You know a mortgage will cost the same or less than your rent which you have paid without problems for years – so it’s obvious you can afford the mortgage.
But that isn’t what a mortgage lender looks at when they assess affordability!
A few years ago, lenders only looked at the size of your deposit, your credit rating and your income.
Now, in 2021, the “affordability calculations” look into your outgoings in detail. Your debts are an important part of this: credit card repayments, any bank loans, car finance payments, the size of your overdraft etc.
And lenders are also more fussy about what they count as income. Many will rule out all or a proportion of bonuses, commission or overtime.
This applies even with the new government-backed 95% mortgages – you still have to pass the lender’s affordability assessment.
The mortgage lender will also be thinking ahead to when interest rates may go up in the next few years.
This doesn’t mean you can’t get a mortgage if you have debts,
but your debts do matter.
Let’s look first at the three things that are most important to mortgage lenders and then at what you can do now and over the next six months to a year to improve your chances of getting the mortgage offer you want.
Contents
1) How big is your deposit?
A bank will feel much happier about any minor credit history problems you have had in the past if you have a good deposit.
With a low deposit, less than 10%, everything else has to be looking great if you want to get a good mortgage deal.
So should you borrow to get a larger deposit? No!
Although having a 10% deposit rather than 5% may make it look as though you can get one of the “best buys” on offer, in practice the extra borrowing is likely to mean that you will fail the affordability calculations so you won’t get a mortgage at all. Not a good idea.
If you have been saving in a Help To Buy ISA, make sure you know the rules about when you can get at the money because you can’t use it for the “exchange deposit”, only when you complete the purchase.
2) Check your affordability now
A good mortgage affordability calculator
Each lender has its own rules and these can differ a lot, see The dark art of mortgage affordability. One of the big advantages of going through a broker, is that they will have a good idea if you will pass Bank A’s affordability calculations or if you would be better to apply to Bank B.
But if you are thinking ahead to a future mortgage, is a good idea to get some feel now for what you may be able to borrow, without having to talk to a broker.
Most mortgage lenders ask for a lot of details when you make an application, including your other debt repayments, your childcare costs and your commuting costs. And they will want evidence about these costs, often asking three or six months bank statements. Many “mortgage calculators” are very basic and don’t ask the right questions to have a hope of giving an accurate answer to how much you may be able to borrow.
But try this Nationwide mortgage affordability calculator as it is pretty detailed.
How your debts affect affordability
There is a wide range here, from “it’s a big struggle and I have made late payments in the last couple of years” to “No problems, the car loan comes out when I get paid and I clear my credit card in full each month“.
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 for your credit record), you just need to carry on and make sure your credit record stays clean until your house purchase has completed.
If you know you are 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 a few years getting your debts down to more easily manageable levels.
If you are in a debt management plan you are also going to find it difficult to get a mortgage. You may be happy to carry on paying £5 a month to some old debt, but the mortgage company won’t like it. Even if your debts defaulted more than 6 years ago so they aren’t on your credit record at all, the mortgage lender will still care about them… read this article: Can I get a mortgage in a DMP?
If you are currently insolvent (you have been bankrupt, in an IVA or a Debt Relief Order (DRO) in the last 6 years) you probably won’t be able to get a mortgage or remortgage however large your deposit.
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.
But it is the mortgage company that makes the judgments, not you.
You may feel comfortable that most of your credit card debt is on 0% deals, but a mortgage lender knows that if you miss a payment, then interest will start to be charged. Also you may not be able to refinance it at the end of the 0% offer.
3) And also check your credit records
Why you should do three checks now just one
You should check your details with all three credit reference agencies. This applies even if:
- you think is fine as you have never missed a payment in your life; or
- you look at a credit report every month and its great.
There could be something on a credit reference agency you don’t check that is wrong – perhaps an incorrect link to someone else’s account, or a wrong previous address, or a debt you are unaware of from when you moved house.
An error on your file can take a long while to get corrected, so check now!
Finding an unexpected problem when you are in the middle of buying a house can often mean your purchase falling through. This really does happen to hundreds of people every year, see A credit rating dispute could cost me getting a mortgage where an error by a bank took six months to sort out – and was only finally resolved when a national newspaper got involved.
