Mortgage rates are at record lows, with Halifax this week launching a fixed-rate deal priced at 0.83% – but these ultra-low rates are typically only available to those with an unblemished credit record.
Negative information on your credit file relating to something a few years ago may not necessarily stop you from getting a mortgage but it may end up costing you thousands of pounds a year extra if it means you are forced to sign up to a higher interest rate.
“Ten years ago it was almost impossible for anyone with adverse credit to get a mortgage but the good news is that even though interest rates are higher for such borrowers, many at least now have some mortgage options,” says Ray Boulger of the mortgage broker John Charcol.
Chris Sykes at Private Finance, another mortgage broker, says “a story we’ve heard many times” is that of a client who, typically when they were in their 20s, perhaps spent too much on credit cards and then later ended up with a default on their credit file because they missed payments or ignored a debt.
A few years down the line, when they are in a better place financially, perhaps earning good money and having paid off the debt, they have saved up a deposit and come to get a mortgage – only to find that that default has come back to haunt them.
A default occurs if a company decides to cancel your agreement with them because you have missed payments
With the Covid-19 pandemic having hit many people’s finances hard, this could be something that affects more homebuyers.
A default occurs if a company decides to cancel your agreement with them because you have missed payments. This could be an account you had with a financial services company, mobile phone firm or utility provider, and could involve only a few pounds or a few thousand pounds.
A default will stay on your credit file for six years from the date of default, even if you pay off the debt in full.
“This means it’ll be harder to get credit cards, loans or bank accounts because the default tells the creditor there’s a greater risk of you not paying. You’ll also find other types of credit such as mortgages and even mobile phone contracts may be harder to get,” says the debt charity StepChange.
However, it adds: “You’ll find creditors are less interested in the default as time passes.”
Sykes says: “Anything in the last three years will probably affect your application and the type of lender you have to go to. If it’s four, five, six years ago, it can still affect you.”
View image in fullscreenA default will stay on your credit file for six years from the date of default, making it harder to get credit cards, loans or bank accounts. Photograph: Thomas White/Reuters
However, some mortgage lenders are becoming more flexible about things such as an unpaid phone bill. Sykes says there are a few more mainstream lenders that may disregard anything under £100 – for example, £25 left on a mobile phone contract that you thought you had paid off, or a small utility bill.
Private Finance did some number crunching to look at how much having a default on their file could cost someone, based on a house price of £268,000 (the average in England earlier this year) and a first-time buyer putting down a deposit of about 10%. It said that at 90% loan-to-value, one of the best two-year fixed rates is priced at 2.19%; however, only those with a near-perfect credit record are likely to be accepted.
If the borrower has a few defaults dating back perhaps two or three years or so, they would be likely to have to go with a specialist lender such as Aldermore, which offers “less than perfect credit” mortgages. At the time of writing, Aldermore had a 90% LTV mortgage fixed for two years priced at 4.78%. Based on those rates, “it would cost the individual around £12,500 more in interest costs over the first two-year period that they have this mortgage compared to someone able to go with a market-leading interest rate”, says Sykes.
Boulger says one “failing” of the credit score system is “you are presumed guilty until proven innocent” – ie, if you have never had a loan or credit card, you will have a lower credit score than someone who does, assuming all their payments have been made on time.
A first-time buyer with a small deposit and no adverse credit history but a low credit score may well be rejected by the computer-driven major lenders but welcomed on normal terms by some of the smaller building societies, he adds. “Although all lenders do a credit check, many smaller building societies will use an actual human to assess the application … A good independent broker will know which lenders are likely to offer best value for these first-time buyers, and also for any borrowers with some adverse credit.”
A few high street players such as Metro Bank, as well as several specialist lenders, offer “near prime” or adverse credit mortgages. However, you may need a bigger deposit and will typically have to pay a higher rate.
Top tips
If you are a potential first-time buyer, at least six months before you intend to start looking for a property, check your credit report with at least one, and possibly all three, of the main credit reference agencies (Equifax, Experian and TransUnion), Boulger says. Make sure all of your information is accurate and up to date. Dispute anything you don’t agree with.
If you have financial links to people on your credit report that are no longer relevant (for example, if you are divorced or separated), ask for them to be removed.
Use a notice of correction to explain special circumstances behind previous arrears or defaults, such as a relationship breakup, unemployment, illness or mental health issues. This is a statement of up to 200 words that you can add to your credit report and which lenders will see when they look at it.
Make sure you are registered on the electoral roll at your current address. Creditors use it to confirm who you are. Not being on it could lead to some creditors turning you down.
