Can you borrow enough to get on the property ladder?

Updated: 

Notting Hill Stock - London

Asking prices for UK houses have risen 9% in the past 12 months - with the average asking price hitting £272,000 - a new record. In London, the situation is even more striking, where the average asking price has topped £500,000 for the first time. For those looking to get onto the property ladder - or take a step up it - there are suddenly very real concerns.

Will anyone lend you the money you need for the home you want?

Mortgage concerns

At the same time as house prices have run away, the mortgage market has got tougher. The Mortgage Market Review changes have kicked in, so that most people wanting to borrow will have to seek advice. They'll need to answer a series of probing questions about their expenditure and income in order to establish whether they can afford to repay the mortgage - and whether they will still be able to afford it when interest rate rises kick in.

To add even more concern for buyers, mortgage companies are starting to impose limits of their own. Lloyds Bank, for example, has said that anyone borrowing more than £500,000 will not be allowed to borrow more than four times salary.

The combination of soaring prices and tougher mortgage conditions, is leaving many people very concerned as to whether they will be able to borrow enough money for the home they want. However, this doesn't have to be the end of their property dreams, because there are a number of ways they can make themselves more attractive to lenders.

Improve your chances

The first is to think about your outgoings. You should consider affordability before you sit down with the mortgage adviser. Put together a budget of all the money you have coming in and going out, and look at what you have left for housing - can you prove you can afford the mortgage? And can you prove you will still be able to afford it if interest rates increase? If not, can you cut the waste? Can you shop around for cheaper utilities, cancel unused subscriptions, and ditch expensive habits? Only when you're satisfied you have done everything you can to keep your outgoings down should you put them in front of a lender.

Next you should consider your credit record. The mortgage companies will examine this in detail in order to put together a credit score to assess whether they are prepared to lend to you. You need to get hold of a copy of your credit record from an organisation like Experian, so you can assess whether there's anything that will ring alarm bells that you can put right.

The first thing to check is whether you are on the electoral roll at your address. Lenders use this to verify your address, so if this is not listed on your report, you need to contact your council and get on the roll.

Next, look through the credit agreements listed on the report. These should include any loans and credit cards. There will also be details of current accounts and overdrafts. Check that you recognise each one, and that the amounts on the report reflect reality. If there are any mistakes on your record, contact Experian, who will work with the relevant organisation to have the mistake corrected.

In some instances there will be a loan listed not as a mistake - but because you have been a victim of fraud. Its not as unusual as you might think - four million people in Britain have been a victim of this sort of crime.

If this is the case, you need to contact the organisation that has been defrauded and let them know, contact the police to report the crime, contact the Royal Mail in case it is the result of postal crime, and contact Experian's Victims of Fraud team. They will be able to advise you on how to go about clearing your name and proving to lenders that you have been a victim of fraud.

The next step is to look through your list of credit agreements. If you have a lot of outstanding debt, lenders may be concerned as to whether you can afford to take on any more, so you need to consider whether you can pay down any of your more expensive loans or cards.

If you have borrowed up to the maximum on each card, and if you are only making the minimum payments on any card, then the lenders will be able to tell, and will take this as a sign that you are not managing your money carefully. So try to pay down the debt.

If there are lots of credit cards opened and unused, then this could count against you too, because lenders will see these as potential liabilities - so contact the providers and close any accounts you are not using.

Next look at your credit repayment record. If you have had a problem with paying debts in the past, then your best approach is to build a strong recent record for lenders to weigh up against past mistakes. If there was a good reason for your problems in the past - such as an illness - you can add a notice of correction, which will let you explain the circumstances.

Also check for how many credit applications you have made recently. Lenders don't like to see multiple applications in a small space of time - which smacks of money problems - so make sure you leave a reasonable time between applications.

By contrast, you may not have any borrowing at all on your record. This may be a sign you have lived within your means, but it worries lenders because you have no record of paying your debts sensibly. If this is the case, you may need to apply for a credit card with your own bank - which is more likely to let you have a card than an organisation that is not familiar with you. You then need to spend small regular sums on the card and pay them off on time and in full to establish a record.

Once you have established a good credit record, and can prove that a mortgage is affordable, then you are in a far better position to apply for your mortgage. Now all you have to worry about is getting your deposit together...