If you have a perfect record, great! See below for making sure it stays that way until your house purchase completes.
How bad are different sorts of previous problems?
With a less than perfect record, how serious is your credit problem? Mortgage lenders usually rank difficulties in roughly the following order, starting with the most minor:
- late payment
- missed payment,
- AP/debt management
- default,
- CCJ,
- insolvency (IVA, DRO, bankruptcy)
Most mortgage lenders also regard payday loans as a major problem if it has been recent. That used to be one year, but since the pandemic many lenders are saying two years. This applies even if the payday loans were repaid on time, see Payday loans make it harder to get a mortgage.
And how old are the problems?
It isn’t just the type of problem that is important, it also matters how long ago it happened and when you sorted it out.
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 in the past. But any default which is still outstanding shows you still have debt problems – not good for your mortgage application.
Some lenders will reject any applications with defaults even if they are settled. But some high street lenders don’t mind past problems:
- if your defaults were more than three years ago
- and they have been repaid for more than a year.
So what the default date is on your credit record is really important as mortgage lenders care more about recent problems.
Also a defaulted debt disappears from your credit record six years after the default date. So if you have several old defaulted debts which you have settled that will be dropping off your record in September 2020, think about delaying any mortgage application until after they have gone. This will give you the widest choice of mortgages including the best deals.
What is your overall picture like?
How good is your overall picture: 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, could you make some of it better in the next 6-12 months?
Read up about Snowballing, this is the fastest way to clear debt and it will also result in your credit record improving a lot.
Also read How to improve your credit record for a mortgage. Time is a great healer of credit records, adding six or twelve months of perfect credit ticks every month, combined with your credit card and overdraft balances falling can make a big difference.
And 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?
10 tips for a trouble-free mortgage application in the next year
Once you know when you want the mortgage, you must 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. This includes not getting a new car on finance until after you have moved! If you have to, then keep the cost down as much as possible.
- if you have any 0% deals ending in the next few months, pay down that balance as fast as possible as you don’t want to have to refinance that just before a mortgage application.
- if you cancel any direct debit, double-check your account is clear first. Be especially careful if you change mobile contracts because they are a common cause of credit record 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. The mortgage lender can see not just your current balance but also your borrowing and repayment history. Ideally don’t spend on the cards at all if you are trying to reduce a balance.
- if you have several credit cards with a zero balance, think about closing at least one. 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.
- no payday loans in the last two years before a mortgage application. Even if you can repay it on time, many lenders see these as a sign of financial problems.
- if you have an overdraft, try to reduce it. If you don’t have an overdraft, make sure it stays that way!
- keep your “discretionary expenses” well under control. When someone says 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 think that these things happen every year!
- don’t change jobs! This may not be under your control but if you have any choice, this is not the time to switch employers. If you do, you may have to postpone thoughts of a mortgage for 6 or 12 months or longer if you become self-employed.
- don’t change your name! It won’t stop you getting a mortgage but it can cause temporary problems on credit records so why take the risk. If you have just got married, leave changing the name on your accounts until after you have moved.
Getting that mortgage – who and how to apply to
Unless your credit record is great, it’s good to go through a broker who should be able to advise which lenders will be happy with your credit record.
Every lender is different. Not only do they use their own assessment calculations, but some are more flexible than others. Some high street lenders 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.
Contacting banks individually can waste a lot of your time and any rejected mortgage application will leave a ‘footprint’ on your credit record. So 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.
35-40 year mortgages – be careful!
95% mortgages – what you need to know
Help to buy – what happens after 5 years?
Nessa says
Hi Sara,
I want to in about year apply for a right to buy jointly with my younger brother.
He signed up (unknowingly) but never started an electrical engeinering course with a training provider about 2 years ago. He is now being hit with a 9k bill for a course he never even started. This debt has been taken over by a debt collection agency and is impacting his credit file badly. How do we rectify this? Is there a way we can get the whole thing cancelled off?
