by: Michael Challiner



Homebuyers with spotless credit records are being warned that they could find it difficult to take out a new mortgage as banks continue to tighten their lending criteria. Banks and building societies are rejecting loan applications at short notice as house prices continue to fall and they become increasingly jittery about the growing threat of unemployment.

Even borrowers with deals that have several years to run are not safe. Banks have been writing to homeowners to demand that loans are repaid in full within 30 days, long before the end of the mortgage term. Most mortgage contracts contain a clause that allows the lender to pull the plug on the agreement, even if the borrower is not in arrears.

In fact, legal experts say that the latest mortgage contracts are littered with vague and open-ended terms and conditions that allow lenders to do almost anything. For example, the conditions attached to a mortgage can be changed "for any valid reason", according to a contract from one leading lender.

One solicitor said: "Homeowners need to read the terms and conditions more carefully than ever before. It could be argued that a clause allowing lenders to withdraw credit with 30 days' notice is unreasonable, but this has yet to be tested in a Court of Law."

The Prime Minister has been putting pressure on lenders to boost mortgage lending and reduce rates in line with the Bank of England base rate, but even state-owned lenders have refused. Last week Northern Rock said that it was passing on only half of the latest base-rate cut to its variable-rate mortgage customers - 0.25 per cent rather than the full half a percentage point.

Banks are struggling to source funding to offer new mortgages. Most banks now use retail deposits to fund lending, but low interest rates do not help banks and building societies to attract savers. This is the biggest problem facing lenders and the only thing they can do is to pick customers who pose the safest risk.

Against this difficult backdrop, experts say that banks are using any excuse to reject customers. If a lender suspects that a borrower has submitted an application with information that is not 100 per cent accurate, it is likely to be refused. A change in circumstances can also worry lenders. Banks are also examining the credit histories of new customers more closely than ever. Lenders have been known to reject applications because of missed mobile phone payments or because a borrower has been overdrawn on his or her bank account too frequently.

Lenders have also tightened the rules on income multiples. Many banks are unwilling to offer loans worth five or six times a borrower's salary, which was common during the boom times. Performance-related income, such as bonuses, is also now routinely excluded from affordability assessments. If a borrower secured a previous deal with high income multiples, banks will be wary of extending the same level of credit again.

There has also been no let-up for first-time buyers. One mortgage deal in four now requires a deposit or equity stake of 40 per cent, as lenders seek protection against falling house prices and the risk of negative equity.

Mortgages aimed at borrowers with smaller deposits are limited and considerably more expensive. The emphasis on low LTV lending means that falling house prices are also a headache for homeowners who need to remortgage.

A 150,000 pound mortgage on a home worth 200,000 pounds has an LTV ratio of 75 per cent, which is the maximum available now from a number of leading lenders. But if that home falls in price by 15 per cent, the same mortgage has an LTV ratio of 88 per cent.

There are ways to make yourself more attractive to lenders. Borrowers who do not need to remortgage or move house in the next year should pay off both capital and interest each month and overpay whenever possible. This will ensure that they have the maximum amount of equity possible when the time comes to take out a new deal. Some mortgage providers will charge a penalty for this, but most will allow borrowers to overpay by up to 10 per cent a year. This puts homeowners in a much stronger position.

You should order a copy of your credit record to check that all the information about you is correct. You can apply directly to the credit-reference agencies - Experian, Equifax and Callcredit - for your file.

After all it makes sense for borrowers to resolve any problems that would show up on a credit report by contacting the lender and clearing the debt.


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