Many of these rejected applicants have had debts in the past. But there are a huge number who fail because their employment patterns don't fit into lenders' traditional credit-scoring systems. That includes the self- employed, people who work on contracts and those who have moved jobs several times in a short space of time.
Until now all these "misfits" have been lumped into one category, and many have been offered loans from specialist "high risk" lenders at interest rates well above standard. But Sue Anderson at the Council of Mortgage Lenders says it is wrong to suggest that everyone who is turned down for a mortgage is a high-risk customer. "There are all sorts of shades of grey in this market. It can be something as simple as having a basic income and showing that, while knowing that you will also earn a lot of commission but you are unable to prove it."
If you have been turned down at one bank or building society, don't repeat the exercise. When you make a second application you will be asked whether you have ever been turned down for a mortgage, and a "Yes" looks bad. At this stage it may be worth paying some money to a reputable independent financial adviser or independent mortgage broker to sort out a deal for you. This will cost you, at most, 1 per cent of your loan.
The advantage of a good independent broker is that he or she will have personal contacts at the major lenders' underwriting offices and can use this trust to pick a suitable lender and negotiate a better deal. The broker will also have access to some deals you won't find on the high street.
Ray Boulger, a manager at John Charcol, independent mortgage brokers, says lenders are becoming more open-minded about applicants with unusual employment patterns. "Two years ago lenders would be looking for three years of accounts from self-employed people. A lot will now accept a contract worker. Some lenders are comfortable with a three-month contract that has been renewed once. Some want a one-year contract."
If you are entirely self-employed, most lenders still want to see two years of accounts. If you have recently become self-employed you will have to self-certify: this means that you have to show details of your income, but the lender must take it on trust that you can pay the mortgage over the long term. "There are degrees of self-certification," says Mr Boulger. "Some lenders will loan against the value of the property, others will accept an accountant's letter saying the client can afford the mortgage. You can still get a mortgage if you self-certify although you won't have such a wide choice. But you don't have to pay more than the standard variable rate on your loan."
This is crucial to know because there have been cases where unscrupulous brokers have unnecessarily pushed clients into expensive specialist mortgage deals. Mr Boulger says he has had clients who took loans with these firms because they were not aware they could get a mainstream mortgage. Brokers can easily pick up pounds 1,000 in commission for each client they place with a specialist high-risk lender, as opposed to getting perhaps pounds 150 and doing more legwork in seeking out a deal from a mainstream lender.
The temptations are obvious, and because the mortgage advice market is unregulated, it is vital to choose a mortgage broker that subscribes to the Mortgage Code. This is a self-regulating code of practice, but it does guarantee you fair advice and a right to complain if something goes wrong. Check whether a broker subscribes to the code by calling 01782 216300.
If you don't want to see a broker or financial adviser, a few lenders do offer self-certification mortgages direct to customers. Mortgage Express, for example, lends up to 75 per cent of the value of homes at a 9 per cent interest rate. The Bank of Scotland is a good bet for anyone hard to classify: it offers special-status mortgages, which don't demand income details, at 8.69 per cent interest. Borrowers can also take out a flexible mortgage, which allows payment of extra lump sums at any time: useful for people who have an irregular income.
Contacts: John Charcol, 0171-611 7000; Mortgage Express, 0500 050020; Bank of Scotland Mortgages Direct, 0800 810810.Reuse content