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Are you a mortgage prisoner?

Are you a mortgage prisoner?

The fact that mortgage lenders are now expected to apply fairly stringent “affordability criteria” to borrowers is probably, overall, a positive.  It is, however, not necessarily a benefit to everyone.  The media has been quick to pick up on the situation of “mortgage prisoners”, sadly lenders and the FCA seem to have been rather slow to respond, although they do appear to be getting there (at long last).

What is a mortgage prisoner?

A mortgage prisoner is essentially someone who is unable to remortgage.  It is often used to refer to people who cannot switch to cheaper deals because they are now considered to be unable to afford them even though they are currently paying more on their mortgage.

It may also be used to refer to people who have had a change in circumstances which does not necessarily impact their ability to pay but does cause them to fall outside standard lending policy, for example, people who’ve recently become self-employed.

The issue of people on interest-only mortgages is a more nuanced one as they would be likely to need to switch from a cheaper deal (i.e. only paying the interest) to a more expensive one, which might quite reasonably raise questions about affordability.  While acknowledging that the end effect is the same, the route there is definitely somewhat different.

How to break out of financial jail

Regardless of your situation, your first port of call should ideally be a professional mortgage broker.  If the issue is simply that you are a “round peg in a square hole” then they may be able to bypass computer algorithms and get your application in front of an actual human who can apply human judgement and common sense.  Alternatively, they may be able to point you towards lenders who can apply a bit of flexibility.

For example, if you are currently on an interest-only mortgage and you want to switch to a repayment mortgage knowing that you cannot afford it over the long term (e.g. after retirement), but simply wanting to build up equity in the property and to have control over when, exactly, you sell it to downsize, then a mortgage broker may be able to assist in finding a lender who can work with that.

Another option (depending on your age) might be to extend the term of an interest-only mortgage to the point where you can use equity release to pay off the principal.  Depending on the type of equity release you choose, you might then be able to pay off some or all of the principal (and/or interest) and/or downsize, so you avoid dying with debts on your estate.  Having said that, if you get a “no negative equity guarantee” then the extent of your estate’s liability will be limited to the value of your home after your death so that may not be a huge issue for you.

How to make yourself more attractive to mortgage lenders

A mortgage broker can help you to make the most of what you have, and the more you give them to work with, the easier it will be for them to help you.  There are three key factors which determine how attractive you look to a mortgage lender.  The first is your credit score and the second is your loan to value ratio, which can also influence affordability (the more you can pay upfront, the less you have to find in monthly repayments) and, of course, affordability.

There is lots of advice online about improving your credit score.  In the context of remortgaging, improving your loan to value ratio basically means either paying down your mortgage to reduce the amount you need to borrow on a new mortgage or increasing the value of your home.  If you have any spare cash, it may be worth looking into the latter approach to see if it increases your options.

Your property may be repossessed if you do not keep up repayments on your mortgage.

Equity release refers to home reversion plans and lifetime mortgages. To understand the features and risks ask for a personalised illustration. 

For Equity Release we act as introducers only

 

Can you pay your mortgage with a credit card?

Can you pay your mortgage with a credit card?

The short answer to this question is probably.  It would depend on your lender’s policies, but there’s a least a decent chance that they can accept credit card payments.  As the old saying goes, however, just because you can, it doesn’t mean that you should.  Here are some reasons why you might not want to.

You’re probably going to find it a bit of hassle

This may sound a bit of a weak reason, but it’s worth mentioning.  You could find yourself having to spend quite some time waiting in a queue to make a payment by phone.  Depending on your lender’s number and your phone package, this could work out expensive.

You could end up hitting your credit limit very quickly

Mortgage payments tend to be fairly major commitments, which means that for most people, it’s probably only going to take a few of them for you to hit your credit limit (assuming you just make your minimum payments).

You could be surcharged

In principle, you could be surcharged for paying with a debit card, but in practice it’s much more likely with a credit card due to the higher processing fees involved.

You could wind up paying a lot of interest

The interest rates on credit cards tend to be massively higher than the interest rates on mortgages (and if you are surcharged, the interest will be added to the surcharge as well).

Why might you want to pay your mortgage with a credit card

It’s a bit cheeky, but if your credit card lender is offering a really good deal linked to a minimum spend, then you might want to use your credit card for everything you possibly can and pay it off immediately.  This might not work if your mortgage lender implements a surcharge.  You’d have to do your sums.

