Well-informed would-be mortgage applicants are usually aware of the importance of their credit record. They are likely to have tried to do all the right things: registered on the electoral roll, changed their addresses with all relevant financial institutions whenever they’ve moved in the past, built up a credit history and, of course, made repayments in a timely fashion. However, credit files can be tricky to navigate - and a glance at the Money pages of most newspapers is enough to verify this.
The potential issues are legion, but we take a look at two of the most common to affect mortgage applicants across the UK. Both problems can affect those hoping to move up the property ladder (or to remortgage) as much as they can first-time buyers.
1. Defaults
Defaults (i.e. a failure to make a necessary repayment on a debt) recorded on credit records are one of the most common reasons for lenders to turn down mortgage applicants. Although you might - correctly - assume that defaults on secured loans, including mortgages, are of greatest concern to a lender, defaults on other types of borrowing can also cause problems.
For example, imagine a young man - “John” - hoping soon to buy his first property with his partner. The couple sensibly decide to check their credit reports before proceeding further. This is the point at which John discovers that a mobile phone provider he no longer uses placed a default on his credit file three years’ earlier. The reason? A small sum - perhaps as little as £5 or £10 - that the provider alleged was owed at the end of the contract. John immediately clears the debt but cannot erase the default itself. Although it is marked as “settled”, it is still there for anyone who inspects his credit file to see.
John worries that this default will affect his and his partner’s ability to get a mortgage, even though he has now cleared the associated debt. He might even wonder if they should reassess their property buying plans and look for something cheaper - not because sold property prices have risen beyond their reach, but in order for his partner to buy the home as a sole purchaser.
Fortunately for John, he may be over-thinking the problem. First, as we’ve already highlighted, defaults on unsecured debt are frequently treated less onerously than those on secured debt.
Secondly, a potential lender will look at the date at which the default appeared on John’s credit file, not the date on which John repaid the debt. Although John may worry that this default from three years’ ago will act as a red flag, provided he has not acquired any others in the intervening period, a lender is more likely to view this one as an aberration. Lenders are always more interested in an applicant’s most recent credit activity.
Thirdly, even if John is unlucky and his preferred lender does shy away at the prospect of lending to someone who was insufficiently careful to ensure that they had no outstanding debts before switching mobile phone providers, the chances are that another lender will not be so fussy. Using the services of a mortgage adviser who specialises in helping applicants with less than squeaky clean credit records is a good idea. A mortgage adviser can also assist in another way: by indicating to John and his partner which mortgages they are likely to be approved for, they can avoid making multiple applications - which is something else that lenders are wary of.
Finally, one other tactic John could employ is to ask the credit reference agency to allow him to add a note of correction to the default. If the agency agrees, John will have 200 words in which to explain why he thinks the default was unfair (for example because he never received notification of the outstanding debt and therefore had no opportunity to settle it).
2. Financial associates
The end of a relationship is, of course, frequently difficult for a number of reasons. One of the less well-known difficulties can involve your credit record. As an unfortunate double whammy, this occurs just at the time when you might be hoping to go it alone and buy a new property in your sole name.
Although altering the status of a legal relationship does not in itself affect your credit rating, there can be knock-on implications if you and your ex-partner were financial associates.
“Financial associates” means that you shared a credit agreement. Most typically this would be a mortgage or other loan but any shared credit agreement automatically links your credit records. Neither divorce nor dissolution of a civil partnership is sufficient to remove this financial link; only ending the shared credit agreement can achieve this. Taking the example of a joint mortgage, the first step is to clear the mortgage in its entirety or for one party to buy out the other. At the same time, any other shared accounts should be closed or converted to a sole name account.
Disentangling a couple’s finances is obviously not always straightforward, particularly if they have been in a lengthy marriage and have dependent children. However, it is essential for division of assets to occur before either party can seek to end their financial association with the other. It may be necessary to seek the professional help of a mediator or solicitor.
Once the parties have clarified and separated their financial interests, it is sensible for them to approach the three main credit reference agencies and ask for the financial link to their ex-partner to be removed from the relevant credit file.
And what is the possible implication of not doing this?
Failing to separate your finances from your ex-partner’s in this way risks their financial health (or lack of) continuing to impact you. This could impact you in a number of ways but, if you’re hoping to buy a new property, it could mean that rising sold property prices are the least of your worries.
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