Mortgage Guides

Why can’t I get a mortgage?

Updated: Thursday 14 April, 2010

By Dominic Welling dominic.welling@consumerchoices.co.uk

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Many people are struggling to get a mortgage at the moment - so what’s causing the problem?

If you’re thinking about buying your first place and have made those first tentative steps towards doing something about it, you’re probably well aware by now that finding the finance to buy a property is not easy.

Seemingly everywhere you go at the moment, you’ll hear people say how difficult it is to get a mortgage. But what are the actual obstacles are holding you back?

Here are the top five reasons you might be finding it difficult to get a mortgage at the moment and what you can do to improve your chances.

1. Insufficient deposit

Prior to the credit crisis that started in August 2007, many of the best mortgage deals were being offered to borrowers with a 5% or 10% deposit.

Buyers will still have to save huge chunks of cash to get a decent deposit

However, in recent months competition has returned to the mortgage market and borrowers with a 25% deposit now are being offered many of the best deals.

But even then, buyers will still have to save huge chunks of cash to get a decent deposit

To put this in context, if you were looking to buy a house for £200,000 pre-credit crisis, to get one of the best deals you would have needed a deposit of £10,000-£20,000.

During 2010, the typical first-time buyer put down a deposit of £28,770 - the equivalent of 21% of the value of the home they were buying, according to mortgage lender Halifax.

In March 2007, according to the Halifax House Price index, the average UK house price was £194,094.

According to Halifax, the average house price today [April 2011] is £162,912. With the average 21% deposit this would cost you £34,211. So although the deposit percentage required has doubled, thanks to falling house prices, the amount of money you need to save hasn’t doubled.

In addition, the fall of savings rates to an all-time low has hindered borrowers trying desperately to scrape together a deposit.

To compound the problem further, with high unemployment and rising household budgets, the “bank of mum and dad” has become a less viable option for many as well.

2. Salary multiples

Before the credit crunch lenders used to lend money based on an individual’s income. The multiples were literally a multiple of your usual salary. Historically, single applicants could borrow three times their annual income and joint applicants could borrow either 2.75 times the joint income or three times the higher income plus one of the lower.

Income multiples have seen little change during the credit crisis and, with house prices still rising, income multiples always added up to an amount much lower than the cheapest house prices. So, with lenders ever keen to get new business on their mortgage books, they have instead focused more heavily on affordability and credit scoring when assessing mortgage applications.

Even using these more generous criteria, lenders are still being very strict to whom they will offer a mortgage.

David Hollingworth, head of communications at London and Country Mortgages, said: “Lenders are all pretty much using affordability models these days; but, when equated to multiples, I think it’s fair to say there was a much greater incidence of multiples being achieved in excess of 5x income before the credit crisis than would be possible now.

“Lenders have not necessarily precluded higher borrowing amounts but achieving a credit score high enough and being able to tick all the boxes is now much harder.

“That said, most lenders would still be able to offer in excess of four times for the right candidate although I think anyone expecting much more than that will be disappointed.”

3. House prices are too high

Many analysts felt that, prior to the credit crisis, house prices were over inflated and when they dropped it was a more a market correction than a price crash and a much-needed readjustment of the market to a more realistic level.

Many still believe house prices are higher than they should be and that the correction of the market still has a way to go.

The introduction of Home Information Packs (HIPs) in September 2007 had slowed down the process of marketing a property and many people, faced with the pointless bureaucracy and high costs of compiling a HIP for a potential buyer, simply didn’t put their property on the market, Since HIPs were scrapped in May 2010 there has been an increase in the supply of properties, which has further depressed house prices.

However, when it comes to property, the UK still suffers from a situation where demand outpaces supply; so while house prices may have further to fall, prices are unlikely to go into freefall.

As long as mortgage lenders remain cautious about to whom they will lend, prospective buyers still face the prospect of having to save huge chunks of cash in order to scrape together a decent deposit.

4. Lending criteria

After having their fingers burned from lending large sums of money to credit impaired borrowers who had very little chance of ever paying it back, mortgage approvals remain low as banks continue to be strict over whom they will offer a mortgage to.

At the moment, lenders are being very discerning when they advance money and fast-tracking those with large deposits or equity in their existing property to the front of the queue while rejecting other borrowers who don’t meet strict lending criteria.

That’s because potential borrowers with large deposits or substantial equity are less likely to default on their mortgage if they have a large amount of equity tied up in the property, but even if default occurs and the lender repossesses the property, the bank is still likely to get all of its money back when it disposes of it at auction.

This attitude is even more prevalent in a market where house prices are falling. Banks have long memories and are keen to avoid the negative equity nightmare of the late 1980s and early 1990s when millions of homes were worth less than the mortgage secured on them.

Mortgages for borrowers with a 10% deposit are available on the market, but anyone taking one is going to have to pay a much higher mortgage rate than a potential borrower with a bigger deposit or equity in their property.

The average two year fixed mortgage is 4.66% today, but for a borrower with a 10% deposit, the rate is 5.2% but just 3.7% for a borrower with a 20% deposit, according to Moneyfacts.co.uk

5. Bad credit rating

Prior to the credit crisis, there was a rise in lenders entering the sub-prime market – lending to people whose poor credit rating meant they were ineligible for a regular mortgage. The only way they could get a foot on the property ladder was by taking out a sub-prime mortgage and paying over the odds for it.

The sub-prime mortgage market was so competitive that many of the deals for borrowers with heavily impaired credit histories were equal to those available to borrowers with perfect histories.

Sub-prime mortgages are considered to be one of the factors for the credit crisis and it comes as no surprise that this market was the first to dry up once the credit crisis hit.

Mainstream High Street lenders are now pricing the risk of default into their mortgage products with the added safeguard of only lending to low-risk borrowers, so lessons have been learnt.

However, the sub-prime market has not disappeared altogether and mortgage products for the credit impaired do exist, although because many potential customers lack a deposit, they come with high set-up fees, much higher interest rates than a mainstream mortgage and punitive penalties for late payment or remortgaging with another lender.

If you want to improve your chances in getting a decent mortgage here are a few things you should definitely do:

Work on saving as much as you can for a deposit - although saving rates are low at the moment, you have to start somewhere.
Keep up payments on any loans and credit cards – any missed payments will mean a black mark on your credit history which will have an adverse effect on your ability to borrow in the future.
Work on getting your credit history in peak condition - Look into your credit history using a service like Experian or Equifax. Here you will be able to see places where you could make improvements and put yourself in a better position to have your mortgage application accepted successfully.
Be realistic about the sort of property you should be considering - Don’t overshoot your budget and remember that there is nothing wrong with renting for a bit longer while you get yourself and your finances in a better condition to buy. Also no one knows what the mortgage market will be like in a few years time, so things could work out better for you if you are patient.