With mortgage rates still at an all-time low, securing an affordable home loan should be easy. But many borrowers still face obstacles – from the self-employed, those with poor credit records to first-time buyers. Here, The Mail on Sunday investigates.
When a former boss of the City regulator recently revealed how she had struggled to remortgage as a result of a change in her employment circumstances, it highlighted the difficulties many people are faced with when applying for a new home loan.
Lynda Blackwell, a former mortgage head at the Financial Conduct Authority, fell foul of a lending system she had helped introduce – one designed to ensure borrowers can afford the debt they take on. She struggled to remortgage with her bank as a result of becoming self-employed.
Keys to success: Louise Forshaw and husband Gavin Naylor
ILL HEALTH DID NOT STOP US GETTING A LOAN
Black marks on a credit record caused by ill health or job loss can scupper a mortgage application.
This prospect faced 43-year-old Louise Forshaw from Preston, Lancashire. She was diagnosed with breast cancer four years ago which meant her husband Gavin Naylor, 35, temporarily gave up work as a joiner to care for her.
After returning to work two years ago, Gavin began rebuilding the family’s finances so they could buy their council home. Louise, who is now cancer free, says: ‘Our bank said we could not have a joint mortgage because of my poor credit record.’ But Louise’s son from a previous relationship directed her to his lender, Manchester-based Together. She says: ‘It looked at all our details and listened to us.’
Together agreed a loan of £44,000 to enable Louise and Gavin to buy their home. Louise says: ‘Now we own our house and are not throwing away money on rent.’
Ishaan Malhi, founder of online broker Trussle, says tainted credit scores do not spell the end for hopeful homebuyers. He says: ‘It is more difficult to get a mortgage if you have a bad credit score but lenders such as Kensington, Aldermore and Magellan Homeloans are experts at providing finance.’
Certain black marks can also be easily erased. Malhi says: ‘Your rating may be impacted by forgetting to register to vote or failing to close a credit card account that you no longer use.’
Saving for a larger deposit can also prove creditworthiness. If you take out a credit card aimed at borrowers with an impaired credit record you can improve your credit rating by making repayments on time and in full.
Check your credit history at CallCredit, Equifax and Experian – but avoid being tied into an expensive subscription.
Like many newly self-employed borrowers, she was hampered by lack of evidence of income. Blackwell now says it is a mistake for mainstream lenders not to make a more ‘informed assessment’ of situations like hers – and her struggle was not an intended consequence of the rule changes she helped bring about.
The reality is that most newly self-employed borrowers have to go the extra mile to obtain a loan. The minefield is best navigated with the help of a mortgage broker – most of whom are clued up on which lenders look favourably on newly established sole traders or company owners. Consider London & Country and John Charcol. Alternatively, find a broker through unbiased.co.uk.
Gemma Harle is managing director of Intrinsic Mortgage Network, part of Old Mutual Wealth. She says: ‘If you have financial accounts going back two years or more, a standard lender should be able to help. But if you have just a year’s worth behind you then it will be the smaller, more flexible lenders that are probably more willing to help out.’ Loan rates will usually – but not always – be higher. Building societies Saffron and Newcastle and specialist lenders Kensington and Precise are among the most self-employed friendly.
Millions of homeowners have become mortgage prisoners – trapped in an expensive loan and unable to switch to a better one. They are stuck because they do not meet affordability criteria or cannot pass strict lending stress tests.
Their fate is to put up with a lender’s standard variable rate and look on jealously at bargain rates enjoyed by others – as much as a fifth of what they are paying. They are typically stuck on a rate of 4.75 per cent.
But there are armies of borrowers who are prisoners of their own mortgage apathy. This group could save a fortune by asking their lender for a better deal or moving to another provider.
David Hollingworth, of broker London & Country, says: ‘A borrower with a £150,000, 25-year repayment mortgage would be paying £855 a month if on a rate of 4.75 per cent. If they have at least 35 per cent of equity they could switch to Monmouthshire Building Society’s two-year fix at 1.34 per cent and see their repayments drop to £589 – an annual saving of £3,198.’ There is a £999 fee but all valuation and legal work is free.
If borrowers are comfortable with their current monthly payments, they could opt to continue paying the same amount, meaning their loan will be cleared more quickly.
The bigger the deposit, the better the potential loan deal for a first timer. Consider saving using a Help to Buy Isa or a Lifetime Isa, both of which offer Government-funded bonuses to help achieve that goal faster.
Those struggling to save for a significant downpayment should consider a Help to Buy: Equity Loan. This allows buyers of new-build properties to borrow up to 20 per cent (40 per cent in London) of the cost of the property’s value – up to a maximum £600,000 in England or £300,000 in Wales.
The buyer must stump up at least 5 per cent in cash as a deposit and then look for a 75 per cent mortgage. The advantage is that rates tend to be more attractive on a 75 per cent loan-to-value deal than for a 95 per cent mortgage.
The Government equity loan is interest free for five years after which borrowers pay interest starting at 1.75 per cent.
Another product worth considering is a guarantor mortgage. This is where a friend or family member guarantees the loan. This means if the buyer misses a mortgage repayment the guarantor must step in – or risk losing their own property.
Unstuck: Lynda Blackwell, a former FCA boss, fell foul of loan rules
Aldermore offers a deal where the buyer can borrow 100 per cent of a property’s value but a parent or grandparent guarantees only the portion above 75 per cent of the home’s value. The Family Link mortgage, from the Post Office, also lets a borrower take a loan without a deposit – with 10 per cent raised as security against a close relative’s debt-free home.
Another option is the Post Office’s First Start, where a buyer applies alongside a relative who acts as a co-borrower – with their income taken into account when considering affordability and a loan’s size.
Offset loans are also worth looking at. This is where a family member’s savings can be earmarked as the property deposit – but this is then held in an account with the lender and they receive little or no interest.
Providers include building societies Family and Yorkshire, and banks Barclays and Lloyds. Harle warns: ‘Financial advice is vital for guarantor-style loans as family situations are often complicated.’
One in five borrowers has an interest-only mortgage. This worries the Financial Conduct Authority, which fears many will not be able to repay the loan and risk being forced out of their homes.
Borrowers hurtling towards the end of their loan term need to check whether they have the means to pay off the original loan.
If the sums do not add up, then it is worth considering requesting an extension to the loan term. Or ask to extend the term and switch the loan to a repayment basis. This will cost more but guarantees the loan will be paid off.
Age matters and those heading towards their twilight years can find it harder to change their mortgage. Each lender has different rules.
While some refuse to lend beyond retirement, others are more flexible – even lending to those who have already retired.
Age caps tend to be 70 or 75 although this is changing. Halifax imposes a maximum age of 80 and Nationwide 85 (for those already retired). Family Building Society now lends to age 95 and Aldermore to 99.
Trussle’s Ishaan Malhi says: ‘You will need to prove you have adequate income to cover the repayments post-retirement such as evidence of pension payments. If years away from retirement, you will need to provide a forecast of future pension income.’