but you also need to be sensible about other costs in the run up to a mortgage application. When someone complains their recent bank statements aren’t normal because they went on a good holiday in November and then it was Christmas, the lender is likely to disagree and think that these things happen every year!
How your current debts affect affordability
There is a wide range here, from having debts you are currently struggling with at one end of the spectrum to “No problems, the car loan comes out when I get paid and I clear my credit card in full each month” at the other.
If you know you are currently struggling to make debt repayments, the mortgage lender is likely to see that and you are very unlikely to get a mortgage. You need to spend the next few years getting your debts down to more easily manageable levels.
If you are currently comfortably in a debt management plan you are also going to find it difficult to get a mortgage even though you don’t think you are struggling at all! You may be happy to carry on paying £5 a month to some old debt, but the mortgage company will be worried that the creditor may want more, especially if they realise you are now a home owner. This will apply even if your debts all defaulted ages ago so they aren’t on your credit record any more. You need to read this article: Can I get a mortgage in a DMP?
If you are currently in an IVA, you won’t be able to get a mortgage or remortgage.
If you are at the very easy end, then your debts are probably falling nicely every month already. Unless you have had debt problems in the past (see below), you just need to carry on with that trend and then make sure your credit record stays absolutely clean until your house purchase has completed.
Many people will be somewhere in the middle – it would nice if your debts were lower, but they aren’t a big problem and you are coping with the repayments. Again it is the mortgage company that makes the judgments, not you. You may not care much about that 8k of debt at 0% interest, but a mortgage lender will worry that if you miss a payment suddenly interest is going to be charged.
3) What is your credit record like? Check it now!
Even if you think your credit record is fine as you have never missed a payment in your life, you have to check now. See how to check your details with all three credit reference agencies.
An error on your file can take months to get corrected. Finding an unexpected problem when you are in the middle of buying a house can often mean your purchase falling through. You will have wasted money on a solicitor and wasted a lot of time apart from the heartache of losing “your house”. This really does happen to hundreds of people every year, see How a stranger’s £40 parking ticket cost family their new home for some recent stories.
If you have a perfect record, great! See below for making sure it stays that way until your purchase completes.
With a less than perfect record, how serious is your problem going to be? Each mortgage lender uses their own approach to assessing your credit record, but credit problems are usually ranked roughly in the following order, starting with the most minor:
- late payment
- missed payment,
- AP/debt management
- insolvency (IVA, DRO, bankruptcy)
Within these, two things matter:
- how long ago was the problem?
- how long ago was it resolved?
A debt problem that you have “solved” is much better than one that is still ongoing… so if you have defaults or CCJs on your credit record you have to settle these debts. A settled default shows you had problems a while a go. But a default which is still outstanding shows you still have debt problems – not good for your mortgage application.
Some high street lenders will reject any applications with defaults even if they are settled. But some lenders don’t mind provided that your defaults were more than three years ago and they have been repaid for more than a year. If you go through a broker, they should be able to advise who to apply to, see below.
What the default date is is really important for two reasons. First because a defaulted loan will disappear totally from your credit record 6 years after the default date. And secondly because some lenders don’t mind settled defaults if they are old. So if the default date for one of your debts looks a lot too recent, you should try to get this corrected, see What should the default date for a debt be?
In addition, most lenders don’t like you to have had recent payday loans, even if these were paid back on time, see Payday loans make it harder to get a mortgage.
Every lender is different. Not only do they use their own assessment calculations, but some are more flexible than others. High street lenders in particular tend to adopt a Computer says No approach to low and average deposit loans if you have any recent credit record problems at all. If you have a very large deposit, some lenders may be more willing to accept an application with recent problems. You are very unlikely to get a mortgage offer whilst you have an insolvency marker showing on your credit record however large your deposit.
So where does that leave you?
How good is your deposit – affordability – current debts – credit record ? If it’s not looking good, then you are going to have to spend some time, possibly even years, improving it.
If it’s just about OK you hope, how much better you could make it in the near future? Read up about Snowballing, this is the fastest way to clear debt and it will also result in your credit record improving a lot. Time is a great healer of credit records, adding six or twelve months of perfect credit ticks every month, combined with your debt balances falling can make a big difference.
When you start the countdown to a mortgage
Once you know you want to move by a certain date, it’s vital that you do everything possible to avoid new problems appearing. So:
- don’t make any credit applications in the few months before asking for a mortgage, nor between getting an offer and completing.
- if you have any 0% deals ending in the next few months, you need to be paying down that balance as fast as possible.
- don’t plan on getting a new car on finance until after you have moved!
- if you cancel any direct debit, double check your account is clear first.
- be especially careful if you change mobile contracts. This is a common cause of problems if the last bill isn’t fully paid.
- make sure credit card balances are reducing and that you are paying more than the minimums:
- lenders can see not just your current balance but also your borrowing history, so show them your debts are going down.
- ideally manage without using the cards at all.
- if you have a credit card with a zero balance, think about closing it. If you are trying to show a mortgage lender that you won’t get into future debt trouble, getting rid of that spare card is a simple way;
- pay off any CCJs or defaulted debts.
- It’s best not have these at all, but a settled debt looks better than one that isn’t;
- absolutely no payday loans;
- if you have an overdraft, try to reduce it. If you don’t have an overdraft, make sure it stays that way!
- don’t change jobs:
- This may, of course, be outside your control. But if you have any choice, this is not the time to go self-employed or switch employers. If you do, you may have to postpone thoughts of a mortgage for 6 or 12 months;
- don’t change your name!
- this is not the time to have any complications in your credit record. If you have just got married, leave changing the name on your accounts until after you have moved.
Getting that mortgage
Contacting banks individually can waste a lot of your time and any rejected mortgage application will leave a ‘footprint’ on your credit record. If any of the following apply, consider going to a mortgage broker instead:
- you have a low deposit;
- you need a large loan in relation to your income;
- your credit history isn’t very good; or
- there is anything unusual about your situation.
Money Advice Service’s article on Where to go for the best mortgage deal has good advice on finding a broker.