Mortgages: good or bad for your credit rating?
A housing boom is officially well underway. House sales have hit a six-year high, and prices are predicted to rise anything up to 10% this year. Mortgage rates are near historic lows, and the Council for Mortgage Lenders says that almost 50,000 mortgages are being approved every month.
But before you leap head-first into the mortgage market, it's worth understanding its effect on your wider finances.%VIRTUAL-SkimlinksPromo%
The headline costFor many people, on the face of it, moving from paying rent to paying a mortgage will change very little about their finances. Low mortgage rates will mean they are paying less each month than they did on their rent.
The most recent figures show that it's on average £124 a month cheaper to buy than rent. There are other costs associated with the upkeep of the property, and furnishing and decorating it, but overall the effect on your monthly outgoings should be roughly the same.
However, your mortgage will become a major part of your financial life, so it's worth understanding the impact it has on other things.
ApplicationYou need to approach getting a mortgage in the right way if you are to avoid damaging your credit rating.
If you have multiple credit checks done by a number of lenders, this will show up on any subsequent check any other lender carries out, and they will be concerned that it could indicate a level of desperation - or even fraud.
The experts at Experian say that to avoid this, you need to do your homework before you make any applications. You should start with the kind of mortgage you want, and the kinds of deals that are available given the size of deposit you have. This can be found through a price comparison site or a broker.
Another alternative is to sign up for CreditExpert with Experian and you can use the deals matcher service to find the mortgages that match up to your credit record.
Next you can ask for a quote - which won't register as an application on your credit record. Instead it's registered as a quotation - which doesn't affect your credit rating. Once you have found your best quote, you can apply for an agreement in principle. This will register as a full credit check, but if you've done the legwork they should agree to the mortgage, so you only ever need to make one application.
BoonOnce you have a mortgage in place, in the very short term you're likely to see your credit score dip, because you have borrowed more money. However, over time a mortgage can improve your credit record dramatically.
Lenders will like the fact you have a mortgage - because statistically those who have a mortgage are less likely to fall into arrears on other debt. As long as you make your repayments, they will see you as a responsible borrower.
If you continue to pay your mortgage on time and in full every month, you will establish a rock solid repayment history, which lenders will see when they check your credit record. This will help convince them that you will be equally diligent in repaying any money you borrow from them.
If you manage to overpay your mortgage, you will be credited with the fact that not only can you meet your financial obligations, but you have also reduced the total debt outstanding - which will count in your favour both in terms of creditworthiness and affordability
DrawbackHowever, if you run into difficulties in paying your mortgage, you can do untold damage to your credit rating. And it's not as uncommon as you may think: just under 150,000 households in the UK are currently behind on their mortgage payments.
Any arrears will appear on your credit record, and Experian warns that as its a major financial commitment and a priority debt, lenders will be very worried about it. If you have missed a payment, the experts recommend paying your mortgage up to date as soon as possible. If you went into arrears for a good reason, it also suggests adding a notice of correction to your account to explain why you missed a month or two.
For thousands of households, things get so bad that they end up having their home repossessed. Last year around 30,000 properties were reclaimed by the banks because the owners fell so far behind with repayments. The effect of this is devastating on your credit record. It will stay on your record for six years, and make borrowing money harder for that time. Many mortgage lenders will also specifically ask whether you have had a home repossessed, and will not lend to anyone who says they have - regardless of how long ago it was or whether there were any extenuating circumstances.
MistakeExperian warns that sometimes people miss payments accidentally. This can come about as a result of an overpayment. They may pay double one month, and then realise they cannot afford their usual repayment the following month. They may think that because they paid the same amount in total it will not affect their credit score, but they'd be wrong. You have to make at least the minimum monthly repayment every month - regardless, so while overpayments are a great idea if you can afford them, you mustn't leave yourself short for subsequent months.
The right approach to the right mortgage can see your credit rating improve over time, and make your financial life easier. However, making a mistake or falling behind in repayments will have precisely the opposite effect, so it's important not to take a mortgage on without carefully considering affordability and how it will affect the rest of your financial life.