|Who can you ask for a mortgage when everyone's turning you down?|
Their worries are justified: although the Halifax accepts eight in 10 applications, many borrowers are falling at the first hurdle with other lenders.
The main problem is that although lenders base their decisions on whether they believe you can afford the loan you have asked for, they calculate affordability in different ways. Some will not touch interest-only borrowers, while others don't like borrowers with a large number of dependents. Their websites or marketing literature, however, make no mention of this.
So how are you meant to know? The obvious answer is to ask a mortgage broker which lender is most likely to accept you. Ray Boulger of London firm John Charcol says: "There's a very strong argument for seeing a mortgage adviser six months in advance [of applying] because there are small things you can do which will improve your chances of being accepted."
So which lenders are best for which type of borrower? We asked Boulger and David Hollingworth of Bath mortgage broker London and Country.
■ First-time borrower, 5% deposit, has worked for the same employer for two years, no debtsHollingworth says there is little choice in 95% loan-to-value mortgages: Skipton building society is lending at 5.99% on a two-year fixed rate with a £195 fee; Yorkshire bank offers a three-year fix of 6.99% with a £599 fee; Nationwide building societywill offer 95% to those saving into its regular saver account for at least six months.
But Boulger points out that a borrower with no credit history — because they have no loans or credit cards — will struggle even with these lenders. Even a first-timer with a big deposit is likely to be rejected. "It's good if a borrower has been working with the same employer for two years – or longer. But they will have more points on their credit score if they have borrowed and had no problems with repayments," says Boulger. He advises taking out two credit cards, spending a bit on each and paying off the balance in full every month to build up a credit record.
Lenders often ask for three months' bank statements. So if there is anything you don't want the lender to know about – such as the three nights a week you spend in a nightclub – do not use your debit card to pay for it.
Alternatively, consider buying on a shared equity basis. Here you could put down a 5% deposit, while your local authority, developer or housing association might cover another 20%, meaning the lender is "at risk" on 75% of the property's value. "The lender will feel more relaxed about lending 75% and you will have a better chance of being accepted," says Boulger.
■ Remortgage, 20% equity in home but has £20,000 in unsecured debts and £100,000 mortgage serviced with £40,000 income. Good credit recordHollingworth says: "Santander can be quite flexible when it comes to its affordability calculation, and subject to everything else fitting can even offer as much as five times income for the right borrower (who has a high credit score and plenty of disposable income). Applying the above circumstances (£25,000 deposit, single applicant with £40,000 income) then Santander could certainly meet the £100,000 requirement and may even go as high as £160,000."
This assumes the monthly repayments for the unsecured debt is about £400 per month with a high or medium credit score. But a low credit score could reduce the maximum borrowing to £141,666, and a monthly cost of £700 per month for the unsecured lending would cut it further to £102,393.
Santander offers a two year fixed rate of 4.19% up to 80% LTV with a £995 fee.
■ Poor credit recordIf you have a county court judgment or even inadvertently missed a credit card payment in the past year, you can forget being able to persuade a lender to take you on in the current economic climate. Boulger says: "That probably is going to be a no-no for most lenders, depending on how many misdemeanours you have made." Some may consider you after a year of re-establishing a good payment record – including Precise, Kensington and Melton Mowbray building society (for those with a 20% deposit), he says – but you will probably pay a higher rate than other borrowers.
Hollingworth suggests Manchester building society, which has loans charging a 5.49% variable rate with a £595 fee and three-year tie in. It will accept borrowers with one missed mortgage payment more than six months ago. Precise is offering loans fixed at 5.84% for two years with a £1,995 fee. It will accept borrowers who have defaulted once more than three months ago, or unlimited times more than two years ago.
■ Planning a familySort out your mortgage before you start pro-creating. Lenders will reduce the amount you can borrow if you have children or a non-earning partner because your outgoings are inevitably higher. ING Direct would lend a maximum of £126,408 over a 25-year term to a family of five where one adult is the sole earner of £50,000 a year. But a childless couple where one partner is earning £30,000 and the other £20,000 could borrow up to £225,000.
ING Direct offers some competitive mortgages, so Boulger suggests extending the term of the mortgage, possibly to as much as 40 years, to make the monthly repayment lower, and therefore be more acceptable to the lender. "You could then overpay your mortgage every month, which will effectively reduce its length without affecting affordability," he says. Nationwide also reduces the amount it lends, but not by as much as some other high street lenders.
■ Self employed, wanting 80% loan-to-value remortgage, good credit recordHollingworth says someone who has been running their own business for three years should not have a problem as long as they have proof their income meets the lender's affordability requirements. He suggests a loan from Furness building society fixed for three years at 3.99% with an £894 fee and free valuation and legal work.
It will be more difficult for someone made redundant recently, but Boulger says the application is more likely to succeed if the applicant is now self-employed in the same type of work that he or she did as an employee.
Hollingworth says that if the loan-to-value ratio is low, the accounts are up to date and a projection of earning is available for up to 18 months, then a lender like Leeds or Principality building societies might consider it. Alternatively, it is worth asking your existing lender, with whom you have a track record, for a deal. But this is unlikely to work for someone who needs tomove house and increase the mortgage or move the existing mortgage to a new house.
■ Interest-only borrowerMost lenders will require you to show proof of at least one year's saving into an endowment or Isa which you could use to repay the mortgage. Boulger says that most people applying for interest only are doing so because they need big mortgages, so saving sufficient money in an Isa or endowment can be even more expensive than taking out a repayment loan. And don't think you can open an Isa and then stop saving after you've got your mortgage: Lloyds TSB says it may check from time to time that your repayment vehicle is still valid.
Hollingworth says the loan-to-value ratio you need is crucial: "Most lenders will cap interest-only borrowing at 75% LTV and almost all have tightened their criteria. Assuming there is an existing repayment vehicle in place but the LTV is beyond 75%, a lender such as ING or Skipton can offer a top-up for the remainder on a repayment basis with products available to 80% or 90% respectively. Nottingham building society can go to 80% on an interest-only basis."