Payday loans won't help your mortgage application.

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.

Interest rate war in the 'Near Prime' arena

As we enter the final few weeks of the year, a number of lenders have entered into an apparent 'interest rate war' assisting First Time Buyers, Residential mortgages and the Buy to Let sectors.  But this is also happening in the ‘Near Prime’ arena. I’m calling it ‘Near Prime’, but it has many other names including, Credit Repair, Almost Prime, Adverse and so on.  In short, it’s an area of mortgages that cater for those who have had some sort of financial issue in the past.

This is a growing sector and many lenders will now cater for missed mortgage payments in the last 12 months, Defaults, County Court Judgements (CCJs), discharged bankrupts/IVAs and those who are in a debt management plan.

This area of the market took a battering back in 2007 as many lenders who offered these types of mortgages were shut down or mothballed.  Today, the regulatory lending restrictions are more stringent than back then and the new breed (some never really left) have a whole new outlook on the term ‘responsible lending’.  Where there is demand, there will always be supply.

Rates start from the late 1%s and go right up to the early 8%s, depending on individual circumstances. Some lenders will lend up to 90% of the property value in some instances and will cater for both employed and self employed.

Financial issues do adversely affect credit scores (the normal assessment process used by a lender to decide whether to lend or not), and as such, some Near Prime lenders will manually review on a credit search, rather than resort to a credit score.

Of course, a lender will only consider those who have endeavoured to right the financial issues of the past. They will not entertain those who continue to flout good financial management.

Finally, the Near Prime lender is a ‘stepping stone’. Most issues tend to disappear from a credit search after a few years. Therefore, the aim would normally be to cater for current requirements on a short to medium term basis with the longer term outlook being structured to enable the customer to get back onto high street mortgage offerings, as quickly and cost effectively as possible.

Lenders are targeting the Self Employed..

Mortgages for the Self Employed have been sparse over the last few years.  Despite providing a huge part of the economy, lenders have been reluctant to lend to this area.  However,  lenders have now recognised this and are looking more positively to assist the 4.5m self employed (figures as at end of 2014).  A few lenders will now even offer mortgages to those with just one years accounts (up to 85% of the property value), although, in the main, the normal requirement is to have two years audited accounts.  In all instances the lender will need to prove suitable affordability and a deposit will be required, but this is a huge step forward from just a few months ago. 

There are also lenders lending in this arena that will cater for customers who may have a missed mortgage payment in the last 12 months or may have Defaults and/or County Court Judgements (CCJs).   Terms and conditions apply, and lenders must prove ‘responsible lending’, but where there is demand, there will always be supply.

The other area that continues to be on the increase and something of a headache for lenders is ‘lending in to retirement’. As we all know, life doesn't end at age 65-70 and neither should it on the high street!  Often, retired people have managed their finances successfully over the years and enter retirement mortgage free.  At the same time, many, whilst having no mortgage, also suffer from reduced income and there is a saying in our profession that it is not always wise to have everything tied up in bricks and mortar and yet have nothing to spend.  Others may wish to continue their mortgage past normal lender retirement age, whilst they may still be working.  There are schemes where equity can be turned into a mortgage (not equity release) and where off-spring may be able to assist with the repayments in order to secure and protect their inheritance whilst also ensuring a comfortable retirement for their parents.  This is not right for everyone but it is certainly worth talking to a qualified advisor to review all possibilities.

Try to not give lenders any excuses to decline your application

Getting a mortgage application through a lender in the current climate can be challenging.  One day it appears relatively easy, yet the next, it’s a nightmare!  So whatever you do, try to not give lenders any excuses to decline your application or refuse to lend to you.  Try to pay bills on time, don’t miss payments of any type and especially not mortgage payments!  Any missed (or sometimes late) payments will be registered on your credit file and this is normally used as the basis of a decision to lend to you.  Remember that many Insurance companies and mobile phone providers carry out credit searches on people before issuing their products.  Try not to incur too many searches in a short space of time as this can also be detrimental to your credit score.

 I haven’t reported on figures for a while, so I’ve highlighted a few stark reminders of the current state of the financials, estimated by creditaction, for November:

-          299 people are declared insolvent or bankrupt every day. This is equivalent to one person every 4 minutes 49 seconds.

-          93 properties are repossessed every day

-          1,432 people a day reported they had become redundant between June and August 2012.

-          1,170 Consumer County Court Judgements (CCJ’s) are issued every day (based on Q2 2012 trends). The average value of a Consumer CCJ in Q2 2012 was £3,217.

-          Citizens Advice Bureaux in England and Wales dealt with 8,465 new debt problems every working day during the year ending June 2012.

-           Average household debt in the UK (including mortgages) was £53,785 in September.

These are eye openers, but there are some that are really amazing:

-           the UK's total interest repayments on personal debt over a 12 month period would have been £60.3 billion.  This is equivalent to £165 million per day!  Just interest payments!

-          UK Banks and Building Societies wrote-off £5.3 billion of loans to individuals over the 4 quarters to Q2 2012.  In Q2 2012 itself they wrote-off £1.15 billion (of which £567 million was credit card debt) amounting to a daily write-off of £12.52m.

I know these are a grim read, but sometimes we need a gentle reminder of what’s what.  It also might help those who were looking to load up their credit cards on Christmas spending, and worry about it later, remember that these need to be repaid!!  Don’t become a statistic..