Also I have a default on my file for a debt a former partner took out in my name via Provident. It defaulted in 2017 but was taken out 2015. I have refused to pay it and have just ignored it however this is also impacting my credit score and will be an issue when wanting to buy my flat. Please advise how I go about dealing with this? Thank you
Sara (Debt Camel) says
Your brother needs to talk to Citizens Advice urgently about whether he has a reason to dispute this debt if he did not know what he was signing up for.
Have you told Provident you did not take out the debt and reported it as fraud?
Nessa says
Thanks for the fast reply Sara!
We will make an appointment and start the ball rolling.
I have not contacted provident. Do you think at this point it’s worth telling them? They have sold the debt to vanquish fresh start. Am worried as how do I prove this after so long?
Also am planning to speak with a broker and see what our options are but not sure we will be in a good position to put in an application and secure a mortgage, with out the “bad credit mortgage” being our only option.
Sara (Debt Camel) says
You either try to sort out the Provident debt, which may not be easy, or you need to pay it.
SBP says
Hi Sara, I have two defaults for a couple of hundred on my file from October 2016 but apart from that no debt. Will this still affect my chances of getting a 90-95% mortgage? I feel like my life is on hold until these fall off my file.
Sara (Debt Camel) says
when were the defaults repaid?
SBP says
Sorry – just checked my credit report the first was actually paid in Oct 2016 and has a date of June 2015, the second was paid Oct 2016 and the default date is April 2015.
Sara (Debt Camel) says
That is a very long time ago. Some mortgage lenders won’t mind about them. But they will be dropping off your credit record in April & June this year, so not long now.
95% mortgages are very hard to get at the moment though. Even 90% ones are less common and more expensive than they were.
SBP says
I had hoped the government guarantee announced earlier in the week would be good news for us. Do you not think it will change anything?
Sara (Debt Camel) says
I don’t know. It may make a difference in a few months.
Chelsea says
Hi there I am looking into a mortgage specifically the LIFT scheme which is a 5% deposit and you own 70% and the government own 30%. I have old defaults on my account all totalling about £500. I have not had any late payments for a year and do have a 5% deposit. What would my chances be of getting a mortgage. I am on maternity leave so will not be looking to buy until a years time just wanting to know what my chances would be like and any improvements I could make. Also do debts that are not on your credit record affect this. I have an old council tax debt I am still paying off?
Thanks
Sara (Debt Camel) says
That is a Scottish scheme? I am sorry I don’t know anything about it and haven’t heard anything about how easy/hard it is to get a mortgage for it.
HJL says
Hi Sara since early 2021 I am debt free & I am in a position where I save monthly & will by next year have a good deposit for mortgage, roughly 15-20 prcent. My partner has been saving aswell and we want to get joint mortgage together. My wage is good but in the past I have had lending from 118, wonga, casheuronet, sunny and had an arrangement to pay with a high street bank. Casheuronet & sunny are now removed from my reports. Wonga settlement date was 2017, 118 settlement is 2017 & the arrangement to pay was sorted in 2018 but the loan which has the AP was only settled in early 2021. Will I struggle to get a mortgage? I haven’t told my partner. Thx for advise.
Sara (Debt Camel) says
118 isn’t a problem – it will not be flagged as a payday loan because it isn’t.
The Wonga loan is pretty old so it may not be a problem. However, as Wonga no longer exist at all (liquidated after administration) if there is anything at all wrong with the Wonga record (wrong date? wrong amount? did you settle it early and not showing? etc) then you can ask the credi reference agencies to “suppress” the record as you are unable to contact Wonga and ask them to “correct” it. See https://debtcamel.co.uk/correct-credit-records-lender-administration/
But the bank AP may be problem. Next year it will only have been settled for a year. pre pandemic that would have been good enough to get a mortgage at an OK rate from a high street lender – next, it will depend what the mortgage market is like at the time.
Don’t pick a lender and apply direct – go through a broker.
PS tell your partner – they have a right to know. It’s better to hear it from you than when a mortgage application is declined.
HJL says
Thx much for advise Sara. How long would it take for the AP marker to be considered fine for most high street standard mortgage lenders? How many years after loan with AP marker is settled would lenders tend to worry less about the marker? Other than this AP marker my Experian report is excellent. Equifax is good but time should bump it up to excellent and CreditKarma is good.
