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It is often a dream of many adults in the UK to own their own home however according to the 2021 census, in England and Wales, 5.4 million households are renting, up from 3.9 million in the 2011 census. The Office for National Statistics (ONS) also said that the average rent in England as of 31st March 2021 was £946 per calendar month. So if millions of people are paying this level of rent per month why are they told they cannot afford a mortgage, even when the monthly payment is lower than rent? It could be you have a poor credit history and need a bad credit mortgage, low savings or deposit or even the type of job you have. This blog will explore the key factors that can prevent people from being able to secure a mortgage.
I'm paying rent but can't get a mortgage - why does this happen?
There are several reasons why mortgage applications can be rejected and just because you are able to make your monthly rent payments, doesn’t mean you are in a position to have a mortgage.
We understand that when this is your first step into home ownership, and you are having trouble securing a first time buyer bad credit mortgage it can feel even more disappointing. Below are some of the reasons why you may be able to afford rent but are considered too high risk for a mortgage so you can try and improve them and increase your chances of acceptance.
High housing prices and low savings
The cost of purchasing a home may be out of reach for many people, even if they can afford the monthly rent. One of the main issues to buying a home may not be how much you can afford each month but how much you have saved as a deposit. To get a mortgage you often need at least a 5% deposit with many lenders requiring at least 10% or more. The ONS said the average UK house price was £296,000 in October 2022, which is £33,000 higher than the same time last year. That means to buy the average home you would need a deposit of between £14,800 and £29,600 as a minimum. So if you are already paying rent of around £1000 per month it can take a long time to save up this kind of deposit.
The problems don't stop here though. If you can save the deposit the lender will have a minimum amount of income required to lend you the remaining money. For example, if you were buying the average home with a 10% deposit you would need to raise a mortgage for £266,400. To borrow this amount of money you would need a minimum annual income of anywhere between £50,0000 to 67,000.
High debt-to-income ratio
Lenders often look at a borrower's debt-to-income ratio, which is the percentage of their monthly income which goes towards debt repayments. If this ratio is too high your mortgage application could be rejected.
Typically, if your debt-to-income ratio is below 20% you will be classed as low risk and be able to have your pick of the best deals. If this ratio is below 50% you will usually still qualify for a mortgage but may get rejected if there are any issues with your mortgage application, such as poor credit history.
If your debt-to-income ratio is over 50% you will find it much more difficult to find a lender. There is a handful out there that do not apply a ratio at all but they usually only work with brokers such as Twin Pine Mortgages so they know you've had good advice.
Poor credit score
Lenders often use credit scores to determine the likelihood that a borrower will repay their loan. Having a low credit score means you might be considered a high-risk borrower and may be denied a mortgage. The problem will be increased if you combine a bad credit score with a low deposit and high debt-to-income ratio. If you have bad credit it's likely you will find it very difficult to get a mortgage from a high street lender. However, there are specialist lenders out there. For more information look through our bad credit mortgage page.
Self-employed or unstable income
If a person is self-employed or has an income that varies from month to month, they may be considered a higher risk and may be denied a mortgage. Why? Because lenders love certainty.
Very often self-employed people will have incomes that can rise and fall in line with their business levels, economy or even the season. A lender would be concerned about your ability to repay the mortgage if your income dipped for a sustained period of time. However, if you've been self-employed for a while and can show a track record of income over a period of 2 or 3 years you should still be able to get the best deals.
Other unstable income would be classed as Zero-Hour contracts, working in the gig economy, temporary contract work or agency work. Working in these types of roles will make it harder to get a mortgage again because of the lack of certainty. But as with the self-employed if you have a track record and can demonstrate your income is sustainable you are in with a better chance. If you fall into this category it would really pay to have a broker look over the market for you and give advice on the best lenders for your contract.
How Twin Pine Mortgages can help if you are paying rent but can't get a mortgage
Twin Pine Mortgages is a specialist broker that helps customers with bad credit mortgages and complicated situations. We've helped hundreds of people over the years reach their dream of moving from renting to owning their own homes. So if you are struggling to get a mortgage even though you are paying rent, we can help. We can look at what barriers are in your way and provide guidance on how you can move forward. So even if you just have a quick question, we'd be happy to help. You can contact us at hello@twinpinemortgages.co.uk or call 024 7601 7747.
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