My husband I are looking to move to a bigger home, as our two children are getting to the age where they don’t want to share a bedroom and we need the extra space.
After seeing a few places we liked, we went to our current mortgage lender to get an agreement in principle – but we were turned down for the amount we wanted.
I’ve heard that some banks – including ours – are making it harder to get a mortgage because they are taking higher energy bills and taxes into account.
Upsizing: The reader is looking to move to a bigger home as her children are growing up
Our bills have risen considerably in the last few months as our fixed energy tariff ran out. Could this be why we were rejected, and if so is there anything we can do about it?
I also have a few late car finance payments on my record from when I was made redundant about three years ago.
I was back in work a few months later, the car is now paid off, and we have always been on time with the mortgage and our other bills.
We’re worried about approaching too many lenders, and are wondering which ones are likely to accept us.
I’ve seen some lenders online who say they are more ‘flexible’ when it comes to helping people with imperfect credit history. Is this worth looking into, and what’s the catch?
The alternative is to put off our move, but with our kids growing up that’s not going to be practical for more than a couple of years.
Helen Crane of This is Money replies: Getting turned down for a mortgage at the first hurdle is disheartening – especially when you have outgrown your current home and have a pressing need to move.
On the market: The family have been browsing homes for sale – but were turned down for a mortgage in principle
Sadly, you are not alone. Many people applying for a mortgage today might find it a bit more difficult to get accepted than they would have a few months ago. This is for several reasons.
First of all, interest rates are rising. According to Moneyfacts, the average two-year fixed rate – covering all deposit sizes – is currently 2.86 per cent, up from 2.65 per cent in March.
On a £200,000 mortgage, this would mean paying £258 more per year if it had been taken out in April compared to March.
That might not seem like a lot, but it could tip the scales from being approved for a mortgage and turned down.
The situation could be more severe for those for those with big mortgages relative to their income, or whose current fixed deal is cheaper than those on the market today.
Additionally, households are being hit by the cost of living crisis which has seen the price of essentials such as gas and electricity, petrol and grocery shopping rocket.
Lenders are increasingly taking these higher bills into account when assessing whether borrowers could afford to pay a mortgage.
Cost of living crunch: Some banks and building societies are factoring rising bills and price inflation into their mortgage lending decisions
Santander, for example, has already factored increased national insurance, household expenditure and dividend income tax rates into its affordability calculations. Others are expected to do the same.
In your case, you are unsure whether the rejection was down to your increased living costs, your previous debts – or something else.
You are keen to find out, because approaching too many lenders in search of a mortgage could damage your credit profile and make things worse.
As a first port of call, I would advise going back to your lender and asking for further information on why the application was turned down. There is no reason why it should not be able to provide this.
Armed with that knowledge, you will then be able to come up with a plan of action for starting a new application that is more likely to be accepted.
This could mean looking at a cheaper property, but the problem might also be solved by saving a slightly larger deposit or considering a different lender.
To help you assess your options, I spoke to Elena Todorova, director of mortgage broker SPF Private Clients; Courtney Flockhart, mortgage broker at Henry Dannell; James Briggs, head of personal finance intermediary sales at specialist lender Together; and Adrian Anderson, director at mortgage broker Anderson Harris.
How do lenders calculate affordability?
Courtney Flockhart says: Each lender will have its own internal credit scoring system, which is different to a credit score on Experian or Equifax.
Somebody who has a 999 score on Experian could easily fail a lenders’ credit score tests, especially if they had a small deposit relative to the property’s value.
There will be tiered ‘pass marks’ based on both the borrowers’ credit history and their ability to pay the mortgage alongside their other financial commitments.
These approval thresholds will change depending on the borrowers’ income, the size of their deposit and how much they want to borrow.
Could higher bills have been the reason for rejection?
James Briggs says: We’re in the worst cost of living crisis since the 1980s, and sadly there will be many other potential buyers in this same situation.
Many banks and mortgage lenders have reviewed how they assess affordability given the current spike in family outgoings on food, fuel bills and taxes, coupled with rising inflation.
Shift: Banks are changing the way they estimate household expenses, due to rising inflation
Some are changing their household expenditure calculations to consider factors such as the size of the family or the number of vehicles they own.
These changes have been made to make sure people’s monthly payments are affordable.
However, they don’t account for people’s individual circumstances meaning people who could otherwise afford a mortgage won’t meet these broad-brush requirements. There will be a lot of ‘computer says no’ type responses.
