Credit Rating And Mortgages

[Guest magnoliawalls]

A friend bought a house almost two years ago - since then she and her partner have had difficulty paying off their credit cards to the point where the banks cancelled the cards and arranged repayment plans. When they took out their 100% mortgage, they already had problems with making their credit card payments.

Now they intend to remortgage as soon as the fixed period is up (in two months), this is to clear some of their outstanding debt and pay for essential repairs to the house. When I asked if she was concerned that they might have difficulty refinancing given their poor credit rating, she said that when they first enquired about a mortgage they were advised that a poor credit rating did not matter so much when taking out a mortgage as it is secured debt.

So no worries then

Is this standard practice? Did banks really not care who they were lending to when prices were going up as the collateral was increasing in value? Is there a significant proportion of FTBs in this position who may have difficulty remortgaging at the end of their 2 year fixed rate period?

If so there could be a large number of repossessed properties either being sold or rented out by banks - and triggering the House Price Crash.

Edited December 6, 2005 by magnoliawalls

[2005]

The way I understand it is that this credit rating lark is not as cut and dry as some people think. There is no 'blacklist' and having a poor credit rating doesn't automatically bar you from gaining credit or a mortgage.

Banks (and mortgage lenders) have some discretion.

So if you went for a mortgage and you had been behind with your credit card payments a couple of years ago during a temporary period of ilness then the banks could over look that.

On the other hand if you have a history of obtaining loans and then moving house and not paying the loans - or a history of taking out very large loans and not paying them back then the bank would be unlikely to offer you credit.

I seem to remember a time after the last housepricecrash when this lending criteria was relaxed because the banks realised if they only lent money to people with a perfect credit rating then they wouldn't be lending any money at all!!!

I don't think your friend will have any problem getting a re-mortgage but he/she may not get the best rate.

I am not sure the banks will be as happy to do this if house prices start to fall.

[Guest magnoliawalls]

I don't think your friend will have any problem getting a re-mortgage but he/she may not get the best rate.

I am not sure the banks will be as happy to do this if house prices start to fall.

That was my (not very clearly put) point - they are struggling to make ends meet now. If they have to pay higher interest rates they may not cope, if they cannot cash in the relatively small amount of equity they have gained in the past two years they may not cope. There could be many others like them who overstretched because "they diddn't want to miss the boat".

Interest rates were lower two years ago and the banks seem to have turned a blind eye to poor credit ratings as house prices increased exponentially. As special 2 year introductory rates end the pressure on those who bought their first home in the past couple of years will increase.

[2005]

if there are many people like this I shudder to think what state they will be in next year when their higher interest payments really start to bite.

Did they get in a mess in the usual way by using credit cards to the point were most of their cash was paying off the CC which meant they then had to rely on CC even more just to make ends meet?

I have seen so many people like this. I had one friend who had so little money that she had to buy all the kids clothes on credit. Unfortunately the only credit she could get was a next catalogue. She was in the bizzare situation where they could barely put food on the table but the kids were running around in Next stuff!!!

I had another friend who was even buying the kids nappies on a store card because she had no cash and another who has so many store cards maxed out (all at the highest possible interest rate) that I think she has forgotten what cash actually looks like.

I feel for these people but to be honest taking on a low fixed rate mortgage that stretches your finances knowing that the deal will come to an end is a little foolhardy. Especially if they can't pay the credit cards aswell.

It could be a long, cold, hard winter for many people this year.

I hope your friend sorts it out

[Guest magnoliawalls]

...

Did they get in a mess in the usual way by using credit cards to the point were most of their cash was paying off the CC which meant they then had to rely on CC even more just to make ends meet?

I feel for these people but to be honest taking on a low fixed rate mortgage that stretches your finances knowing that the deal will come to an end is a little foolhardy. Especially if they can't pay the credit cards aswell.

...

Yes it is the usual story - she is one of those who complains about not being able to pay off credit cards but always has the latest mobile etc. I am sympathetic but it is not exactly a tragedy, they have effectively been paying low rent on a house that they may lose.

It is more than a little foolhardy but in the past few years those that extended themselves to the max have done well from, and been protected by HPI. Sensible people like me tried to save a deposit and our thrift was rewarded by even the most ordinary dwellings moving out of our reach. Friends who have bought still ask why we have not, when we say we can't afford it the response is something like "go to our bank they are great, they let us borrow xx times our income!"

The only reason I posted the anecdote is that I don't think the story is an unusual one - how many people do we know who took out the maximum mortgage they were allowed and then bought furniture on credit?

The idea that credit rating and outstanding debt was unimportant when lending circa 100k on a 100% mortgage seems amazing to me.

edit - typo

Edited December 7, 2005 by magnoliawalls

[New Darker Law]

...The only reason I posted the anecdote is that I don't think the story is an unusual one - how many people do we know who took out the maximum mortgage they were allowed and then bought furniture on credit?

The idea that credit rating and outstanding debt was unimportant when lending circa 100k on an interest only mortgage seems amazing to me.

One of my former colleagues bought a flat about 6-12 months ago, having been outbid on around 3 other properties. I shudder to think what she paid over the asking price. Don't know the address so can't check LR.

Anyways, a current colleague visited her recently (she can't afford to go out!). She had £70 to last her till the end of November and that was with two weeks still to go.

She didn't have any seats in her living room and was still waiting on an oven. Bear in mind she has been in the place for a few months. I suspect she can't get credit cards through previous history when a student.

The irony of it all was that she rented for around 8 years prior to buying. She was one of those FTBs that "got on the ladder before she never could".

Point is some are gonna struggle whether they have other debts or not. A few clicks up on IR and it's curtains.

NDL

[Guest magnoliawalls]

Its interesting you make this post, becuase an FA customer of mine mentioned a few weeks back when we were talking about the state of the economy that about 90% of his work has now become debt consolidation loans, where previously he was heavily into investments. A sign of the times perhaps?

A drastic increase in debt consolidation loans suggests to me that the debt bubble is ready to burst. Good news for some!

The irony of it all was that she rented for around 8 years prior to buying. She was one of those FTBs that "got on the ladder before she never could".

Point is some are gonna struggle whether they have other debts or not. A few clicks up on IR and it's curtains.

I hope she had no deposit!