Mortgage lenders have to assess in detail whether a loan is really affordable for the borrower. You may think “well the mortgage is going cost 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 in 2019 or 2020.
A few years ago, lenders only looked at the size of your deposit, your credit rating and your income. Now in 2019 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.
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 to mortgage lenders and then at what you can do now and over the next six months to a year to improve your chances.
1) Your deposit
With a large deposit, a bank will feel much happier about any minor credit history problems you have had in the past. 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 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.
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) Your “affordability” – check it now!
Years ago lenders used your income as a rule of thumb to decide if you would be able to manage the amount you want to borrow – for example, they might lend four times your income .
But in 2019 a mortgage lender will ask for a lot more details, often including your other debt repayments, your childcare costs, your commuting costs, and a lot more. And they want evidence about these costs, often asking three or six months bank statements.
Each lender has its own rules and these can differ a lot as discussed here: The dark art of mortgage affordability.
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 I suggest you try this Nationwide mortgage affordability calculator as it is much more detailed.
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 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 (in an IVA, or you have been bankrupt, in an IVA or a Debt Relief Order (DRO) in the last 6 years) you 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 not care much about that 8k of debt on a 0% balance transfer deal, but a mortgage lender knows that if you miss a payment suddenly interest is going to be charged and that you may not be able to refinance it at the end of the 0% offer.
3) Your credit record – check it now!
You must check your details with all three credit reference agencies. This applies even if:
- your credit record must be fine as you have never missed a payment in your life; or
- you look at your credit score 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 months 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 How a stranger’s £40 parking ticket cost family their new home for some stories.
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
- insolvency (IVA, DRO, bankruptcy)
And how old are the problems?
It isn’t just the type of problem that is important, it also matters how long ago it was 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 a while a go. But any default which is still outstanding shows you still have debt problems – not good for your mortgage application.
Some mortgage 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.
What the default date is on your credit record is really important.
A defaulted loan will disappear totally 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 say, think about delaying any mortgage application until they have gone. This will give you the widest choice of mortgages including the best deals.
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.
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 you hope, how much better you could make it 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.
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.
10 tips for a trouble-free mortgage application in the next year
Once you know you want to move by a certain date, 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, paying 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 manage without spending 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.
- absolutely no payday loans in the year 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 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!
- 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.