Why Is my mortgage in principle so low?
In this brief article, we are going to answer the question: Why Is my mortgage in principle so low?
Why Is my mortgage in principle so low?
Your mortgage in principle may be so low due to the following reasons:
- The property
- The type of mortgage
- The mortgage lender has not assessed your true mortgage affordability
- The mortgage lender uses a low-income multiple
- Your mortgage affordability is low
One main reason why your mortgage in principle could be so low is due to the type of property you are applying for a mortgage for.
Most mortgage lenders will have strict lending criteria on the type of buildings they could lend on and the maximum loan-to-value rates they could offer on each building type.
If your property type fits into this category e.g grade 2 listed property then you may find that mortgage lenders will offer you a low mortgage in principle and likely a low mortgage offer.
The type of mortgage
One main reason why your mortgage in principle could be so low is due to the type of mortgage you are applying for.
Most mortgage lenders will have strict lending criteria on the type of mortgages they offer and this will include maximum loan to value rates for each mortgage type.
The mortgage lender has not assessed your true mortgage affordability
A very short and simple reason why your mortgage in principle could be so low is that the mortgage lender has simply not assessed your true mortgage affordability.
The mortgage in principle is not your mortgage offer but rather a very basic assessment of your mortgage affordability typically based on your income multiple and a soft check of your credit report.
The mortgage in principle check just tells the lender that you are likely someone they may want to lend to and provides you with a very rudimentary scale of how much they may be willing to lend to you.
It is by no means a definite number and the true amount the mortgage lender may be willing to you will be detailed in the mortgage offer.
For a mortgage lender to assess your true mortgage affordability they will have to undergo a full & hard credit check to view your credit score and history.
They will have to assess the property you are looking to purchase, the stability & reliability of your income, your current debts and have a complete understanding of your disposable income.
None of these things are done by any true margin when you make a mortgage in principle application.
The mortgage lender uses a low-income multiple
Your mortgage in principle may also be low because the mortgage lender has a low-income multiple and strict lending criteria.
When assessing an initial amount you may be able to borrow, the mortgage lender will use an income multiple to determine that figure.
In the UK, the income multiples could be as low as 3 to as high as 6.
If the mortgage lender you have applied to has very strict lending criteria which restrict it to such low-income multiples then you may have received a low mortgage in principle.
Your mortgage affordability is low
Another reason why your mortgage in principle could be low would be if your mortgage affordability is low.
Whilst most mortgage lenders do not carry out a full mortgage affordability check at the point of offering a mortgage in principle, some of the checks they carry out may have led them to offer you a much lower mortgage in principle.
Some of those checks could be your income and credit score checks.
If your current disposable income is not high enough to afford the mortgage then the mortgage in principle would be low.
If your credit score is low due to bad credit such as CCJs, bankruptcies, debt relief orders, IVAs, home repossessions etc then your mortgage in principle would be low.
Your credit score and history is a very big part of your mortgage affordability and you should spend enough time building it before you apply for a mortgage in principle.
How to improve your credit score
You can improve your credit score by doing the below things but you should be aware that improving your credit score will take at least a few months.
Open a bank account or credit account
The simplest thing you can do to establish or improve your credit score is to open a bank account or any other credit account.
By opening a bank account you open an account that gets reported to the credit bureaus as an account on your credit report.
The longer you have this account open for the longer you will have a credit history. It usually takes 3 years from you opening an account that gets reported on your credit file before you will have any credit history which can be seen by others.
Opening a bank account also allows you to have an account on your credit file with a verified home address. This means it will be easier for you to access credit products in the future.
A bank account might also be the easiest way to a credit card as banks are more willing to offer credit cards to account holders as they can view your account history and see how credit worthy you are even if you have a low credit score.
Ask your bank for a small overdraft facility
To Build credit you need credit so one of the ways to improve your credit score or build credit is by having an overdraft. You then need to show good behaviour when you have access to this credit.
By asking your bank to give you an overdraft facility you will have a credit account open on your credit file which boosts your credit score.
You will also have the ability to use your available credit, sticking to the 30% maximum credit utilization golden rule per credit account and thereby showing good credit behaviour which should boost your credit score even further. Always repay your overdraft as soon as you can to avoid any fees.
Get a Household Utility in your name
Some utility accounts are now being reported on your credit file and having one in your name is a very good way to improve your credit score. This means that your payment history on your gas, electric and telephone service will affect your credit score.
By getting yourself named as the account holder on these services you can establish and improve your credit score if your bills are paid on time and there are no balances or defaults on the Utility account.
If you live in a shared accommodation be sure to avoid any disputes and get payment for utilities well in advance so as to avoid any of your house mates holding you hostage and ruining your credit file.
Do you live with your parents? Ask them to put your name, date of birth and address on the utility bill. This will open a new account on your credit file and ensure you begin to get credited for the regular payments being made on the account.
If payments are missed on the account this could negatively affect your credit score so you must ensure payments are not missed.
