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Home buyers must 'live on credit card' to get mortgage
Sri Carmichael, Consumer Affairs Reporter26.08.09
First-time buyers are being told to "live on a credit card" to secure a mortgage, the Standard has learned.
Brokers are telling people with small deposits they have no hope of securing a loan if they cannot show they have a history of managing debt.
The advice is the latest sign of how strict mortgage-screening rules are locking out first-time buyers.
Just a handful of mortgages are available for 85 or 95 per cent of a property's value, but deals are elusive for even impeccable buyers, brokers said.
James Rodea, of Savills Private Finance, said: "Some of our squeaky- clean customers, who have never missed a payment and would have got any mortgage they wanted a year ago, have been rejected recently."
Ray Boulger, of John Charcol, said: "My best advice to someone hoping to buy with a small deposit is to live on a credit card. Buy your groceries on it, go out to dinner on it, spend on it what you'd normally spend on a debit card. And make sure you pay it off each month to prove you're handling the debt."
David Hollingsworth, of London and Country, said: "It's ironic that you're seen as a better bet if you're someone who's been in debt, but people without a credit history are viewed as a blank book who can't be trusted in the current climate." Another credit pitfall young people tend to fall into is frequently changing their electoral roll address.
Mr Boulger said: "Young people renting should keep themselves registered at their parents' address. A single address history is seen as a sign of a more stable, responsible borrower." It also helps to have the same address on financial statements, and to stay with the same bank and employer. A Savills Private Finance client was penalised for not having a landline because it made them seem less "settled".
Broker Capital Fortune said one "high net worth" client was rejected for an 85 per cent loan because he was in a dispute over a £20 mobile phone bill, which was going to court.
Andrew Montlake, of brokers Coreco Group, said each lender used more complicated calculations than credit agencies, such as Experian.
Mr Boulger claims banks regularly tweak how they calculate credit scores. He said: "If their deals are starting to become too popular, they up the credit scores so applicants get rejected."
FIRST-TIME buyer Fay Alison, 42, had a "total nightmare" trying to secure a 85 per cent mortgage for her one-bedroom garden flat in Chigwell, despite being a "top class customer".
The personal assistant had never missed a payment for anything in her life, but was rejected by Abbey because her credit score was not high enough.
The building society gave no explanation, but with the help of her broker, Capital Fortune, Ms Alison spent nearly a month delving through her financial records to discover the reason.
The main problem was that the credit card she had been using and paying off regularly for 20 years was too old to be registered with a credit agency so she had no track record of borrowing money and paying it back.
The other issue was that the basement flat she rented had been variously recorded over the years as a 'basement flat', a 'garden flat' and just a door number with the companies she organised her finances through.
In the current climate of ultra-strict screenings, those factors were enough to ruin her credit score.
Ms Alison said: "It was extremely stressful because the banks tell you nothing, you're digging around blind trying to work out what's wrong when you thought you'd been so perfect with your credit. It's very upsetting and takes so much energy, time and effort.
"I'd been doing exactly as is recommended - spending a few hundred pounds on my credit card each month and paying it off in full each month - but I got the card back in the Eighties before they even registered them with credit agencies. Once I knew that I took out a new one and started using that and got a letter from my bank stating that I had been using a card for two decades which I showed to the lender to prove my credit history.
"Also I had no idea that companies had taken my address down differently but apparently it can be a problem with flats and it can make you appear dodgy. I standardised how it appeared on my driving licence, on the electoral roll, on my bills, with my bank and savings accounts and it seemed to work."
Once the changes were made, Ms Alison secured a mortgage at 85 per cent through Alliance & Leicester at 5.69 per cent fixed for three years.
"I feel incredibly lucky to have managed to get a mortgage of that size at the moment," she said.
ends
Reader views (19)
Banks strike me as being rather stupid when it comes to lending money. Everything has been boiled down to number systems leaving no room for people smarts. As a computer person I respect numbers, but must admit that the human brain is still superior.
A perfect example is that our bank of 15 years just lost our mortgage when we refinanced -- costing them thousands in guaranteed interest return. We have a fantastic track record, but the bank wanted to treat us like any Joe off the street when we decided to refinance. So we figured we would act like any Joe off the street and shop around more -- found a $200 better deal somewhere else and went there!
What's really bad is all the current bank needed to do is engage their brain and they would have kept us.
- Michael, Denver, CO, USA
Presumably then, if the same is applied to investment banks, they will now have to pay a premium to market rates after their grotesque mismanagement of the free money they get from retail banks (ie everyone with a bank account) shows they are incapable of managing risk ?
But we can't have anything upsetting Darling and Brown's investment bank advisers now can we ?
- John, Twickenham
We have zero debt on our US issued cards, we use them infrequently, and clear any expenditure at month end.
I have recently been told that this type of usage adversely affects our credit rating.
What price such responsible management?
- Peter, Falmouth, Antigua
Mickinlondon - I seldom agree with your views on politics and the economy - I believe capitalism and free markets are the best way for this planet and its nations to feed their people.
However, poetic licence excepted, what you have said hits the nail on the head. Whilst banks were part of the complicated problem in financial markets - it ALL started with the personal responsibility of borrowers. No one was frogmarched into a bank and forced to take out a loan or a credit card at gun point - Consumers bought houses they couldnt afford (the government of UK and US reinforced this by telling willing voters that it was their right to own a home), they bought cars and TV's they couldnt afford (and perhaps didnt need)and millions in the UK have run up credit card debts of £1000s and then put their head in the sand as regards to how they would pay off the debt.
The 'old fashioned' views you have expressed are spot on - they always have been and always will be - live within your means or else you will no longer have control of your destiny.
A lot of folk need to remember this rather than pointing the finger at someone else for the troubles they are facing.
