7 deadly mortgage sins to avoid

Many people were expecting that house prices would fall during the pandemic, or at least stagnate.

Indeed, a lot of first-time buyers were wistfully hoping that it might happen. But the government didn’t want a property crash on top of everything else, so introduced the stamp duty holiday to buoy up the market and protected many people’s incomes with furlough schemes.

The result is that house prices are climbing at the fastest rate in seven years, with little sign of slowing.

Andrew Wishart, property economist at Capital Economics, predicts a further 17% price growth over the next four years. In other words, house prices are now rising at a faster rate than most people can save.

So instead of waiting for prices to fall, right now prospective buyers are better off trying to cut their losses by getting on the property ladder as soon as possible.

This has always been easier said than done, but with the right advice it’s now easier than many think. Mortgage rates remain at historic lows, and the government’s new 95% mortgage guarantee scheme will be a great help to many.

However, one of the biggest risks to a mortgage application can be the little slip-ups. There are numerous minor factors which might seem trivial, but which to a mortgage lender can raise red flags.

By making yourself aware of these in good time, you can try to ensure that your mortgage offer doesn’t hit any last-minute snags that lead to you being refused.

1. The Help to Buy ISA deposit pitfall

If you’ve used the Help to Buy ISA to save up your deposit, you may get caught out by an issue that has taken some buyers by surprise. The Help to Buy ISA provides a 25% bonus when you buy your first home, but the bonus is only paid after the sale completes. Therefore you can’t use this money directly as part of your exchange deposit but will have to find the extra from another source. A short-term loan should suffice, as you can pay it back using the bonus as soon as the purchase completes.

2. ‘White noise’ on your credit file

Your credit record may be solid, but any irregularities can still tarnish it – and even if they don’t stop your application, they might delay it so that you lose the property you want. Common issues can include:

• Large one-off payments in recent months
• Gifts or loans made to others
• Gifts or loans to you from others (the lender may worry that you are reliant on someone else financially)
• Misnamed payments (don’t give money transfers ‘joke references’ – say exactly what it’s for)
• Impulse purchases
• Multiple credit cards (even if unused), or store cards you may have forgotten about
• Old financial links with other people (e.g. shared credit cards with ex-partners)
• Gambling transactions – these can make lenders very nervous. It’s best to kick any gambling habit, however minor, in the run-up to a mortgage application.

It might seem perverse that even receiving money from someone else could harm your credit file.

But if you have received gifts to be paid towards your deposit, make it clear that this is what they are and keep the paper trail to prove it.

So long as you can prove that they are gifts and not loans, you will (probably) be okay.

3. Gift deposits

That said, lenders have even started to look askance at buyers who have deposits gifted to them by others.

There was a minor outcry in August 2020 when Nationwide said it would refuse applications for its 90% mortgages where the buyer’s parents had supplied more than 25% of the deposit. By November the lender had done a U-turn on this, meaning that parents could now supply more (up to the full deposit).

However, lenders generally are more cautious when the gifted deposit comes from people other than parents, such as more distant family or good friends. In these circumstances there is more risk that the ‘gift’ is really a loan in disguise, so they may want additional confirmation that the money really is yours to keep.

This is another potential delay, so be ready to deal with any questions promptly if necessary.

In general it’s good practice to keep all the paperwork relating to your deposit, even if you just saved it up yourself. This way, there’s no lender uncertainty.

4. Failing the affordability test

Many first-time applicants think only about their borrowing power – generally you can borrow up to 4 and a half times your dependable income. What is often overlooked, and less easy to calculate, is the affordability of mortgage repayments.

The lender wants to be sure you can meet the monthly mortgage payments, and the size of these will depend on several factors, including:

• How much you’ve borrowed
• Your interest rate
• Your type of mortgage deal (e.g. fixed, tracker)

Take this into account when working out the maximum you can afford. A higher loan-to-value (LTV) mortgage like a 95% deal will have higher interest rates than a 90% one, which in turn will have higher rates than an 85% loan, and so on.

Therefore, the largest loan you can borrow may be bigger than the largest you can afford to repay (bearing in mind that lenders prefer a comfortable safety margin).

You can play safe by borrowing slightly less than the maximum, or alternatively make a concerted effort to prove you can make those repayments.

Adopt a personal austerity programme, cut back your spending as much as possible in the months before your application, and demonstrate to your lender that you have the safety margin they’re looking for.

5. Mistakes when recording your income

This is a silly blunder, but it does happen surprisingly often. Don’t write down your income off the top of your head – check your P60 and give an exact figure.

People often forget about pay rises. If you use a salary sacrifice scheme (e.g. for pension contributions) then explain this to the lender, as it can make it seem you earn less than you really do.

Also include any bonuses and commission, but separately so that the lender doesn’t think you’re trying to deceive them. And don’t make the error of writing in your monthly salary when they are asking for annual.

6. Changing jobs or business structure

Lenders like you to be well settled into a job, so it may harm your application if you’re still in your probationary period (e.g. the first six months). Having a higher salary may offset this to some extent, but it can still be an issue.

If you’re self-employed, a similar problem can arise if you have recently changed your business structure from that of a sole trader to a limited company.

The company will appear to be a new business (even though it's your same one with a different hat on) and some lenders will insist on a full year’s trading before offering you a mortgage.

Check with your mortgage broker if you’ve already made the switch, as they can usually find a workaround.

7. Having a failed mortgage application

Yes – frustrating as it may seem, having one failed mortgage application on your record can make it harder to succeed next time.

Every time you apply for a mortgage, the lender conducts a hard credit check that stays on your file.

This can then raise concerns for the next lender you approach, and if you’re not carefully it can tip over into a spiral of rejection.

In other words, your best hope is to do everything you can to get it right first time, rather than adopt the ‘If at first you don’t succeed’ approach.

The simplest way to achieve this is to find a mortgage broker to help you at the outset. Not only will they search the whole of the market to find you the most affordable deal, but they will also rigorously check your mortgage application and highlight any concerns before the lender gets to see it.

This minimises the chance of rejection – around 80% of applications made via a mortgage broker are accepted first time.

By paying close attention to these seven crucial details, you can finally take advantage of the rising property market by jumping on board, instead of watching it climb further out of reach.