Oak Tree Mortgages Blog

Looking after your credit file - What is credit scoring?

"The computer says no..." the now infamous line touted by rude bank teller Carol, in Little Britain. Carol displays an extreme lack of interest in her customers' personal lives. For some people, Carol is a metaphor for impersonal "credit scoring".

Being declined for a credit card or loan might not be such a big deal, but being declined for a mortgage can have devastating consequences.

Credit scoring is a method of assessing risk used by lenders in their decision making process.

There are two aspects to credit scoring; the credit score itself and your credit history - both of these are linked.

Firstly, Credit Scoring takes the data you provide to the lender - and assigns points to each bit of information. The more points you get, the lower risk you are considered to be and the higher your credit score.

Secondly, your Credit History looks at all of the credit you have held for the last six years. A mortgage lender will refer to a Credit Reference Agency, such as Experian or Equifax, who are licensed to hold this information on us all.

By looking at your credit file, a lender can easily see how much you owe and how you have conducted yourself. This information is held for the past 6 years. So, late and missed credit card payment or loan payments may have an impact for years to come.

The Credit Reference Agencies also collate information about you from the Voters Roll and the County Courts. All of this information is fed into your mortgage application and will have an effect, on your overall credit score.

As part of our advice process, we carry out a full "Fact Find" when we meet a customer for the first time. This information is extremely important - using our knowledge and experience, we can normally tell where we feel a customer may have a problem.

A problem can exist even if a customer has had no missed payments or poor credit history - there are many aspects to a persons financial makeup that can affect a credit score.

Not all lenders credit scores are the same - some lenders are a lot more difficult to get a mortgage with than others. Some lenders don't use a credit score at all. If we feel one lender may reject you and another lender is likely to accept you - we will probably want to avoid the mortgage lender that is likely to reject you!

This may seem like commonsense - but it is very important commonsense often completely overlooked by customers looking to "shop around" for a mortgage themselves. How is a member of the public meant to know which lenders are likely to accept them and which are unlikely - they aren't. As brokers, it's something we have learnt over many years experience.

When approaching a mortgage lender directly, you are likely to be credit checked as part of the initial interview. A lender may offer to produce a Mortgage Certificate for you. Sounds great... but beware - a credit check is going to be carried out!

Each time a check is carried out, it leaves a record or "footprint" on your credit file. Too many of these checks can make it appear to other lenders that you are desperate and can result in you being turned down for credit. Don't let careless credit checks trample all over your credit file.

Our knowledge and experience helps avoid unnecessary credit checks. We aren't going to undertake a pointless check in the knowledge that the lender is unlikely to accept you. Yet, if you walk directly into a lenders branch and see a bank adviser - they only have their own products to offer you and are likely to undertake a credit check.

Beware of a mortgage lender undertaking checks without your knowledge, you have no way of knowing beforehand how likely they are to accept you - if you are just after a couple of quotes, there really is no need to have a credit check carried out.

At some point a credit score is going to be necessary. Near to the point that you are going to put an offer on a property, an estate agent may ask for a Mortgage Certificate to confirm that you are able to obtain a mortgage. This helps them to confirm to the seller that you are "proceedable".

Credit scoring is only the first hurdle - a professional mortgage broker will also look at the supporting evidence you are going to need to provide as part of the mortgage application process. We will advise where we feel a lender may have an issue with the supporting documents, helping to avoid calamities at a later stage.

My next article will look at the practical steps that can be taken to improve your credit score and also explore some of the myths credit scoring.

Oak Tree Mortgages are whole of market mortgage brokers and provide comprehensive professional advice to those considering taking out a mortgage. We can help guide you through the credit scoring maze and obtain a Mortgage Certificate should you require one.

Buying a home needn't be taxing...

Stamp Duty Land Tax, more commonly referred simply as 'Stamp Duty', was introduced in December 2003. Stamp Duty is a tax charged by HM Revenue & Customs upon the transfer of a property. So, tax is normally payable by the purchaser of a property.

Like income tax, it is a percentage based tax, so if you purchase a property for more than £125,000 you will pay 1% of the value as tax. Above a purchase price of £250,000, this increases to 3% of the total and again at £500,000 where the tax increases to 4% of the total value. Not insignificant sums of money!

For many first time buyers, Stamp Duty is another cost eating into the funds that could be used towards a deposit.

In the wake of the problems experienced in the housing market in 2008, the Government announced in the September of that year a temporary suspension of Stamp Duty on purchases up to £175,000. So if you were to purchase a property at £175,000 you would not have to pay £1750 in tax!

This Stamp Duty holiday was further extended in the 2009 budget and is due to end on 31st December 2009.

To take advantage, the property you are purchasing must be purchased for less than £175,000 and you must legally complete on the purchase before 31st December 2009.

