I have mentioned previously the impact that Payday loans can have on a mortgage application and lenders decisions. It is fair to comment that the incident rate on these went quiet for a while, but over the last few days there has been a marked increase in enquiries from those who might have used a Payday loan in the last twenty four months. I need to reiterate that these are classed as an ‘adverse entity’ with most lenders (not that some would admit it!). However, even the lenders who accept customers with historic CCJs, defaults, or missed mortgage payments registered against them, may choose not to accept someone who has taken out a recent payday loan. So, although these may be right for a customer in certain circumstances, they will almost definitely limit the number of lenders available to you when you come to apply for or change mortgages. With this in mind, lenders will also look closely at an individual’s payment profile, how many recent credit searches have been incurred by financial institutions and more. The more credit searches you have on your profile, over a recent period of time, the more likely your credit score will be lower as a result. Every financial institution, including Payday loan lenders, will credit search you, so beware!
The other issue tends to be around lender affordability. Difficult to detail when I have minimal words, but in the main, lenders will stress test all mortgages against a possible rate rise and underwrite the customers based on their ability to pay at the higher rates. The regulators want lenders to ensure the customer can afford their mortgage for at least the next five years. So, for example, a shorter term deal may be stress tested at a pay rate of 3% plus 3 percentage points higher than the prevailing rate at origination, so in this case 6%. Whereas a five year (or longer) deal may be stress tested against the pay rate, which might only be 3 or 4% in current climates. This can make quite a difference when it comes to calculating the affordable loan amount over the first five years of the loan, subject to the lenders terms and conditions.
There are however many opportunities, whatever your circumstances and lenders are willing to have a conversation in order to do the right deal. Of course, rates and terms will vary depending upon the type of mortgage written. Lenders have varying degrees of risk assessment calculations and this will determine the loan to value and charging rate levels. Finally, remember to always read the small print and understand all fees involved. The lowest rates on offer may not always be the most cost effective over a period of time for you.