New rules making it more difficult for borrowers to get a mortgage come into force tonight. We look at steps you can take to improve the chances of your application being approved
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• Pay down debt
Lenders will consider how much you owe on personal loans, credit cards and other types of debt when assessing your finances. David Hollingworth, of broker London and Country, said you should pay this off if possible before you apply for a mortgage. “If you are able to pay off loans and other debts it is worth doing it so they are taken out of the equation,” he said.
• Rein in your spending
Many lenders are now looking much more closely at borrowers’ bank statements, sometimes as far back as six months. The earlier you get your finances in order the better. Make sure you don’t exceed your overdraft limit, or go overdrawn if you don’t have a facility, for at least six months before you apply for a mortgage.
Also try to make sure your bank balance doesn’t deteriorate from month to month, as this would suggest you are spending more than you are earning. Previously, lenders asked for detailed information about monthly debt repayments, maintenance costs, utility bills and other essential expenses such as council tax, and used Office for National Statistics’ averages to estimate expenditure on most other items.
This is changing and lenders want to know exactly how much borrowers spend on child care, grocery and travel costs, as well as non-essential items. Ray Boulger, of broker John Charcol, said above-average spending on holidays, clubbing, eating out or pet food, for example, could reduce the amount a lender would offer. Mr Boulger added that borrowers should also carefully consider who they were making regular payments to. “As bank statements identify most payees, certainly as far as payments by direct debit and debit card are concerned, make sure there are no payments a lender may take a dim view of,” he said.
Most lenders will ask whether you have future plans that could affect your expenses, such as starting a family or becoming self-employed. If you are simply considering these you are not obliged to tell your lender. “This is a bit of a grey area at the moment but being eight months pregnant and about to go on maternity leave is very different to thinking about starting a family in a few years’ time,” Mr Hollingworth said.
• Reconsider your saving habits
Some lenders are treating regular savings such as a monthly direct debit into a personal pension as a financial commitment when assessing affordability. Mr Boulger said that for some people it might help their mortgage application if they discontinued or suspended regular pension contributions for six months. However, it is important to check what impact this would have on the pension or saving product, such as additional charges or lost interest.
• Maximise your credit score
Make sure you are on the electoral roll and check your credit file for mistakes. Remember that as far as most lenders are concerned the information they get from a credit reference agency is gospel, even if you have evidence it is inaccurate. Make sure any problems are corrected before you apply for a mortgage.
• Check affordability calculators
Most lenders now offer affordability calculators on their website. You can enter your income, spending and other personal details to get an idea of how much you could borrow. Some are more thorough than others and all give an indication only, but they can be useful when deciding which lender to apply to.