Adrian Anderson says: When factoring in affordability for a mortgage most banks use Office for National Statistics data to presume certain household outgoings.
As the cost of household outgoings (including utility bills) has increased, according to the ONS – and is expected to continue to increase – most banks have factored this into the affordability calculators.
This may have an impact on some applicants’ ability to borrow the amount they are seeking now.
Could there be a different explanation?
Technical tweak: The couple in question may still be able to afford their larger home if they chose to extend the mortgage term, according to one expert
Elena Todorova says: It is disappointing to hear that the couple’s bank refused to lend without clear explanation.
However, it does not necessarily follow that the decline was down to an assessment on the increased cost of living and adverse credit.
It may be purely technical as the case may just fall outside of credit policy – for example, it may be a few thousand pounds short on income multiples, or applying for an incorrect term.
What about the car finance debt?
Adrian Anderson says: Late payments on a finance agreement can reduce your credit score.
You should obtain a copy of your credit report through one of the credit reference agencies so that you are aware of any negative entries that may go against you.
If there is a genuine explanation regarding why there were some late payments on your record for car finance, a mortgage broker may be able to use their relationships with the underwriters at the competitively priced mainstream or high street banks to explain the circumstances.
Late payments of debts will stay on a credit file for at least six years – but they do not automatically spell mortgage rejection
This could help you avoid using a ‘flexible’ or ‘specialist’ bank which may charge a higher rate of interest.
Elena Todorova says: Credit history remains on file for a minimum of six years (longer if the commitment is unsatisfied or unpaid).
This could be a reasonable cause for borrowing being declined, but if it was three or more years ago, certain lenders may be prepared to look at the case more sympathetically.
Lenders who may consider to lend in this instance range from high-street lenders offering competitive terms, to smaller banks or building societies which could be more expensive but offer flexible underwriting.
How could they improve their chances of approval?
Elena Todorova says: The mortgage term can be adjusted to suit the couple’s plans.
They could potentially take a longer term [these are available up to 40 years] if it eases affordability models and reduces monthly outgoings, as long as it fits with lenders’ maximum age limits.
It’s important to consider different terms and rates and discuss their monthly budget as ultimately, the couple has to be comfortable with the mortgage payments they will pay now, and in the future.
Adrian Anderson says: The best way to avoid approaching multiple lenders and give yourself the best possible chance of securing the mortgage you are seeking is to speak to an independent expert.
They will have the knowledge of how to navigate you through the banks, hopefully meaning fewer failed applications and marks on your credit file.
Get advice: Mortgage brokers can tell borrowers which lenders are most likely to accept them, helping to reduce the chance that applications will be rejected
Should they try a specialist lender?
James Briggs says: Specialist lenders differ to traditional banks as they can make more pragmatic individual lending decisions, considering the applicant’s actual circumstances and expenditure on a case-by-case basis.
These types of lenders are also typically more flexible when dealing with mortgage applications from people with a less-than-perfect credit history, as is the case here, particularly if the outstanding debt has now been settled.
As a trade-off for this increased flexibility, borrowers should expect to stump up a larger deposit, typically between 15 per cent and 25 per cent of the purchase price of their new home.
Many specialist lenders’ products are only available through mortgage brokers, so I would recommend speaking to a Financial Conduct Authority authorised broker.
Helen Crane, This is Money, replies: I hope the responses above have shown you that all is not lost, and that – depending on your exact circumstances – there are several options you can explore for getting your mortgage.
It may be that the amount you asked for in your application was just slightly too high to tick the affordability check box given your income, outgoings or deposit size.
That is hopefully reasonably easy to rectify by adjusting your budget downwards just a little, elongating your mortgage term slightly or even just seeking a mortgage with a better interest rate to bring down your projected outgoings.
If you do find that it is the cost of living or your credit record that is causing the issue, you may want to take some time to consider what the best course of action is, and how your circumstances might change.
For example, if it is the increased cost of living that is hampering your application, perhaps you or your husband might have a chance to get a modest pay rise in the near future, which could tip you over the affordability threshold.
And if it is the previous debts that are making things difficult, another year or so of building your credit score back up could help, too.
When the time is right, using a broker should help you avoid more failed applications and ensure that you approach the right lender and get a mortgage deal that works for you.
Although your children are growing up fast, some careful planning should mean you secure the home you want in the not too distant future.