Sara (Debt Camel) says
1 year could possibly be OK this time next year, or high street lenders may be looking for two or more. Sorry but there is not point in me guessing what the market may be like then.
C Cin says
Hi Sara. I’m now reaching the half way point in my debt management plan and I’m thinking ahead. I noticed you mentioned above about defaults being paid off more than 1 year and older than 3 years however what if the creditor agreed to write off the debt?
Ideally due to the current change in circumstances I would like to think about house changes for an office, once I’ve finished paying off my DMP I would like to save my money for any work however my concern is that they may not view these written off debts so kindly. So for example one was written off more then 1 year ago however the default date will not drop off till June 2025.
Many thanks
Sara (Debt Camel) says
when is the DMP likely to end?
C Cin says
DMP at the moment is planning to end 2025, however I’m hoping a new job is in the pipeline and I can work on full and final offers.
Halfway as in amount cleared.
Sara (Debt Camel) says
read https://debtcamel.co.uk/dmp-partial-settlement/
It sounds worth going for F&F offers. if you don’t it will definitely be longer before you can remortgage. If you do, then it could well be quicker. Just go through a broker, don’t apply direct to a lender and take a chance.
Ed says
Hi,
I have 2 credit card debts that have been defaulted on and subsequently sold to debt collection agencies. Neither has resulted in CCJs and the first is being paid off. I haven’t raised or asked for credit in 3yrs and have no other debts. With my total debts from these 2 credit cards being half my annual salary will i be auto declined from a morgage application?
Sara (Debt Camel) says
Both debts are shown as defaulted on your credit records? What are the default dates?
Why are you only repaying one of them?
How large a % deposit do you have?
Ed says
Hi Sara,
I have a 3% deposit at the moment so thats building up. The dates are 2016 on the debts, paying both would probably limit my ability to save fullstop. As renting is more expensive than a morgage ironically its cheaper to take a morgage out and clear than pay off all debts and rent then go for a morgage.
Sara (Debt Camel) says
Well you have no chance of a mortgage with large debts, one not even being paid back and a low deposit. Even with a 10% deposit a lender wants a very clear credit record at the moment.
The debts will drop off your credit record after 6 years, so in 2022. But a mortgage lender will still see payments being made from your banks statements. And if you stop paying one, and don’t set up payments to the other then you are likely to be taken to court for a CCJ.
I am sorry but at the moment any thought of a mortgage looks like a fantasy, even if it would be cheaper than renting :(
Your best hope seems to be to get a low settlement offer accepted on these debts. After 2022 the debts drop off so a mortgage lender won’t see that you have settled them partially.
Also as they have been sold to debt collectors then read https://debtcamel.co.uk/ask-cca-agreement-for-debt/. But that may not work…
Ed says
Thank you for your thoughts :). Just looking at the one i’ve not paid on, my last payment was 27th Jan 2016 and i’ve made no acknowledgement of the debt. No CCJ is in place according to my credit report from the central agencies.
Mercy says
Please I need you help!
I am looking forward in getting into the property Ladder this year. Last month my husband and I gather ourselves and found a lender. They did affordability checks that went through. After doing a credit check they found out that I have a CCJ on my credit report which I am not aware of. It was a parking fine and it’s gone pass the 4 weeks. I quickly call them to pay in full as I didn’t want to drag matters. This been paid over a month now. I have called the creditors countless times to inform the court so they can issue certificate of satisfaction but they keep saying they will do it but it’s not been done yet. What should I do?
Thank you.
May
Sara (Debt Camel) says
See https://debtcamel.co.uk/paid-ccj-satisfied/ for how to get the CCJ marked as satisfied.
For sone mortgage lenders this will make a difference, others will still turn you down.
Nigel says
Is it worth going for a one bedroom sharehold,
Which I start off 25% can build up to 100%
The only things putting me off it’s for 115 years, lease(can be extended)so it can’t be passed onto anyone and won’t it be hard to sell if I wanted to move in bigger property
Sara (Debt Camel) says
Selling these properties is sometimes difficult. What are your other options you don’t buy this?
