What is credit referencing?
Banks and building societies can access details of all your outstanding borrowing (such as your current mortgage, credit cards and even mobile phone contract) via your credit report. This report is held, though not determined, by several credit reference agencies, one of which your lender will contact for the information. Quite simply, if the information shows you to be a reliable borrower, the lender will be more willing to part with its cash.
However, every time you make an application for credit – such as a mortgage – a footprint of that search will be left on your credit report. Too many searches will raise eyebrows and suspicions, increasing your chances of being turned down in the future.
So how can you test the water before making that all-important mortgage application?
Obtain a copy of your credit file
The first step is to know where you stand by applying for a copy of your own credit report. “With mortgages still in relatively short supply, many lenders continue to favour applicants with spotless credit histories,” said James Jones at credit reference agency, Experian. “As a result, it makes perfect sense to review your credit report before you approach a mortgage lender. This way, you can ensure any discrepancies are rectified before they become a problem.”
Costs will vary when accessing your credit report, according to the provider. You can compare prices of one-off or fulltime access to your report via moneysupermarket.com’s credit checking channel.
Whittle down your options in advance
Having a good idea about the type of mortgage you want – a fixed or tracker rate for example – and researching online for the best deals within your chosen category will whittle down the number of potential applications you need to make.
“When shopping around, take particular note of the level of deposit required,” warned Hannah-Mercedes Skenfield, moneysupermarket.com’s mortgage expert. “It’s still the case that the very best deals require hefty deposits of 25% or more, so don’t waste an application if you don’t have this under your belt in either equity or cash.”
Keep track of the number of searches
Having done your homework and armed yourself with the same credit information as the lender will see, proceed with great care. Even securing a mortgage agreement in principal (AIP) – which is a provisional green light before the real application process begins – typically involves a search against your credit file.
However, lenders must also inform you before making their search, so stay closely involved and keep on top of this number. David Hollingworth at L&C Mortgages, a broker, said: “One or two times won’t be the end of the world but, ultimately, you want to keep searches to a minimum.”
Bear in mind also that, even if the search is returned as successful, an AIP is not a watertight invitation for a mortgage. If the lender comes across something it doesn’t like in the formal application process, such as declared income that is not guaranteed, it could still refuse you regardless.
Visit a mortgage broker
When applying for a mortgage, it’s natural to start with the market-leading deals, such as First Direct’s lifetime tracker priced at 2.39%, and work downwards. However, these top rates can have some particularly stringent criteria attached.
If you have any concerns about your application – perhaps as a result of a less-than-perfect credit report or even becoming recently self-employed – it could be a good idea to visit a mortgage broker before you do anything.
You can also request a call from a qualified adviser through moneysupermarket.com.
David added: “Brokers know what’s expected of applicants for each deal in advance and can therefore avoid wasted applications.”
Opt for a mortgage deal that doesn’t credit score
It’s also possible to avoid being credit scored at all. Legal & General, for example has broken the mould by launching a two-year fixed rate mortgage, funded by Hanley Economic Building Society, that doesn’t credit score at all – although borrowers will need to apply through Legal & General’s network of advisers.
Head of mortgage products Martyn Smith said: “Credit scoring has its place but complex cases are not always catered for by this approach. There are many reasons why an otherwise credit-worthy borrower might generate a low credit score. Ditching credit scoring is an innovative, back to basics way of looking at lending.”
The two-year deal is fixed at a competitive 3.35% for borrowers with deposits of 25% or more. Set-up costs are relatively high though, with a £1,399 administration fee and £100 booking fee.