You can also simply get a cheap phone on contract. A £5/month contract will be achievable with little or no credit history as the risk of default is very low and making regular repayments to your phone contract will boost your credit file.
You should avoid applying for more expensive phones with no credit file or score as this could damage your credit score even further even though you don’t have one.
Not all utility providers report your payment history to the credit bureaus so you may want to inquire with the utility provider before opening an account.
Keep your credit utilization below 30%
Your credit utilization is one of the factors that affects your credit score. The golden rule is to use no more than 30% of your available credit. If you are currently using above this then reducing your credit utilization below this limit will help improve your credit score
Pay down your credit card balance & other debts
Credit card balances and credit debts are recorded on your credit file. These balances have a negative impact on your score(especially when your revolving debt is over 30% of your available revolving credit) as well as costing you in interest rate charges and fees.
Paying down your credit card balances, loan balances or any default you have on utility and credit accounts will help improve your credit score.
Paying your credit card balance in full each month
Making only the minimum payment on your credit card means you have an outstanding balance which is recorded on your credit file.This negatively influences your credit file. Paying your credit balance on time full in each month will help improve your credit score
Make your credit repayments on time
Missing credit repayments negatively impacts your credit score. Keeping up with your monthly credit repayments will see your credit score improve gradually.
Making your credit repayments on time will also ensure you avoid negative credit markers such as:
- County court judgments
- Missed repayments
Get on the electoral roll
The easiest way to improve your credit score is to register to vote as this data is recorded on the public register which the credit bureaus check and include in your credit file. This is the first way to prove your identity and by far the easiest.
In the future when you apply for credit or a credit check is done, this will be the basis of their verification method for you and helps make you seem more creditworthy. You should check with your local council here if you are already on the electoral roll and if not you can register to vote here.
If you are not eligible to vote in the UK you will not be able to get on the electoral roll. In this case you can get a similar benefit by submitting a document to either Experian, Equifax or callcredit proving your identity and address. You can then ask them in writing to confirm that they have verified your identity on your credit file
Get a credit builder card
To improve your credit score you could get a credit builder card. Credit Builder cards are similar to secured credit cards as they are targeted towards people with low or no credit scores.
Credit Builder cards do not require security deposits but as with secured credit cards they will have low credit limits and high APRs.
A student credit card will likely be available on the same terms as a credit builder card. The best place to get this might be from your bank as they will be more likely to approve you for this type of card due to already having an idea of your income and expenses.
Store credit cards are usually easy to get approved for too.There are also credit builder prepaid cards which charge a monthly fee which is then recorded on your credit file as repaying a debt. This helps you build your credit score.
Get a secured credit card
Secured credit cards can be used to improve your credit score as they allow you to show you can make credit repayments, they add to your available credit which will improve your score and they allow you to show a low credit utilization which will improve your credit score.
Getting approved for most credit cards will be difficult if you have a low credit score but a secured credit card can help you overcome this.
Secured credit cards will approve you if you pay a deposit as part of your secured credit card application.
This deposit is usually your credit limit or a percentage of your credit limit. Secured credit cards aren’t very common in the Uk.
Capital one was known to offer one and you should contact them to see if this is still available.
You should be aware that secured credit cards will have low credit limits and high APRs. This can lead you to fall into serious debt if you fail to keep up your monthly credit repayments.
Get a credit builder loan
Another way to improve your credit score is by using a credit builder loan.
Credit Builder loans, just as they sound, help you build credit. The idea is you take out a loan but rather than receiving the loan funds these are deposited in an account(usually to earn interest) and you make repayments to the loan provider every month.
As you make these loan repayments on time your credit file records this and your credit score improves. At the end of the loan term you get all your loan repayments and whatever interest you have gained.
Loqbox is a credit builder loan provider in the UK.
Get a cosigner for a credit card or loan or become an authorised user
If you can’t get a credit builder loan, credit builder card or secured credit card then your next bet to help you improve your credit score will be to get yourself a cosigner on a credit card or loan.
You should really only do this if you are likely to repay your credit cards or loans on time and in full every month.
If you fail to make your credit card repayments on time then this may affect your co signer’s credit score too. If you make these repayments on time your credit score will rise and the payments will be registered on your credit file for at least 6 years.
Getting a cosigner on a credit card or loan creates a financial relationship between yourselves. This means any negative behaviour from them might affect your credit score negatively and vice versa.
A cosigner essentially allows you to qualify for credit and in some cases cheaper credit. A cosigner will also be legally responsible for any debt owed on the account if you default.
Another way to help improve your credit score is by becoming an authorised user on someone else’s credit card.
The difference between authorised users and cosigners isn’t that much. Becoming an authorised user on someone else’s credit card will help you improve your credit score if the main card holder makes all their repayments in full and on time each month as well as keeping their credit balance low.
some credit card companies might not take you into account and may not collect this data and hence report it on your credit report.