- Dc, London
Are these "advisers" on how to run our private financial affairs the same banks and credit agencies that almost blew the economy out of the water? You couldn't make it up!
- Ted, London
I was given this advice last year. I had never had a credit card because I didn't want the temptation. I had no debt, had savings and lived within my income. I figured that would look good. Now I spend on a credit card, which I pay off each month, so I'm earning extra interest on my current account because the money is no longer going out day by day (from debit card spending) and I get cash-back from the credit card. I'm still spending the same amount but now I'm being paid to do so - it seems a crazy system.
- Anon, London
Being old fashioned; I only use cash to pay my bills, and buy anything I need, I have never been in debt, or borrowed anything from anyone that I could not pay back in cash the following week etc.
As you can gather; I am poor, debt free and happy, in our modern Great Britain today.
The more possessions you have, the more you become slaves to them?
Ignore wealth and possessions; life is too short to waste your time getting everything you don’t really need at all.
I am often struck by the younger generation’s attitude towards life; most are screwed up, in debt, and miserable.
A few years on ration books, and living in bombed houses, would soon get their priorities right.
All we have today are wimps, greed, and corruption.
Bring back lino, and get rid of your carpets, bring back mangles and scrubbing boards, and get rid of your washing machines, you pansies.
Bring back tallymen; and get rid of your bank accounts, bring back the call-up, two years training in the forces will soon turn you pansies into real men and women.
Oddly enough; we never had credit cards when I was young; so I don’t know how we managed at all, I guess we were just honest workers, earning an honest days pay, and we asked nobody for anything.
As we sow; so shall we reap.
- Mickinlondon, london
Be careful to read the T&C's on your card first though, some cards make you pay even if the card is paid off in full each month.
- Bob, Cheam
They've learned nothing from the past decade have they ?
Well I've news for the 'Borrowers'In the nect decade you will have to live within your means.
- Andrew Nicholls, Ely ,England
I think, although the headline is alarmist, this shows the value of a brokers advice.Too many people these days are blindly applying online for mortgages and wondering why they are turned down.
Having a credit profile is a necessity to show you can handle debt.Would you lend £150k to someone who still lives with Mummy and Daddy?
Thought not!
- Alan,., Wimbledon
In my 30's, it does seem that financial institutions are behind the times with address changes. My generation move for jobs where there are jobs. We no longer have 'jobs for life' and as a result we change jobs and therefore change addresses to suit. When will they remodel their financial models to allow us to settle somewhere when our life allows.
- Annie, London, UK
Stephen - Swindon: almost right but not quite. It is the credit "reference" agencies that are the cause of the problem. Note once again that Experian are quoted. How much did they pay for that bit if advertising?
Until Experian et al are properly regulated, and lenders employ staff that are capable of ignoring the lies published by Experian et al, nothing much will change.
- Bj, London
Am I the only one to think that this is exactly backwards? The credit agencies are part of the current problem, not part of the solution. Why is it seen as good that first time buyers need to take on credit card debt and not disclose their whereabouts just to please the credit rating agencies?
It is the credit rating agencies that need reform, not just the banks, as they are not only encouraging risky financial behaviour, but also (as an effective monopoly that is poorly regulated) they had a negative role to play in the current financial crisis.
Remember, it was the banks and credit rating agencies that deliberately and systematically targetted loans to those they considered most profitable. This cabal of greed went after sub prime debt to maximise their returns. Those least risky and less risky were poorly served and shunned.
We need to reward good personal financial management which does not require loans or credit, rather than penalise this.
- Stephen, Swindon
Credit cards are a first class way of planning expenditure.
If you can not pay the balance each month you are living beyond your means.
If the card company offers cash back, this is money for old rope for household bills etc have to be paid any way so why not receive a gratuity for doing so ?
- Bernard Parke, GUILDFORD
Careful Alan, if you don't pay off the very last penny each month, you probably pay interest on the whole month's spend (and the next). Work out how much that is routinely costing you, before celebrating a score that might not be much improved.
- Steve, London, England
Telling people to "live on the credit card, but pay it off each month" is code for "live within your means."
Fine, but using credit cards, for many, encourages them to do just the opposite.
Now if the "flexible feind/sorry, friend`s credit LIMIT were set responsibly by the PROVIDER, then using it like this would be good advice.
But , until plastic credit providers force this credit limit control based on monthly income LESS basic outgoings (mortgage, etc), AND only ONE card is allowed per household , all that will happen is inflated morgage debt (higher house prices) will be transferred to plastic, and the debt burden will increase month after month, as usual.
We would have learned nothing from the last 12 years of gross financial negligence.
What money lenders and politicians SHOULD be telling the feckless spendaholic is simply "Live within your means, and limit your spending on un-neccessities UNTIL you`ve paid up your debts"
But of course they won`t, they want the failed experiment to tick over, so some “feel good” factor is still prevalent amongst their clientelle `till after the next election.
A Tenner for a loaf of bread, anyone?
- Darius, London UK
I never pay off my balance in full, I always leave a small amount on the card in order to accrue (some) interest, although the amount is tiny, this demonstrates my ability to pay and manage credit effectively but also shows the bank im a great customer cause I am paying interest to them.
as a result i got a great mortgage deal. But now I cant afford the repayments.
OOPS.
GOVT HELP PLEASE.
- Alan, London
This is nothing new. You have always had to run up a credit history by putting yourself into debt to gain a mortgage? The fact that you never get into debt and manage your finances properly seems to have no weight with the banks. No wonder they all went bust.
- Frank, Home Counties, England.
Well yeah: if the last decade has proved anything it is that the Banks actively encourage people to run up debts so they can make fat profits from outrageous charges and interest. Shouldn't the Government do something about that . . . ?
- Roz, France
