Sam Dunn: 'Should our credit rating haunt us?'

House Doctor
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The Independent Online

Question: We're trying to move up the property ladder and buy our second home for £185,000 with a 15 per cent deposit, but have recently been rejected by Abbey and HSBC for mortgages. My guess is it's down to two monthly mortgage repayments we missed in 2006 – an age ago – but we paid them back soon after and haven't missed a single one since.

Is it fair that they can turn us down? Neither lender would tell us why they said "no". Will any lender help us? DE, Truro

Answer: Dredging up ghosts from a dodgy past – more usually associated with detective novels or Hollywood thrillers – sadly now extends to the recession.

Thanks to well-founded jitters over risky lending and fears of rising bad debts, banks and building societies have begun to impose a de facto clampdown on any applications from borrowers that even hint at a less-than-squeaky-clean mortgage history.

Worse still, as bitter recessionary winds continue to blow across Britain and force more households to default as they struggle to keep on top of their finances, the number of borrowers besmirching their credit history is on the up.

"The recession has dramatically changed the mortgage landscape and led lenders in general to embark on a "flight to quality", which means they are being very choosy about who they lend to," warns Andrew Montlake of mortgage brokers Coreco.

"Not only does this mean that they are lending at lower multiples of income and lower loan-to-value (LTV) ratios, but also they currently take a very hard stance on those, like you, who have had any kind of issue financially."

Two missed mortgage payments in the past three years, he stresses, "would be an issue for many lenders now, especially at 85 per cent borrowing, which is the new 95 per cent".

In a nutshell, lenders collate information about you to thrash out a credit score for you, with plenty of data emerging from credit records stored by credit agencies Equifax, Experian and Callcredit.

However, says Melanie Bien at broker Savills Private Finance, "each lender scores differently and they are not obliged to tell you why they have refused your application, so it can be very frustrating."

Although your missed mortgage payments might feel like a small hiccup from an age ago, they'll be considered very relevant today, explains David Hollingworth, mortgage specialist at broker London & Country.

"They will be deemed much more seriously than a blip in the eyes of a mortgage lender, and so it'll therefore be very difficult to find a mainstream lender that is likely to take on your mortgage, particularly now that they have tightened criteria as well as product availability."

As a result of the recession, the market catering for those like you with an impaired credit history has been "devastated by the liquidity crisis", he adds.

"Most lenders are no longer offering mortgages in that sector and those that do, such as Platform Home Loans, will require a bigger deposit than the 15 per cent you have. Their interest rates are also much higher than those from a mainstream lender."

For example, Platform's offers include a three-year fix at 8.39 per cent, but you'll typically pay a hefty arrangement fee of nearly £2,995 and need a significantly higher LTV closer to at least 75 per cent.

However, says Ms Bien, it could also be the case that you have a mistake on your credit record that's damaging your prospects, so "contact each to ensure there isn't something more sinister on there that you don't know about or that's incorrect."

Rather than apply a scattergun approach direct to different lenders, use a broker instead who can properly assess your creditworthiness and target individual lenders it knows may be more likely to lend to you.

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