Figures published by the Council of Mortgage Lenders earlier this month gave unwelcome confirmation that banks and building societies are still reluctant to provide loans to either first-time buyers, or homeowners in search of a new deal.
The data shows that, in October, the number of loans for house purchase (46,000) was 4% down on the previous month and 16% lower than in October last year.
Remortgaging showed a similar pattern, with just 26,000 loans advanced in October. This was 9% less than September, and a staggering 21% less than a year ago.
The good news is consumers are not entirely powerless. In fact there are clear steps you can take to maximise your chances of getting a mortgage agreed.
Step one: Pay off your debts
Mortgage lenders are much more welcoming to applicants who have no other debts as they are regarded as lower-risk borrowers. Not only will clearing your debts give you a better chance of a green light from a mortgage lender, you will have a greater capacity to borrow.
This is because most lenders now employ affordability criteria (where your monthly debt repayments are subtracted from your monthly income when calculating how much you can borrow), instead of straightforward income multiples (where the lender multiples your gross annual salary by say, three or four).
Step two: Save, save, save
Once you are on an even financial keel, it’s time to save as much as you possibly can. These days you will need at least 10% of the property value to put down as a deposit but, even then, you will have a better chance of being accepted with 20%. What’s more, the greater the slice of deposit you are offering the lender, the greater access you will have to its cheapest mortgage deals.
Step three: Start stashing records
If you can demonstrate that you have a consistent and reliable income, you will be a much more appealing prospect to a mortgage lender. Keep all bank statements and pay slips and – if you are self-employed – produce as many yearly accounts as possible compiled by a reputable accountant.
Step four: Face up to your borrowing past
Obtain a copy of your credit report from a credit reference agency such as Experian or Equifax before applying for a mortgage. This sets out all current and previous borrowing you have made and shows up difficulties a lender might identify, such as defaults, arrears and any County Court Judgments against you.
Getting familiar with the contents of your credit report before a lender does will give you a good steer on the likely outcome of your mortgage application. It will also give you a chance to amend incorrect or unfair information by adding a ‘notice of correction’ to your report which lenders are obliged to consider.
You can compare costs of accessing your credit file at moneysupermarket.com’s credit monitoring channel.
Step five: Get yourself on the electoral roll
If you register to be on the electoral roll for every address that you live at, it will help to confirm your identity and address history – both of which will make lenders happier to part with their cash. It will also potentially improve your credit score. Call your local council to and ask to be sent the relevant forms or do it online.
Step six: Research and compare mortgage deals
Once you are nearing a position where you have a chance of being accepted for a mortgage, it’s time to do your homework on the best deals. moneysupermarket.com’s mortgage channel sets out clearly the best mortgage deals whether you are a first-time buyer or an existing homeowner looking to switch deals. It also lists the deposit required and associated fees and tie-ins.
If you only have a 10% deposit for example, the best deal is currently a two-year fixed rate from HSBC priced at 4.99% with a £99 fee. And for remortgagers with 35% spare equity in their property, First Direct has a two-year tracker priced at 2.19% with a £99 fee.
Step seven: Don’t apply willy-nilly
If you are refused by your chosen mortgage lender, going on to apply erratically to a series of different banks or building societies is a big mistake. So-called search ‘footprints’ are visible on your credit file to lenders and, as you go along the line, each becomes increasingly nervous as to why you keep being refused. In other words, it becomes a self-fulfilling prophecy.
Ask the lender to carry out a ‘soft credit search’ which will be recorded on your credit history but not visible to other lenders.
Step eight: Use a mortgage broker if you are a difficult case
If you have been refused a mortgage or if you just fall outside the box – for example you are self-employed, have a patchy credit rating or have lived outside the country for some time – it’s wise to seek out an independent mortgage broker. You can speak to a qualified mortgage adviser through moneysupermarket.com.
They will know where best to direct you according to your circumstances before taking the plunge. However bear in mind that HSBC and sister bank, First Direct often have deals at the top of the mortgage tables – but neither bank takes business from brokers.
Please note: Any rates or deals mentioned in this article were available at the time of writing.