Luca says
Hi Sara,
I currently have the following debt: 17k in personal loans (more than half in low interest across 3 providers) and Credit card debt of 5k (1500 in 0% offers)
My goal is to get a mortgage on a shared ownership with the government help to buy scheme as soon as possible. Credit score is currently 680 out of 999.
I’ve just got a significant pay rise at work, and with budgeting I think I can pay off £500 extra a month on top of all the existing minimum payments that amount to £570. So I was looking at snowballing the credit cards starting with the highest interest and working my way down until all credit debt is gone and all accounts are closed except one for emergencies.
My goal at the end of that stage (should be April if I really cautious) is to consolidate the 3 loans into the same low interest loan I have with my bank to give myself a DTI of below 30%.
However. I need to move fairly quickly due to issues with neighbours (the ones from hell you read about) and so I’m tempted to increase my personal loan to contribute to the deposit amount . I know you said not to, but I can increase the term so DTI is still below 30%. So that’s not effected. But if I do I will have 20k on the personal loan. It would be the only debt I have though outside of my student loan.
Do you think that increase in the loan would be a no go to a mortgage provider despite the fact I have systematically reduced debt and closed credit accounts?
Sara (Debt Camel) says
Why is your credit score so poor?
Has your bank said it will loan you 20k at a low rate? That sounds unlikely if you have such a poor credit score.
Your DTI calculations, do they take into account the rent you will be paying?
Luca says
Hi Sara,
I have been gradually rebuilding by credit score since studying my postgraduate degree 8 years ago, the cost of study was extremely high and I was supporting myself on a part time wage to try to cover it and thus things got out of hand.
This has left short term debt spread across 8 different credit accounts, and whilst payments have been met, I’m only just entering a period where I can start to close accounts one by one in the coming months due to my increased income.
10k of long term debt is actually with my bank on 3.5% APR already, so it would be the case of adding the extra 5k. These other 2 loans are at 17%. I have spoken to them about it but they’ve asked me to wait until January at least so I can improve my situation before they will consider.
The DTI taking into consideration the rent and service charge on a shared ownership for the price I’m looking at (120k for 25% share – the joys of London) would be 29%.
Sara (Debt Camel) says
17% ouch. But with high cost loans, you may not save as much as you expect by refinancing them, as the interest is front loaded.
This short term debt – can I check none of this is with tenders such as Safetynet Credit or Drafty at high interest rates?
If you have borrowed from one if those lenders repeatedly, then you may have a complaint for unaffordable lending and be able to get a refund of the interest you have paid.
I’m sorry but I don’t think talking a large bank loan in the 6 months before a mortgage is a good idea unless you have talked to a mortgage broker that specialises in shared ownership – it’s a very niche market and I wouldn’t like to guess.
Luca says
Hi Sara,
Thanks for your advice so far.
I’m now wondering on the face of things, if it may be better to try to close one of the 3 loans by paying it off rather than take out a new loan to combine the three. As you pointed out its a it risky and could delay things further.
If one of the smaller loans was cleared my DTI would still be on track, it will just impact the time it will take to save the deposit.
But I would prefer 3 months extra saving, than being told I should wait an additional 6 months to apply for a mortgage because of the recent loan (which would take me maybe even to spring 2023 before I could do anything).
There would also be the risk that the bank would say I can have the consolidation loan, but at a higher APR than the 3.5% I currently have.
The short term debt is with credit card companies, but I have used SafetyNet in the past as a last resort. So I may look into that as you have suggested. I was actually going to ask to close the account I hold with them later this week, would you suggest keeping it active whilst I look into the complaint?
Many thanks
Sara (Debt Camel) says
You are thinking about the right things, I am worried that you would not get such a large consolidation loan at such a cheap rate as well as what a mortgage lender might think of this.
But as I said shared ownership is a VERY niche mortgage market. I am sorry but a broker that knows that market could give you advice which I cannot.
re Safetynet, see https://debtcamel.co.uk/payday-loan-refunds/ for how to make an affordability complaint. If you only used them a few times with large gaps in etween this isn’t likely to work, only if you borrowed every month for a period.