Nearly half of first-time buyers have been rejected for a mortgage, survey finds

Nearly half of would-be first-time buyers have been turned down for a mortgage, a survey has found.

And nearly two-thirds (62%) said buying a home feels less achievable in current economic conditions.

Over a third (35%) have been rejected once for a mortgage. A further one in 10 (10%) have been turned down more than once, according to the survey of more than 1,000 prospective first-time buyers in August.

The most common reason given for rejection was that the applicant was self-employed or a contract worker, according to the research commissioned by Aldermore Bank.

This marked a change compared with the bank’s first-time buyer index carried out in March, when this was the ninth most common reason given for an application being declined. The most common reason for rejection at that time was applicants’ existing debts.

Other top reasons for prospective first-time buyers being turned down for a loan in the August survey included not having a big enough deposit or income and having a poor credit history.

A third (34%) of people trying to get on the property ladder said they were looking to improve their credit score by paying bills on time, paying off debts or registering on the electoral roll.

Some had also given up their self-employed status because they felt this might give them a better chance of securing a mortgage.

Many low-deposit mortgage deals have disappeared from the market since March as lenders grew concerned about the potential for house prices to fall.

In this scenario, home owners who had put down the smallest deposits would potentially be at the greatest risk of falling into negative equity – where the amount they have borrowed outweighed the value of their property.

The UK Government has plans for a new 5% deposit mortgage scheme, with further details yet to emerge of how these loans will be made available.

Jon Cooper, head of mortgage distribution at Aldermore Bank, said: “A decline for a mortgage can be a deflating experience for those looking to fulfil their dreams of home ownership. But do not despair as options for first-time buyers and the self-employed have broadened over the past decade.”

He said there has been a growth in specialist lenders who can handle more complicated applications.

Mr Cooper added: “The current generation of first-time buyers are now far more diverse, coming to the market with a wide range of financial backgrounds. But one constant is they all appear to find the process confusing and complicated and the pandemic has only heightened this.

“It may feel daunting at times so we would recommend seeking advice from a mortgage broker that can give a whole of market view and provide options specific to a new buyers’ individual circumstances.”

Here are Aldermore’s tips to help secure a mortgage if you are:

– Self-employed:

If an applicant’s income has been impacted by Covid-19, lenders will want to understand whether it will return to expected levels or have changed longer term.

If someone who is self-employed has had their income affected by Covid-19, they should provide detailed information to their broker or lender so they can outline the options.

– A first-time buyer:

Using a broker may help. Aldermore found nine in 10 (91%) prospective first-time buyers who had used a broker found them useful – but only 14% had used one.

Also, there are fewer low-deposit products available than before lockdown, which means those looking to get on the property ladder may have to raise a bigger deposit. For those with smaller deposits there are still options available, such as shared ownership or Help to Buy. The schemes available may vary depending on where in the UK the first-time buyer lives.

– Have credit issues:

There are quick steps which can help, such as registering on the electoral roll, closing unused credit cards and, if you can afford it, paying off an overdraft.

Specialist lenders will consider borrowers with county court judgments (CCJs) and other credit issues. You may need to pay a higher rate initially but making all your mortgage payments on time will improve your credit rating, making it easier to get a better rate when you apply for a future loan.