8th May 2014
Rising house prices and tighter lending regulations are contriving to make it much harder for borrowers to obtain the money they need to buy a home writes financial journalist Jill Insley.
The Government’s Help to Buy scheme, which enables those with a 5% deposit to borrow a mortgage, has encouraged thousands of first and next-time buyers to take the plunge in the last few months. The rush to buy has caused a surge in house price inflation, making it difficult for those still looking for an affordable home.
The Financial Conduct Authority, the regulator responsible for overseeing mortgage lending, has also implemented a new set of rules which mean lenders must scrutinise prospective borrowers more carefully than ever to ensure they can afford a mortgage.
The rules are intended to protect people from borrowing more money than they can afford to repay, especially if interest rates rise. But David Hollingworth of mortgage broker London & Country says that in some cases the lenders’ questions are ending in disappointment for prospective borrowers. “Some people are qualifying for smaller mortgages than they expected – or needed,” he says.
So what can borrowers do to improve their chances of getting the mortgage they need?
Reduce your debts
One of the best ways to improve your chances of mortgage approval – and of getting a bigger loan – is to pay off any credit or store card debt or personal loans, according to Kevin White, head of financial planning at deVere United Kingdom.
A lender will reduce your disposable income – which is used to calculate the size of the mortgage you can borrow – by at least 3% of the amount outstanding on your credit and store cards. The 3% reflects the minimum payment that you must make each month.
He adds: “Make sure that you are managing your finances well. Showing a constant overdraft on your bank statements could hinder your mortgage application as it shows you have not been managing your money well enough.
“With lenders possibly going back over your bank statements up to six months, getting your finances in order sooner rather than later is a must.”
Get to grips with your spending
Under the new rules, lenders must have a thorough understanding of their mortgage applicant’s financial situation. In most cases this will involve going through all aspects of the applicant’s spending, from utility bills, childcare and council tax to hair dressing and posh coffee.
Hollingworth says: “It’s been suggested that people should cut back on spending for six months or so before making an application to make their disposable income look healthier and to give the impression that they can afford a bigger mortgage. This could be dangerous if they then intend to return to their old spending habits after the application is granted.”
Instead he suggests that mortgage applicants spend time going through their spending so they can provide the lender with accurate information. “If that results in you spotting things you are spending money on but not really using – like gym membership – then that’s an added advantage,” he says.
Extend your mortgage term
One way to make your monthly repayments more affordable is to extend the term of the loan. Someone repaying a £150,000 mortgage with an interest rate of 3% would pay £711.32 a month for 25 years. But if the term was extended to 35 years, the monthly cost would drop to £577.28.
However Hollingworth warns the borrower could end up out of pocket: “While this would clearly help with monthly cash flow, the overall cost of the mortgage would be £26,062 more thanks to additional interest over the longer term.”
Improve your credit record
It only takes one forgetful slip to knock points off your credit score and become less attractive to lenders. A late payment to your credit card company, or going over your overdraft or credit limit, can make the difference between acceptance and rejection, and it can take six months to a year for your record to recover.
Set up direct debits or standing orders to make sure payments to credit card companies happen within the payment due date. And if your bank offers a text warning service if you are approaching your current account overdraft limit, sign up.
White also says it is imperative to get on the electoral roll as soon as possible, and check your credit record to make sure there aren’t any errors which have a negative impact on your record.
Build your deposit
The bigger the deposit you save, the more loan options you should have, and the cheaper they should be. But with house prices rising so quickly in certain areas, the benefit of building a bigger deposit depends on how quickly you can do it and where you intend to buy, says Hollingworth.
In the first three months of the year asking prices have increased by 6.67% in London, 3.01% in the South East and 2.42% in East Anglia, according to independent estate agent network Move with Us. In comparison asking prices in Scotland increased by 0.23% in Scotland, 0.46% in the South West and 0.86% in Yorkshire and Humber.
“In London and the South East, the benefit of saving may be outstripped by house price inflation,” says Hollingworth. “But if you can afford to put large amounts of money aside, it could still be worth aiming for a lower loan to value ratio.”