Alternatively, if you have a very short-term cash-flow problem, then you might want to use your credit card to pay your mortgage to avoid taking a hit to your credit record for what is just a short-term issue, which you are confident you can address.

Alternatives to paying your mortgage with a credit card

First of all, it’s always best to avoid getting into a situation where you might struggle to pay your mortgage each month.  This may sound like stating the obvious, but it’s often much easier to take preventative action (even if it involves making some sacrifices to find the money to fund them) than it is to deal with a situation which circumstances have forced upon you and for which you are not prepared.  Ways you can prepare for temporary cash-flow issues include:

Having cash savings, the amount you will need will depend on your situation but ideally, you will want to have at least 6 months worth of living expenses set aside.

Have insurance, income protection insurance and critical-illness cover might help to cover loss of income.

Ideally, you will want them in place when everything is still going fairly smoothly as policies are unlikely to pay out for issues which arose before you bought them.

Other possibilities

The previous suggestions are all under your control. You can also try asking your mortgage lender for a payment holiday or to switch to an interest-only mortgage for a limited period. You could think about letting out a room in your home (if your lender permits it). You could even look at downsizing

Alternatively, you could try looking at ways to reduce your other expenses and/or increase your income to be able to afford the payments.

 

Your property may be repossessed if you do not keep up repayments on your mortgage.

For insurance, we act as introducers only.

Getting a “bad credit” mortgage

Getting a “bad credit” mortgage

Mortgage lenders are now obligated to look at long-term “affordability” when calculating whether or not to offer a mortgage.  This is not necessarily a bad thing, but it can create challenges for people in unusual situations, especially for those who have a bad credit record.  Fortunately, these challenges often be overcome.  Here are some tips.

Make your credit record as good as it can be

There may be nothing you can do about your credit record being bad, but there may be some actions you can take to limit the damage.  Make sure you take care of any “quick wins” such as making sure that you are listed on the electoral roll.  Similarly, make sure that you check for any mistakes as you can ask for these to be rectified.

Depending on the situation you may even want to see if you can get any “black marks” removed, for example, if you defaulted on a debt, but can now afford to pay it, then you might want to try reaching out to the company and seeing if they will take your payment and remove the mark.

Make a point of managing your finances impeccably

This is partly an extension of the previous point and partly a reflection of the need to practice good financial management in general.  Basically, you want to be in a position where you can convince lenders that you really have dealt with whatever issues messed up your credit file in the first place.  Acting responsibly for a month or two is unlikely to impress anyone, but acting responsibly for a year or two is more likely to be taken seriously.

In short, even if your credit record is “bad”, if the issues were in the past and you can clearly demonstrate that you’ve now sorted yourself out, then you can really improve your chances of being taken seriously by lenders.

Build as big a deposit as you possibly can

Admittedly this holds true for just about everyone in the UK (and quite possibly in other countries as well) but it has particular relevance for borrowers with bad credit.  Basically the more of the purchase price you can pay upfront, the less the lender is at risk in the event that you default, or, to put it another way, the more chance there is that they’ll recover the full loan principal from the sale of the house, even if it takes place in a buyer’s market.

With this in mind, depending on your situation, you may want to look at properties which have room for some kind of expansion, for example space at the side, an attic or a basement.  That way you could take out the mortgage on the price of the house “as is” and then increase the usable space later when your credit record has improved (if only through time).

If you’re thinking about going down this route, be sure to consider all the implications.  For example, you might want to research the likelihood of you needing planning permission (and if so your chances of getting it) and think about the level of potential disruption building works could involve.

Go through a specialist mortgage broker

Simply put, if you’re a potential borrower with a bad credit record then you’re the proverbial square peg in a round hole.  In other words, you’re exactly the sort of person who’s likely to struggle with algorithms and automated scoring and, by contrast, to get particular benefit from “the human touch”.  A good mortgage broker will take time to listen to you and understand your situation and as well as having a good knowledge of available mortgage products, they may also have professional contacts with lenders to help get your application past computers and in front of actual people.

If you would like to know more or are thinking of applying, please contact us

Your property may be repossessed if you do not keep up repayments on your mortgage.

 

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