Applying for a mortgage during a credit crunch

Increase the odds in your favour

The current credit crunch and economic turbulence have resulted in affordable mortgage schemes becoming even scarcer, so if you are looking to raise mortgage finance what can you do to increase the odds in your favour?

Start by checking your credit report. This is your personal credit history of what you have borrowed, such as loans, mortgages and credit cards, plus your repayment record and other information that lenders take into consideration when they decide whether you are a good risk.

Items in your credit report, along with details from your application, are used to calculate a credit score, which will determine whether you receive an offer and how much interest you will pay, so it makes sense to ensure that everything is up-to-date and accurately reflects your circumstances.

Mortgages of 125 per cent and 100 per cent of the value of a property are a thing of the past and even 90 and 95 per cent deals are thin on the ground. So for many, the traditional five per cent deposit is not likely to be enough.

Before you make a mortgage application consider saving in a high interest account to build up a deposit and take advantage of any fall in house prices.

Make sure your credit history is accurate and up to date. And if you’ve had problems repaying credit in the past, work to improve your credit history. Buyers should also register to vote, as this can count in your favour with lenders.

Consider buying with another person or in a shared ownership scheme. It is not just housing associations that can help you get your first property, some house builders are offering this service and some may even help you find a suitable mortgage.

From next year, the government is offering a £1,500 grant to first-timers under the Open Market HomeBuy scheme, although this is likely to apply only to key workers in certain geographical areas.

For 1.4 million people, 2008 is the year when their fixed-rate mortgage expires, according to the Financial Services Authority (FSA).

If you fall into this group, improve your chances of getting an affordable replacement deal by starting to look early. Lenders, especially those offering attractive rates are swamped and applications can take longer than expected to process, so you should begin the hunt for a replacement around three months before your current deal expires.

Factor in any transfer or application fees. These have risen in recent months, you might be better off staying with your existing lender, even if the interest rate is a little higher than you can get elsewhere.

Pay off as much of the mortgage as you can before you apply. The more equity you have, the better your chances of getting a good deal. The best offers are currently available only to people who own at least 25 per cent of their property outright.

If there is a reason why you’ve skipped any repayments in the past, contact the credit reference agency that has your credit report and ask to add an explanation. For example, you might have been ill or had an accident. Lenders will see this and may take it into account.

Some people who have built up a portfolio of buy-to-let properties in recent years are finding current conditions difficult. More experienced landlords are seeing falling house prices as an opportunity to snap up bargains. However, this is not market wide, and research from Paragon shows rental yields are stable at 6.4 per cent.

If you have assessed the risks and want to invest
in property you will almost certainly need a
25 per cent deposit plus arrangement fees, which are typically higher than for owner-occupiers. It’s important to be realistic about potential rental income, lenders are now looking for rents that will typically cover 120 -130 per cent of the mortgage.

Make certain your credit report demonstrates that you are a responsible borrower who makes repayments in full and on time. If you have been through a bad patch in the last few years, missed repayments or been turned down several times, it may be better to wait until your credit history looks better.