'Help to Buy' hopefuls set for disappointment
For first-time-buyers, the government's Help to Buy schemes seem like the answer to all their problems. No longer will mortgage lenders shun their 5% deposit, but they'll be queuing up to lend the money they need to finally get a foot on the property ladder.
Unfortunately many of them are set for a horrible disappointment - because they haven't made the right preparations.
DemandThere are two 'help-to-buy' schemes. The first is for new-builds: if you have a 5% deposit, the government will lend you 20%, so you only need a mortgage to cover 75% of the cost. For older houses, you borrow 95% from the lender - but the government will guarantee a portion of the mortgage.
They are enormously popular. A study by Experian CreditExpert has revealed that an incredible 39% of 20-40-year-olds are planning to take advantage of them in 2014. The scheme is particularly popular with 20-somethings: 33% of those who want to take advantage are aged 20-24 and 31% are aged 25-29.
DisappointmentHowever, while some may get the lifeline they expect, thousands more will be in for a horrible disappointment - because they're going to be turned down.
The most worrying problem, revealed by Experian CreditExpert, is that many people haven't saved enough of a deposit. Some 7% have not saved anything at all, and 26% don't have the £5,000 minimum you need to take part in the scheme.
For the rest, the problems aren't so much financial as organisational. The very first step - and the simplest - is to ensure you are on the electoral roll at your current address. This is a bare minimum for the initial identity checks that lenders do, but 60% of help-to-buy-hopefuls aren't on it.
The next step should be to check your credit report, to ensure there aren't any red flags for lenders. Some 25% of hopefuls haven't taken this step.
The third part of the process is to be sure you are managing your money wisely, so you appeal to mortgage lenders. This means not slipping into the red on your current account, not being borrowed to the max on your credit cards, and not missing bill payments. One in seven of people planning to apply haven't managed their current accounts well in the past few years, and on average they owe £4.600 in other borrowing.
Part of the problem is that 14% of these hopeful buyers think that the government scheme isn't going to be as rigorous as a typical mortgage lender - when in fact the opposite is likely to be true.
Improve your chancesExperian CreditExpert has put together five tips for those considering the scheme to help prepare their credit rating for an application.
1. Understand what is on your credit report. Is everything accurate and up-to-date? Pay attention to addresses, whether you're listed as being on the Electoral Roll at your current address, financial associations which are no longer relevant and or outstanding accounts that should be marked as settled.
2. Does your credit score need work? You may need a period of good management of your finances before you start making any applications if you have had problems in your past.
3. Decide what kind of mortgage you want, how much you can afford and compare products you are likely to qualify for. Only when you've found the best deal should you ask for an agreement in principle.
4. Do you want a quote or an agreement in principle? A quote will tell you what mortgage rate you're likely to get and what your repayments would be but does not require a full credit check. An agreement in principal will tell you if a lender will offer you a certain size of mortgage and is treated as an application and will leave a footprint on your credit file. Too many footprints could cause future lenders to be concerned you have been rejected for previous applications
5. Remember your credit report is only one part of your application. Lenders also use the information provided on your application form and that they already hold on you (if you're applying through your bank, for example).