The economic situation over the last couple of years, with the government having to support several banks, has resulted in a huge change in the way banks lend money. So what are lenders looking for, to enable them to lend you money?
Lenders are now pricing interest rates be it fixed or variable based on the amount of deposit you have, therefore the larger the deposit the better the rate. The deposit bandings are typically as follows:- 5%, 10%, 15%, and 25%.
Sometimes an extra 5% deposit can make a big difference to the rate you pay, lets look at an example:-
If you consider a purchase price of £400,000 and make a deposit of 20% or £80,000, the best tracker rate is currently 2.89%. However with a 25% deposit or £100,000 the best tracker rate reduces to 2.49%. The cost of borrowing an extra £20,000 over 2 years in interest charged is approximately £3,500, this equates to just under 9%!
A client of mine was recently declined for a mortgage due to 1 missed credit card payment, this was a client with a 35% deposit and other than the blip had a clean credit history. A couple of years ago this type of client would have still been accepted. I did manage to find a lender to accept the missed payment, however the difference in interest rate was over 1% a year. This would mean that if you have a £300,000 mortgage, you would be charged an extra £3,000 in interest every year.
To avoid these problems, keep your credit history clean by setting up direct debits for the minimum monthly payment to your credit cards. You should also ensure you have adequate funds in your bank so that the payments are maintained on other credit agreements, especially contract mobile phones.
Some lenders will also ask to see 3 months personal bank statements, they are looking to see that you do not spend more than you earn and that you manage your account well. They will be checking to see if you go overdrawn or over your overdraft limit. If this is likely to happen, ask your bank for an overdraft facility or to increase your facility.
Strangely not having any credit can have a negative effect on your credit score. You would be forgiven for thinking that not having to borrow money means that you manage your money well. Lenders though are interested to know how you manage debt, if you have no record, they don’t know how you will perform. For those lucky people who are in this position, it may be worth getting a credit card and using it for general expenses and pay the card balance off every month.
Any blips on our credit file can be viewed for 6 years so by doing the tips above can keep you clean!