Whether a first-time buyer or remortgaging, having a lender say ‘no’ to your mortgage application can be upsetting. It can also be confusing if you are unsure why you have been on the receiving end of rejection.
The cost-of-living crisis is having a huge impact on some borrowers’ finances.
Rising fuel, energy and food prices are making a bigger dent in borrowers’ outgoings; leaving less money at the end of the month to meet mortgage payments.
Against a backdrop of rising interest rates, most Brits are not seeing their salaries rise in-line with the increased costs. It could be that a provider’s decision to refuse to lend to you is a bi-product of the impact of rising costs on your affordability.
Yet just because one lender has turned you down, it does not mean that others will. Knowing the potential reasons behind the rejection and seeking advice can help you turn that ‘no’ into a ‘yes’.
Why lenders may reject a mortgage application
First and foremost, a lender needs to be satisfied you can afford your repayments and the first thing they will look at is your earnings. As a guide, most lenders will offer you around four to 4.5 times your annual income, on an individual or joint basis.
With the average house price having risen 10.5% in the last year, falling within this income multiple bracket is increasingly challenging for many hopeful borrowers.
Most lenders will lend up to 95% of a property’s value, but if this is out of reach you may need to save for a bigger deposit.
In addition to your income, lenders will also assess your outgoings – that’s your monthly financial commitments – with some providers already starting to factor in the increased cost of living into their affordability calculations.
If you already have substantial outgoings or loan repayments, it could work against you – especially if you have missed any payments.
What you can do if you’ve been rejected for a mortgage?
Most borrowers have already started to tighten their belts in response to the increased cost of living but if you haven’t done so already, now would be a good time to cut out any unnecessary expenditure.
Borrowing beyond one’s means is a huge red flag for lenders. As day-to-day costs continue to rise, likewise are fears that an increasing number of Brits are turning to unsecured credit and payday loans.
Bank of England figures show £0.4bn was spent on credit cards in May – 11.2% higher than in the previous year, while TSB research found nearly a quarter of Brits are dipping into savings to cover essentials such as food.
If you are concerned about outstanding loans, seek advice. Speak with a mortgage adviser early on to highlight problems before applying to a mortgage lender.
Another vital piece of information lenders will base their decision on is your credit score. This highlights whether you’ve managed to meet repayments on previous loans over the past six years and lenders will be looking for a good score, so it’s vital borrowers take what action they can to build a better credit record.
One of the simplest and quickest ways you can potentially improve your score is to check it online for any inaccuracies. The problem might not be you but a joint account with an ex-partner or roommate. If this is the case, you should write to the credit agencies and ask for a notice of ‘disassociation’.
Whilst too much credit can be a bad thing, so also can too little – particularly if this results in you having no repayment history for lenders to assess. A way borrowers can look to improve their credit score is by spending a little on a credit card and paying it off on time every month.
Another simple, yet effective way to boost your credit score is to sign onto the electoral roll through your local council, as lenders will sometimes use this to check your identity.
Why it’s best to seek mortgage advice
If you have already had your mortgage application turned down, it’s best not to reapply to another lender straight away as this could show up on your credit file. Instead, speak to a mortgage broker for guidance and advice, especially in the face of the current economic uncertainty.
Each lender has different criteria, and a mortgage adviser might be able to steer you in the direction of a lender better suited to your case and more likely to say yes.
By Dave Woodbridge, Linear, LSL Financial Services
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