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Could a poor credit rating affect your mortgage?

Could a poor credit rating affect your mortgage?

Category: Mortgages

Updated: 04/08/2017
First Published: 04/03/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

With more first-time buyers able to get on the property ladder, largely in response to the Government's Help to Buy scheme, the industry is enjoying a period of rapid expansion. There are significantly more high-LTV mortgages available than there have been in a number of years, with the latest Moneyfacts figures even showing that there are currently 106 mortgages on offer in the fixed 95% loan-to-value (LTV) sector, compared to just 35 a mere six months ago.

However, unfortunately this has led a lot of first-time buyers to think that it's easier to get a mortgage, when actually the reverse could be true. Strict lending criteria and tighter affordability checks mean it won't always be that simple to get on the ladder, and one area that needs to be thoroughly addressed is your credit rating.

What does a poor credit rating mean?

A poor credit rating essentially means that you're deemed more of a credit risk to your bank or building society. In other words, they assume you'll be more likely to default on your payments and they could end up losing the money they lent you altogether, which means they'll be less willing to lend you the amount in the first place.

Will it affect my mortgage application?

In most cases, yes – have a poor credit rating and it means you'll find it much harder to secure a mortgage, much in the same way as you'd find it difficult to secure any other kind of credit. Even if lenders are willing to take the risk, chances are you'll end up paying a much higher interest rate as they'll want to hedge their bets – the higher the risk the more you'll have to pay for the privilege of being loaned money.

Unfortunately, a recent study has found that far too few people actually realise the importance of having a good credit rating if they want to secure a mortgage, particularly under the Help to Buy scheme.

Research from aqua credit cards revealed that 21% of those surveyed didn't know that their credit rating would determine whether or not they'd be accepted for a mortgage, a figure that's even higher in the younger age groups – or those that are more likely to be first-time buyers. In fact, 48% of 18-24 year olds surveyed and 40% of 25-34 year olds didn't realise that their credit score would be used as lending criteria, with almost half (48%) having never actually checked their score.

Take steps to improve your credit rating

Given that credit score is such a key determinant of mortgage acceptance, it's vital to make sure yours is as good as possible. However, even if you've got a low score at the moment, it doesn't mean all is lost – there are things that can be done, and if you're one of the 31% that wouldn't know how to improve your score, we've got a few simple steps you can take.

  • Make sure you're on the electoral roll. This is the first thing a lender will check, and if you're not on it you won't get a mortgage.
  • Keep current credit balances as low as possible, ideally sticking within the 30% limit and definitely not more than 75%, as if you're already reliant on credit a lender will be less willing to offer you more.
  • Check your credit report for any errors and make sure to get them amended if necessary. Incidentally, make sure any CCJs or defaults that have been settled are properly recorded to build your rating back up.
  • Close any accounts that aren't needed, as if you've already got access to a lot of credit you might find it difficult to access more.
  • Don't apply for more than two forms of credit in any six-month period as too many applications can lower your score, so only apply if you really need it.
  • If you've been rejected for credit, stop applying! Each credit search will leave a footprint on your file, and if you've applied for a lot without being accepted it could indicate you're a credit risk and could therefore reduce your chances of getting credit in the future.

What next?

Find out how to improve your chances of mortgage acceptance

Find out more about Help to Buy

See how to improve your credit rating with our compare credit check providers

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.