Don't take no for an answer from mortgage lenders

News that banks are getting tough on potential borrowers doesn't mean you won't get a mortgage.
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The Independent Online

Two-thirds of borrowers are being turned down for the best loan deals, a mortgage expert claimed this week. "We know that for some of the best headline rates available on the high street, up to two-thirds of applicants are being turned down," says Ben Thompson, managing director of the Legal & General Mortgage Club.

He's not alone in highlighting the trend. Melanie Bien, director of the independent mortgage broker Private Finance, agrees and claims that some lenders are cherry-picking the best borrowers. "Some lenders, which often top the best buy tables, seem to regularly turn down applicants.

"HSBC, for example, keeps coming up as a lender which turns down perfectly good applicants," Bien says. "We've had a lot of people coming to us who have struggled to get funding with HSBC yet they have been easy to place elsewhere, so there is nothing wrong with the applicant or the property. In HSBC's case, it is very much cherry-picking of customers."

The worst hit are first-time buyers with a deposit of just 10 per cent or less. While there are now a tempting range of deals targeted at hopeful home-owners, few will get the thumbs up from hard-to-please lenders.

A report published yesterday by the online surveyors e.surv revealed that a tightening of lending led to fewer first-time buyers clambering on to the property ladder last month.

Purchase approvals for homes under £125,000 – typical first-time buyer properties – accounted for only 23 per cent of all approvals in May, compared to 27 per cent in April, and below the 24 per cent average for 2010.

Meanwhile Skipton building society recently reported that it was rejecting three out of four applicants for its 95 per cent loan-to-value deal, which illustrates how hard it can be to borrow.

The high-street banks point out that they are in the business of lending and try not to turn down applications. "We accept around eight in 10 of all customers who apply for a mortgage with the bank and the growth of our mortgage business backs this up," says Martin van der Heijden, head of lending at HSBC.

He rejects charges that HSBC cherry-picks customers. However, he says that, along with other mainstream high-street lenders, the bank has been focusing on existing customers rather than offering deals that may draw in new borrowers.

"Lenders have realised that holding the ongoing relationship with their customer is more important than just making another sale," says Van der Heijden. "We've taken a lead in offering exclusive and preferential mortgage deals to existing customers which allows us to maintain competitive mortgage pricing sustainably. The more business customers do with us, the better the price or interest rate we can offer them."

So if you're not already a customer of one of the big banks, what chances do you have of being accepted for one of the best deals, rather than having to pay through the nose for your home loan?

In fact you'll probably be better off not applying for the best deals but spending the time to find a loan that you can afford and that you are likely to be granted, say experts.

Part of the problem is to do with expectations. Research published today by the L&G Mortgage Club, a broker network, shows that there's a shortfall between borrower expectations and what is actually available in the mortgage market.

According to the research, a third of potential borrowers would be able to put down a deposit of only 10 per cent or less on a new mortgage if they were to apply over the next year. But their savings would give them access to only 17 per cent of current best buy loans.

For the one in five potential borrowers with 5 per cent or less for a deposit, the position is even more dire: they have only 2 per cent of the market to choose from.

"Most borrowers will be left disappointed with the number of products available to them on the high street," points out Ben Thompson. But it's not just disappointment. Making unsuccessful applications could actually damage your credit score.

"Lenders prefer to choose the borrowers with the highest deposits, incomes and credit scores," Thompson points out. "A typical applicant applying for a best rate product, which our research shows most will do, runs the risk of a refusal and damage to their credit record."

How can you find out which type of deal is best for you? Thompson suggests – as you'd expect – taking independent advice from a mortgage broker about the most suitable products available.

That's not a bad idea. A good adviser will guide you towards lenders more likely to be sympathetic to your own circumstances, particularly if you are self-employed, require interest-only borrowing or rely on bonuses for a large part of your income.

But there are also things you can do for yourself to vastly improve the chances of being approved for one of the better deals.

"Borrowers can help themselves by pulling together as big a deposit as possible," advises Melanie Bien. "Ensure your credit record is correct and have any mistakes changed before you apply for a mortgage.

"If you had credit problems in the past which have been rectified add a note explaining why you got into difficulty in the first instance and how you have come back from this, demonstrating that you are now a good risk."

It is actually a good idea to take out a credit card before applying for a mortgage. If you use it and pay it off each month it demonstrates to a lender that you can be trusted to pay your bills on time. And crucially, it can help build up your credit history, and improve your chances of mortgage acceptance.

"Get your name on the electoral roll so that your address history can be proven," Bien adds.

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