Shape up your finances to avoid mortgage letdown

Imagine only being considered for a mortgage if you had built up substantial savings over several years and could show that you were able to live on less than your salary.

This is set to become the reality for many first-time buyers as the credit crunch takes hold and lenders limit their best deals to lower risk borrowers.

Until recently, borrowers have been willing – and in many cases able – to stretch themselves to the limit of their financial budget to get onto the first step of the property ladder.

Rising house prices meant that in many cases they had no other option but to take such a risk.

There have even been some reports in recent years of mortgage brokers helping borrowers to push through mortgage applications with inflated incomes. Stories emerged of lenders turning a blind eye to florists and builders claiming to be earning annual salaries of £150,000 in order to get a larger mortgage.

But now both borrowers and lenders are revealing a more cautious attitude about the housing market and reigning in the degree of risk they are prepared to take.

New research from Abbey reveals that nearly two-thirds of prospective first-time buyers have decided to delay buying their first home amid growing concerns about the economic slowdown and house prices.

Meanwhile, nervous lenders are also reacting to the credit crunch by being more selective about the mortgages they offer. As many as a third of lenders have reduced the maximum loan to value that they are prepared to offer in the last year, according to statisticians Moneyfacts.

Even Halifax, Britain’s largest lender, has lowered its loan to value from 97pc to 95pc.
But the big news has been the amount of lenders which have pulled out of the 100pc mortgage market. With talk about house prices being over inflated and set to tumble, lenders are no longer willing to take the risk and lend such a high percentage of the value of a home.

Well-known high street names, such as Alliance and Leicester and Abbey, have pulled out of the 100pc market and more lenders look set to follow as the true extent of the credit crunch unfolds.

So where does this leave homebuyers? The housing market is certainly changing and if you are looking to secure the best mortgages on offer, borrowers must now be looking to borrow significantly less than the full purchase price, have a good credit record and be able to move quickly.

Without fulfilling these criteria, borrowers may find themselves hard pushed to find a competitive deal.

Securing the mortgage deal of your choice is becoming that much harder, but by making sure that your finances are in the best possible shape before you approach a lender or broker, you’ll be making sure that you are in a strong position in these changing times.

By Myra Butterworth, personal finance reporter for The Daily Telegraph

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