You should contact the credit card company asking them to report the fact that you are an authorised user on the credit card to the credit bureaus.
Becoming an authorised user does not give you any liability, so if the main card holder defaults you won’t be held liable but it does affect your credit score if the account is mismanaged or goes into default.
Keep your credit accounts open as long as possible
Closing credit accounts can negatively impact your credit score as this reduces the number of accounts with a credit history. This is especially worse if the credit account you close is one with a long history. The account will no longer be open and will therefore not count towards the majority of your credit score.
Unused credit accounts which don’t have long histories can be closed as they do not add to your credit score. Having access to too much unused credit may also be seen as negative.
Avoid payday loans
Most lenders look down on payday loans as they view people who take out these loans to be desperate and hence financially irresponsible.
Paydayloans will therefore have a negative influence on your credit file and you should avoid them.
Avoid making too many credit applications
Making applications for utility or credit can reduce your credit score. This is because everytime a utility or credit provider is about to open a new account they will do a hard credit search. You should only apply for credit or utility which you are pre-approved for. If you make multiple credit applications then multiple hard credit searches will be done on your credit file.
This means your credit score will go lower as the credit bureau will view too many credit applications as you being desperate. If you stop making blind credit applications then your credit score will likely improve.
You should always use an eligibility checker to see if you will be approved for credit or utility accounts before you apply. These checks are done with soft credit searches which only you can see.
Report your rent to the credit bureau
Another way to improve your credit score is by reporting your rental payments to the credit bureaus.
If you currently pay rent or paid rent within the last 3 years you will be able to report your rental payments to the credit bureau and this will be an account on your credit file showing your payment history.
Paying your rent on time will ofcourse improve your credit score whilst missed payments will reduce your credit score. The scheme is known as the rental exchange scheme and is currently only being offered via Experian.
Increase your available credit limit
Increasing your credit limit will reflect on your credit file and improve your credit score as it shows lenders are willing to trust you with more money as well as reducing your current credit utilization (how much you spend in relation to how much credit you have available. The golden rule is a maximum of 30%).
You can ask your current card provider to increase your credit limit or let you know if you will be eligible for a credit limit. Also ask if they intend to run a hard credit search on you and do not consent to this unless they will pre-approve you for a credit limit increase.
Open a new credit card account
Opening a new credit account will be your next option if your current credit card provider will not increase your credit limit. You essentially accomplish the same things as your available credit limit increases.
You must repay your balances on your credit card account every month and avoid using over 30% of your available credit. This is a good option if you want to improve your credit score.
Have a good credit mix
Mix things up a little by having a varying degree of accounts on your credit file. Like your partner, credit bureaus like to see you mix things up a little bit. By this, we mean that a proportion of your credit score is ranked by how diverse the different types of credit you have been utilizing is.
Revolving accounts (i.e. credit cards, store cards)
Installment accounts (i.e. home equity line of credit, auto loans)
Open accounts (utility accounts)
Increase your variety and your credit score will increase.
Ensure your registered address is the same on all your credit accounts
Any active accounts on your credit file should display your correct address. You can check the addresses on your accounts by viewing your credit file. Make sure all active accounts list your current address. This may improve your current credit score.
Check your credit score regularly
Checking your credit score regularly is one of the ways to ensure that the information on your credit score is indeed up to date.
It also informs you on what your credit score is and this allows you to have an idea of which credit providers may lend to you.
If you find any errors on your credit score or report you can contact all of the credit bureaus or the specific credit bureau where the error is mentioned and ask them to make the necessary corrections.
The credit bureaus will check and investigate the matter but in the meantime put a notice of correction on the record entry so that any third parties who are checking your credit score will be aware that the entry may be incorrect.
The credit bureau will usually let you know the outcome of their investigations within 28 days.
Some of these credit bureaus may charge you a fee to view your credit report so what you can alternatively do is request a statutory credit report which is a free credit report which each credit bureau must provide to you upon you requesting it.
Alternatively, you can also use credit score services such as Checkmyfile and clearscore to check your credit report.
Remove negative financial links
You should check your credit file for financial links that you don’t recognise. Some financial links can reduce your credit file as this might mean your credit score is going down due to someone else’s bad credit behaviour.
Any financial links which seem out of the blue can be removed from your credit file. Financial links can be generated by just sharing apartments with someone else, getting a loan with someone else, etc. You should ask the credit bureaus to correct this. As you remove these negative financial links your credit score should improve.
Can a lender increase your mortgage amount from your mortgage in principle to your mortgage offer?
Yes, a mortgage lender can very well increase the mortgage amount on offer to you from what was indicated on your mortgage in principle to what is indicated on your mortgage offer.
The mortgage offer reflects what the mortgage lender views as your true mortgage affordability and could be much higher than what is on your mortgage in principle as, by this point, more detailed checks on your credit score and history, your income, and the property would have been carried out.
In this brief article, we answered the question: Why Is my mortgage in principle so low?
If you have any questions or comments please let us know.