Given the levels of deposit required by mortgage lenders, we would urge any first time buyer considering buying in the early part of 2010 to consider bringing their purchase forward to this year in order to avoid this additional cost. 

Given the state of the public finances, it is doubtful that this scheme to help first time buyers will be extended.

If you are considering buying a property and what to go through your options as well as calculate the costs of moving, Oak Tree Mortgages are on hand to help. Call us on 0121 733 8833.

The First Time Buyer 90% Mortgage - "Members Only?"

Mortgages with a 10% deposit, sometimes referred to as 90% Loan to Value products, are few and far between.

Some of our biggest mortgage lenders, the likes of the Abbey, Alliance & Leicester and the Nationwide Building Society have shunned this 'high risk' lending for new borrowers. Why so?

There are a number of different reasons.

First and foremost, lenders have taken an over cautious approach towards house prices this year. As we have seen, house prices would appear to have stabilised over the summer. However, mortgage lenders need to look further ahead than the BBQ summer that never was! Their collective worry is that as unemployment reaches 3 million (reach for the Prozac), more repossessions will take place which will act as a drag on property prices.

They worry that today's 90% borrower is next months redundancy statistic. No income, no mortgage payments made, no house.

Faced with the prospect of a repossessed property, the bank would try their best to sell the property to cover the remaining mortgage on the property. What if the bank were to make a loss? Not a great place for a mortgage lender to be in the current environment?

Thinking more about the relationship between supply and demand for housing and house prices; recent research has indicated that up to 20% of households have insufficient equity to allow them to move home. With fewer properties coming onto the market (less supply), prices may not actually fall (even if the level of repossessions increase). This assumes that the current levels of demand seen over this year are maintained over the coming years.

Secondly, the Financial Services Authority insist that a mortgage lender sets aside a much larger sum of money in case the mortgage goes bad against a 90% mortgage than say an 85% or 75% loan to value mortgage. This set aside money can not be lent out, so it's earning the lender virtually nothing! In other words, it is very expensive for a mortgage lender to offer a mortgage to someone who is only able to put down 10% (how times have changed!)

For these reasons, the 90% mortgage has become a a byword for high fees, high interest rates and unfavourable terms and conditions. Many lenders have relied upon cross sales of "expensive add on's" such as linked current accounts with monthly fees and the lenders own life and critical illness cover to make the required amount of profit on a 90% mortgage.

How refreshing it is to see The Coventry Building Society offer a new 90% mortgage to help first time buyers. The rate currently on offer is a relatively competitive fixed rate for 5 years at 5.99%. The lender is also offering a free basic mortgage valuation and also a very low arrangement fee of just £195. The icing on the cake is a £500 IKEA voucher given once you move in!

The catch? There isn't one, except this mortgage is not available to all and sundry! The mortgage is available to "members" of 3 years standing or longer. In essence, this means that you will need to have had a savings account with the Coventry for 3 years. To widen this criteria further, the lender will also allow an application if your parents have had a mortgage or savings account for at least three years.

It's good to see a local Building Society using their resources to the benefit of their members and the local West Midlands housing market.

If you would like to find out more about this new mortgage, or any other 90% mortgage, give us a call on 0121 733 8833 and we will be more than happy to help.

UPDATE 16th November 2009

The Coventry Building Society have today confirmed that they are widening the criteria so "eligible members" now include grandparents of first time buyers who have been members of the society for at least 3 years.

Can we call the bottom of the property market?

What can I say? "I'm sorry" - for having been away from our blog for so long!

"Where have you been?" I hear you ask. Well, I have been very pleasantly surprised by the level of activity in the market place since the start for the year. I notice this week that the National Association of Estate Agents has commented that demand from buyers is currently outstripping supply. This upturn in acitivity has left precious little time to update our blog!

Anyway, with a moment to spare this Saturday afternoon, I thought we should reacquaint ourselves with a previous entry I made in January. In this entry, I asked if some kind of stabilisation in the housing market was close?

To my mind, this year feels very different to last. This year, we have come to terms with the fact that we are in a recession and we are working our way through. 

We have adjusted our lives and expectations. The media spot light has shifted from property prices to MP's expenses, Michael Jackson,and Jordan's love life. So Life goes on!

Last year people were genuinely scared of the unknown. There was talk of banks collapsing and financial melt down. In America, the Bush Administration allowed Lehman Brothers to collapse in September 2008. This was the beginning of the turning point in the global banking crisis.

Following the collapse of Lehman's, the whole banking system was thrown into turmoil. Governments and Central Banks across the globe have been dealing with the aftermath ever since. Robert Peston at the BBC continues to provide an excellent commentary on the finer detail of the banking crisis and the attempts by governments and regulators to deal with the mess.

 As a result of the both the structural and attitude changes within the banking sector, we are now working with a very much changed mortgage market...

