As a glitch on a credit file could mean having to sign up to higher interest rates, all relevant agencies should be checked before applying for a mortgage.
With Halifax launching a fixed-rate deal priced at 0.83pc last week, mortgage rates are at record lows, but these ultra-low rates are typically only available to those with an unblemished credit record. Negative information on a credit file concerning something that occurred a few years ago may not prevent an individual from obtaining a mortgage, but it could end up costing thousands of pounds a year extra if it means having to sign up to a higher interest rate.
Ray Boulger, of mortgage broker John Charcol, says ten years ago it was almost impossible for anyone with adverse credit to obtain a mortgage, and although interest rates are higher for such borrowers, many at least now have some mortgage options available.
Chris Sykes at Private Finance, another mortgage broker, says a typical story involves a client who in their twenties maybe spent too much on credit cards and later ended up with a default on their credit file because they missed payments or ignored a debt.
A few years later, when they are better off financially, perhaps earning a good income and having paid off the debt, they have saved a deposit and try to secure a mortgage, only to find that the default comes back to haunt them.
Default on credit file valid for six years
As the Covid-19 pandemic has hit many people’s finances hard, this may be something that will affect more homebuyers.
A default occurs when a company decides to cancel the agreement with a customer because they have missed payments. This could be an account with a financial services company, mobile phone firm or utility provider and could involve anything from a few pounds to a few thousand.
A default will stay on a credit file for six years from the date of default, even if the debt is paid off in full. The debt charity StepChange says this means it will be harder to acquire credit cards, loans or bank accounts because the default tells the creditor there is a greater risk of not being repaid. Other forms of credit such as mortgages and even mobile phone contracts may also be harder to obtain.
However, the charity adds that creditors become less interested in the default as time passes.
Sykes says that anything in the last three years will probably affect an application and influence the type of lender to approach. Even if it’s four, five or six years ago, it can still affect the applicant.
Specialist lenders offer ‘near prime’ mortgages
Yet some mortgage lenders are becoming more flexible about items such as an unpaid phone bill. Sykes says there are a few more mainstream lenders who may disregard a debt under £100, for example, a small utility bill or £25 left on a mobile phone contract that an applicant thought had been paid off.
If a borrower has several defaults dating back two or three years, they could consider a specialist lender such as Aldermore, which offers ‘less than perfect credit’ mortgages. Aldermore has a 90pc LTV mortgage fixed for two years priced at 4.78pc, and based on these rates it would cost the individual around £12,500 more in interest costs over the two-year period compared to someone able to buy a market-leading interest rate, says Sykes.
Boulger says one ‘failing’ of the credit score system is ‘you are presumed guilty until found innocent’, i.e. someone who has never had a loan or credit card will have a lower score than someone who does, assuming all their payments have been made on time.
A few high street players such as Metro Bank, as well as several specialist lenders, offer ‘near prime’ or adverse credit mortgages. However, they may require a larger deposit and will typically impose a higher rate of interest.