RICHARD PERKINS was sure he was doing the right thing when he applied to check his credit score online.
He wants to buy his first home and had read that it is sensible to look at your credit history before applying for a mortgage, so he used a website that checks three different agencies.
However, he was startled to discover that the ratings from each agency varied dramatically. One gave a very good score, another was very poor. There were also factual errors. “One has the wrong credit-card balance and the wrong credit limit for one of my cards.” Richard says. “If I can’t trust the reports, should I or should I not risk applying for a mortgage?” Richard, a 27-year-old sales representative living in York, suspects that his credit rating may be flawed. He has one unsecured personal loan for £12,000 with Egg on a rate of 7.8 per cent and monthly repayments of £250. He also has £1,500 spread between two credit cards: £450 is on an Egg card and the remaining £1,050 is on an HSBC gold card. Most of the debt was incurred when he was made redundant this year.
His former company paid him two months’ salary, but it took him three and a half months to find a job. Richard had no emergency savings to tide him over and says: “That situation made me wake up. I realised that I was only just able to scrape by, but only by going into a lot of debt.”
Time spent travelling earlier in his twenties also led to some credit card abuse. “I lived off credit cards for most of the time I was away, thinking that I’d simply pay it off when I got back,” he explains.
Richard now earns £27,000 a year, which should enable him to buy a one-bedroom flat worth between £100,000 and £110,000, but he is worried that this will not be enough to redeem him in the eyes of a mortgage lender.
“Until I know my correct credit rating I will be too nervous to apply for a mortgage. If I get turned down, wouldn’t that make it harder to reapply in the future?” He wants to buy a property in York before going ahead with a planned career change. Richard wants to go into business development, which he says would almost certainly involve a pay cut and moving to the South, where property prices are higher.
“My plan is to live in the property until I move and then rent it out so that it pays for itself,” he says. Once he has his credit score sorted, Richard needs help to find the right mortgage deal. “There are thousands and I have no idea where to start,” he says.
He has no savings so would need a loan for 100 per cent of the property’s value.
Richard would also like advice on starting his own pension. He contributes to a work scheme, but given his plans to change career, he thinks that he should probably have some other provision in place too.
His living expenses are relatively low, thanks to a work package that includes a company car, a free mobile phone and free broadband internet at home. He currently pays rent of £375 a month.
What the experts say
FINANCIAL PLANNING
Chris Tapp, associate director, Credit Action “Credit reports can be confusing, particularly because agencies do sometimes score the same people in slightly different ways. Also, lending criteria differ, so two lenders could make different decisions based on exactly the same report. There is little that Richard can do to avoid this.
“However, he can do something to correct any factual errors. Indeed, it is important that he does so or this could affect his ability to obtain credit. He should contact the lender and the credit-rating agencies to notify them of the inaccuracies.
“Richard should also add a notice of correction (NOC) to his report. This is a short note of less than 200 words explaining to creditors the circumstances of his past financial difficulties. Richard should do this himself and steer clear of ‘credit repair’ companies, who charge a large fee and cannot guarantee changes to his report anyway.
“Once the inaccuracies are cleared up and the NOC submitted, Richard should feel confident in applying for a mortgage.
“Mortgage lenders base their lending decisions on income as well as credit scores, which should stand Richard in good stead as he is young and has a reasonable income. If he is refused, he should find out why so that he is better prepared in the future.”
MORTGAGES 1
James Cotton, mortgage specialist, London & Country Mortgages
“Richard’s differing credit ratings should not cause significant problems. Not having a squeaky-clean credit record does not mean that you will be turned down for a mortgage.
“What can cause problems are things such as defaults, county court judgments and mortgage arrears. If Richard’s record is free of these, he should be able to get a mortgage from a standard lender. If not, he may have to approach a sub-prime lender, which would charge a slightly higher interest rate.
“Assuming that he has none of these on his record, Richard should be able to borrow about £100,000 with no deposit, but his choices will be limited. Northern Rock might lend up to 4.5 times Richard’s income if he gets a medium credit score and 4.8 times income for a high credit score.
“Other lenders, such as Bank of Scotland and Mortgage Express, may also offer up to 100 per cent of the property’s value. Richard should try to avoid paying a higher-lending charge, which many lenders impose.”
MORTGAGES 2
Simon Tyler, managing director, Chase De Vere Mortgage Management
“If Richard were to approach a lender asking for a touch over four times his salary for a 100 per cent loan on a property he intends to rent out while having £13,500 of unsecured debts after being in a job for only a few months, he would be politely shown the door. No lender would touch him. He needs to whittle out the factors that make him an unsuitable borrower.
“For a start, forget about letting the property. That would mean taking a buy-to-let mortgage, which may be more expensive and for which he would not obtain a 100 per cent loan. Perhaps Richard should simply buy a property for himself and then he can reassess the letting situation at a later date.
“That aside, a lender would require a bit of persuading about his job security and propensity to fall into debt. However, if he has passed the probation period at his job and has been maintaining rent payments of £400 to £500 a month, a lender could probably be persuaded that he could afford mortgage repayments of a similar amount.
“His best option, therefore, would appear to be to take an interest-only loan until his finances improve. Interest-only payments would be about £466 a month.”
PENSIONS
Dean McCarthy, director, Cobalt Private Finance
“Richard is rightly concerned about his future pension provision. The average current UK pension fund is estimated to be £20,000 at retirement, which yields about £1,200 a year for a male — hardly the high life. So Richard should start putting aside as much as possible, but he should also deal with his debts.
“I would recommend that he increases contributions via his employer’s scheme. This could have the advantage of lower charges and even matching employer contributions. If Richard still wants a personal scheme, he should consider a stakeholder plan, which offers low charges, flexibility and portability, with certain governmental guarantees.
“As he is young, he could invest mainly in equities to produce long-term capital growth and switch to less risky assets as he nears retirement. But where he invests depends on his attitude to risk.”
Richard’s response
“The mortgage advice seems to range from the slightly optimistic to you haven’t a chance. I know I could easily afford £600 a month, but can I convince a lender? “Having read the advice, I think that getting a mortgage at this point could be a mistake. The mortgage that I could get with Northern Rock sounds dangerous and could be something I regret in five or ten years. In a housing market where the property prices go only one way I do not believe that everyone has an automatic right to own a house. However, I am still young and have a lot of potential earnings ahead of me.
“As for the credit rating I have taken the advice of the expert and made an alteration to my credit report. However, the agencies don’t make it easy. There should be a central organisation or watchdog that could standardise the reports and make the agencies more accountable.
“I will take on board the advice about the pension, but I feel that increasing my pension payments would be the wrong move while I still have unsecured debt.”
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