Gone are the heady days of mortgages for all, easy lending criteria and cheap rates. Good bye and good riddance! What has followed are higher mortgage rates and less choice. But before I induce some form of mortgage related depression, please read on...

This year has seen the return of so many first time buyers. Interestingly, the type of first time buyer has changed.

Prior to the 'Credit Crunch', the average age of a first time buyer was 34 years old. This year, we have seen a range of ages. A couple aged 18 and 19 who have been saving for a deposit since the age of 16, clearly ready and able to buy ~ through to people in their mid-20's.

These are the people who have have been priced out of the market for years because of the super charged property prices caused by the easy lending of the last 10 years. So, good riddance to all that...

Now, a young couple earning £16,000 each can afford to buy a house (yes, a house) within walking distance of our offices. I hope,  from the ashes of the banking crisis and the bonfire of the vanities shall rise the Phoenix of affordable, private home ownership with responsible mortgage lending. Now it's down to government, the regulator and the industry to usher in such a golden age. Let's hope they can deliver.

Considering that young first time buyers are now able to afford properties and the official statistics from the Land Registry, Nationwide and Halifax show house prices starting to stabilise; I hope we are now through the worse. The younger first time buyer is the very foundation of a sustainable property market.

For those considering buying now, it is a myth that "you can't get a mortgage".

Mortgage lenders are still willing to lend... at a price and with a big enough deposit!

You need to be on your guard as the bankers are trying to force first time buyer's to pay the price of their mistakes through charging much higher interest rates on mortgages.

Over the coming weeks, we will be devoting our attention to showing you ways to increase your chances of getting approved for a mortgage whilst at the same time opening up cheaper mortgage products to buyers.

It's time to take off the blinkers and think outside of the box as we play, "Beat the Banker"!

If you are a first time buyer and you need some advice and help, why not speak to the experts at Oak Tree Mortgages. Our contact details can be found on our main website www.oaktreemortgages.com

The fixed rate dilema... is 2 years too short?

As any good cook will tell you, timing is everything. The same is true with fixed rate mortgages at the moment!

Imagine you want a mortgage that allows you to budget for the next few years. You might be unsure which way interest rates are heading and you don't like nasty suprises. It's important that you know how much your mortgage payments are. After chatting through your mortgage requirements with an adviser, you decide a fixed rate matches your needs.

You've decided to stretch yourself a bit to get a nicer home, maybe with an extra bedroom or a bit more space downstairs. You can see yourself staying there for at least 5 years.

If you want a fixed rate, how long should you fix for?

You will probably look at 2, 3 or 5 year fixed rates. You might be tempted to go for a shorter 2 year rate for two reasons...

The rate may be (but is not always) lower over a shorter period of time AND you might want to 'review' your mortgage again in 2 years time.

Of course, in times past, shopping around again for a mortgage every couple of years could prove lucrative. Beware, 2 year rates may lead to some very nasty suprises in 2 years time!

Consider what the Bank of England forecasts are for economic growth over the next couple of years. Billions upon billions of pounds, dollars, yen and euro's are being pumped into the global economy to fend off the recession by governments across the globe. Whilst we are all experiencing pain in the shorter term, in time economic growth will return.

As previously mentioned in our blog, it is our opinion that the Bank of England base rate will rise in the medium term. Just to repeat why we feel this...

Firstly, low rates have not helped savers who have withdrawn their savings from British banks to find a better rate of return elsewhere. This has left the banks with even less money to lend.

Secondly, the low exchange rate is leading to the price of imports increasing, which, in time will lead to higher prices in the shops (and higher inflation). This problem will be especially acute once the economy pulls away from recession.

The Bank of England will try to tackle these problems, when it is safe to do so, through increasing the bank base rate.

How will that effect you if you have chosen a 2 year fixed rate?

In our opinion; at the exact point a 2 year fixed rate comes to an end, interest rates could have already been increased to counter the threat of inflation and to halt the flow of savings out of the UK.

In two years time;

• How will you fair trying to renegiotiate a new interest rate at a time when interest rates could be increasing?

• Will the effects of the 'credit crunch' mean the mortgage market lacks competion at the point you are trying to find a new mortgage?

• What if property prices have fallen a little bit more over the course of 2009? If you started your fixed rate with say a 10% deposit, and your equity has been eroded by further falls in property prices, how likely is it that you will be able to find a new mortgage as your deposit has shrunk?

Very careful consideration needs to be given to these points before deciding the length of any fixed rate. None of us can be certain what is going to happen over the five years. Taking a shorter term rate exposes you to the risks that the next couple of years are likely to bring. Just as we are starting to think about our homes as somewhere we may have to live for a little longer than we would have done in the past, maybe now is the time to take the same view with our mortgage?