‘I’m worried I won’t get a home loan’

Ashley Richardson, 30, lives in a fashionable part of town: Southfields in southwest London. She shares her one-bedroom flat with Harry, her partner, and the two are saving hard.

They have saved £25,000 towards a home deposit, but realise they need to save more if they are to take that important first step on to the property ladder.

Ashley says: “We’re planning on buying a home in Surrey with a value of about £300,000. That’s with a 10 per cent deposit.”

There is a fly in the ointment, though, as Ashley explains: “I have a poor credit history, having missed some payments on a loan in 2013. These are on my credit file, which shows as ‘poor’ on Experian, ClearScore and Noddle. I am worried that I won’t be accepted for a mortgage.”

Ashley has a good job, which puts her in the higher-rate tax bracket. She runs Gorkana Jobs and is eligible for a bonus each year. While trying to save for her first home, Ashley pays £600 a month in rent, about £250 on food and bills, and £100 on travel. She also spends £200 on her credit card, but manages to plough £650 into savings accounts.

Ashley says: “My partner has very few debts — maybe £500 on his credit card, but he’s clearing it. I’m also clearing chunks off my credit-card bill each month. It’s on an MBNA card, and interest is at 18.9 per cent APR. I don’t want to do a balance transfer because it will put a search on my credit file. On the upside, I have paid off my student loan.”

When it comes to savings, Ashley has taken advantage of the Help to Buy Isa, putting in £2,400, and has more than £8,000 into a Virgin account.

With the money that Harry has saved, the couple are on course to meet their target for a deposit.

In addition to their savings, Ashley and Harry have £200 in Premium Bonds, although they are yet to win anything. “Does anyone ever win?” asks Ashley.

Ashley has a workplace pension, with about £7,000 invested so far. She places 3 per cent of her monthly wage in the fund, which is matched by her employer.

When she isn’t working, Ashley has many hobbies. She says: “I was on the BBC’s Think Tank quiz show and won £1,200. For people with good general knowledge it’s an easy way to get free cash. “I also enjoy cooking. As Harry and I are saving, we’ve not been able to go out much this year, so we tend to host dinner parties and enjoy an evening in with Netflix.

“In my spare time I run a blog, sosolusso.co.uk, with a friend, which is about luxury gifting. In more affluent times I love to travel and visit the wine regions of the world.”

The couple have also invested £200 in a start-up crowdfunded company. Ashley says: “I got into this through Crowdcube. Adzuna, the company I have the money in, was on my radar because of my work, and when I heard it was crowdfunding I felt it was an interesting prospect.

“Adzuna is doing well. It is moving to bigger offices, so I hope that one day I will see a return on this investment.”

James Jones, head of consumer affairs at Experian, the information services group
“Ashley should try to build up her credit score before applying for the mortgage, particularly if she’s hoping to bag a competitive deal. That said, if Harry’s score is healthier, this could counterbalance Ashley’s poor rating.

“Unfortunately the missed loan payments are likely to linger on Ashley’s credit report for three more years. However, if there were mitigating circumstances, such as losing her job or going into hospital for an operation, she could send the three credit reference agencies an explanatory note. The note won’t increase her score, but it will be seen by the underwriters assessing the loan and may help.

“Another key factor is the credit card and overdraft debt, which has a bearing on calculations of risk and affordability that mortgage lenders look at so closely these days. Paying down, or, better still, paying off this existing borrowing could give Ashley’s score a significant boost.

“As tenants, Ashley and Harry might consider registering with a service called CreditLadder. It is working with landlords and Experian to strengthen people’s credit reports by adding in their regular rent payments. Building up a positive-payment history can help make up for past misdemeanours.

“Multiple credit applications smack of desperation and can be bad news for scores. However, a single application is unlikely to be a significant factor, especially if made more than six months before the mortgage proposal. So if Ashley could secure a 0 per cent balance transfer card now, she could use the money saved on interest charges — minus any balance transfer fee — to repay the debt more quickly and lift her score faster.

“Once Ashley’s credit score has improved, and she and Harry have saved enough for that all-important 10 per cent deposit, it would be sensible to secure the services of a whole-of-market mortgage broker. This can be particularly helpful for people with past credit hiccups.”

Rachael Griffin, financial planning expert at Old Mutual Wealth, the investment manager
“Research shows that having clear goals and targets is likely to help Ashley to realise her financial objectives. Ashley should try to project how much she needs to have saved to fulfil her property-owning plans. That will give a structure to her savings plan and she will be able to think ahead, knowing she’s on track to hit her financial goal at a certain point.

“When she’s planning how much she’ll need, Ashley should factor in additional costs, such as stamp duty, solicitors’ fees and a homebuyer’s survey. Stamp duty alone will cost £5,000 if she buys a £300,000 home.

“Ashley should make sure that after all expenses she still has cash savings for emergencies. Setting aside at least three months of expenses is a good idea. It is also vital to get insurance cover to protect both partners if something happens to the other.

“Putting money in a Lifetime Isa [Lisa] is smart. They have been pitched by the government as a scheme to help first-time buyers and people saving for later life, but in reality they are most useful to aspiring homeowners. Remember that the top-up you receive on the Lisa savings will apply only when Ashley completes the transaction, meaning it can’t be used for an ‘initial deposit’. Her solicitor will process this, but she’ll need to close the account with the bank.

“A professional mortgage adviser will help Ashley to understand how her credit rating could affect borrowing. They will also be able to guide her through the application and reassure her that she’s getting a good rate.”

Emanuel Andjelic, co-founder and chairman of Squirrel, the money management service
“It’s great that Ashley is managing to save so much every month, but the reality is she’s been doing that at the expense of her debts. She should immediately clear her overdraft, credit card and store card using her Virgin savings. These debts are costing her more than £1,300 a year in interest, while the savings account interest is a paltry £30 a year after tax.

“There’s no point Ashley worrying about her credit score. She just needs to get on and start improving it. The credit reference agency scores are just a guideline. Lenders use their own system, with each taking a different approach. Paying off her debts will be a giant leap in the right direction. Her decent income and sizeable deposit will work in her favour too. The missed payments from 2013 will carry less weight as time goes on, so she must make sure not to miss any other payments from now on.

“If Ashley wants to get on the housing ladder more quickly, she might want to consider the government’s shared-ownership scheme. This is where you buy a portion of a property and rent the rest from a housing association. You can buy additional shares in the property over time. Ashley’s savings would buy a sizeable share right away.”

Ashley’s response
“I decided to sort out a 0 per cent credit card, and I think in the long run that will save me about £1,000 in interest and fees, so I’m chuffed. I’m sure that consolidating my old credit card and store card will help with the credit score, given that I’m now spending less on my card and at a lower interest rate.

“I get the point about shared ownership, but Harry and I don’t feel comfortable with it. We are hoping this won’t be a problem because we’ve planned our combined resources down to the last penny and reckon we can save £42,000. Because we plan to spend £30,000 on a deposit, that gives us enough to cover other essential outgoings, such as stamp duty, and provide a buffer for unforeseen extras.

“We found the advice really helpful. We appreciate the comments, because we are not financial experts and I’ve worried we could make mistakes.”