How Just Mortgage Brokers Can Help You
If you are currently on a debt management plan (DMP), or have completed a debt management plan in the past few years, it will, of course, affect your ability to get a mortgage. However, it does not necessarily mean that you will not be able to obtain finance to buy a new home or be able to remortgage your existing property.
There are many lenders in the market who specialise in providing mortgages designed for people who have had credit problems, so even if you have been turned away by high street banks and building societies, do not give up; it may still be possible to get a mortgage from a more specialist lender.
What is a DMP?
A debt management plan is an informal repayment arrangement between you and anyone you owe money to for what are classed as non-priority debts. Non-priority debts are things like store and/or credit cards, loans, and other credit agreements, such as a mobile phone contract. To be able to take out a DMP, you need to be able to afford your rent or mortgage, council tax, utility bills and other living costs, plus a contribution to your non-priority debts.
DMPs are usually arranged and managed by a DMP practitioner. The practitioner will act as a buffer between you and your creditors – they will negotiate with them on your behalf, and you will make regular monthly payments direct to them. The DMP practitioner will then pay your creditors the agreed monthly sum. A DMP practitioner may take a fee or may be free for you to use. Fee charging DMP practitioners usually charge an initial arrangement fee plus a handling charge for each monthly payment they process. The three main free DMPs are StepChange, Payplan and National Debtline.
One thing to bear in mind is that unlike with an Individual Voluntary Arrangement (IVA), the interest on the debt is not automatically frozen. Because of this, and because you will be paying back less under the DMP than you would be without one, it can take a long time to clear debts.
Because DMPs are not legally binding, you can cancel an arrangement at any time. There is also no legal obligation for you to avoid taking out more credit.
I am on a debt management plan – can I get a mortgage?
If you are currently on a debt management plan, it may be more difficult for you to successfully apply for a mortgage than if you have completed your DMP. However, lenders who specialise in lending to those with past credit problems are often more willing to look at your overall financial circumstances and assess your application on an individual basis, rather than automatically declining the mortgage outright.
Mortgage on DMP
When assessing a DMP mortgage application, in addition to the usual criteria – such as evaluating your income and expenditure (including your monthly DMP payment) to calculate affordability – the lender will also take account of the severity of any other credit problems, and how long ago they occurred.
If, for example, alongside a current DMP, you have had more serious problems with credit in the past – such as bankruptcy or an Individual Voluntary Arrangement (IVA), or you have had a property repossessed – you may find it more difficult to be accepted for a mortgage. Less serious issues, such as late payments, or limited arrears that have since been cleared, may not present so much of a problem to the right lenders. As a general rule, the older the entry on your credit file, the less negative weight it will carry when a lender is making a decision.
Why is it harder to get a mortgage with DMP?
High street lenders make decisions as to whether to lend based on a credit score. The information used to determine your credit score is gathered by the credit reference agencies. The three main ones being, Callcredit, Equifax and Experian. Just to be clear, the credit reference agencies only provide the information, it is the lender that decides how to interpret it; it is always the lender’s decision as to whether they agree the credit.
In order to qualify for the better mortgage deals on offer, you need an exemplary credit score and, often, a sizable deposit. If you are dealing with bad credit, the chances are you will have neither of those things. Every month you make a payment under your DMP, it can show up as an underpayment on your credit report. This is because although you have come to an agreement with your creditors under the DMP, they may still record the reduced payments you make as defaults, as you are unable to pay the amount you initially agreed to pay – you broke the terms of the initial credit agreement you had with them. Also, if you had a substantial sum of money to use as a deposit, the chances are you would have used that to pay off (or pay down) your debt.
All that combines to mean the number of lenders and mortgage deals available to you are limited by your DMP– but it is not necessarily impossible to get a mortgage.
Will it affect how much I can borrow?
The maximum amount you will be able to borrow against the price of the property (the ‘loan-to-value’ ratio, or LTV) will be affected by your credit history. While the government’s current Help to Buy scheme aims to make lending up to 95% of a property’s value more widely available, being allowed to borrow up to this level of loan-to-value with an active or historical DMP is unlikely. If you have a history of defaults or County Court Judgments (CCJs) recorded against your name, then lending is more likely to be restricted to a maximum of 85%, meaning you will need a deposit of at least 15% of the purchase price – and more serious credit problems may mean you require an even larger deposit.
Deposit for DMP mortgage
The main issue is arguably that when you are on a DMP, you use all your disposable income to pay down your debts, meaning there is nothing left to allow you to save up for a deposit.
It may be that you have an asset or assets that you can sell or cash in, but again, you may find yourself under pressure to put the money raised towards your debts. Also, if you are cashing in a financial product with linked life assurance, there are additional risks attached. Always take advice from a financial adviser if you are considering such a course of action.
Mortgage affordability with DMP
Adverse credit may also affect the affordability assessment that the lender uses to calculate how much you can borrow, so your total mortgage borrowing may be limited by a DMP compared to the market as a whole.
Lenders are aware that people will not just have one debt: their mortgage. Many people have loans, cards and other credit agreements as a matter of daily life. However, the amount of debt, and the nature of it, will have an impact. If you are carrying a sizeable amount of debt, and especially if that debt is covered by a DMP, then a lender will question carefully just what you can afford to pay.
On the plus side, having put a DMP in place shows that you are back in charge of your finances and taking positive steps to clear your debt.
Another consideration is that if you are currently renting and your rent is high, or if you are trying to downsize, you may actually end up paying less with a mortgage, effectively making your combined monthly commitments more affordable.
Remortgaging with DMP
A remortgage means that you stay in the same property, but take out a new mortgage on it. People do this for various reasons – maybe to carry out home improvements or renovations, or to free up cash for some other reason.
Remortgaging might be an attractive proposition if you are on a DMP, not least because you might be able to release enough equity to clear – or at least substantially reduce – your outstanding debts.
There are a number of factors to consider when looking to remortgage with a DMP. The first is that even though you already have a mortgage and may be looking to remortgage with the same lender, they will assess your loan application again against whatever criteria they work to. This may mean that even though you already have a mortgage with them, they will not offer you an additional loan.
You will also need to be in a position where you own a good percentage of your home. The amount of your home you own is the market value less the outstanding debt, so the amount by which the value has changed since you bought it is in your favour. We mentioned LTV above, and with a remortgage the LTV percentage permitted may be higher – around 80%, or even 85% in some cases. Say you have a property valued at £200,000 and a mortgage of £170,000; the LTV is currently 85%, so it is unlikely you would be able to remortgage. If the value of the house was £300,000 and the mortgage £100,000, then with a LTV of 33%, you are likely to be able to release some equity, up to 80% or even 85%.
Do not forget that affordability will still be a consideration, so a lender’s decision will be influenced by the size of the debt covered by the DMP.
What about if I have completed a debt management plan?
Many of the points mentioned above will also apply if you have completed a debt management plan – and if you have had a DMP at any time in the past six years you may find it difficult to get a mortgage with a mainstream high-street lender, as that is how long details stay on your credit file – but in general you are likely to find lenders more willing to give you a mortgage if you have seen a debt management plan through to completion than if you are currently on one. Obviously, this will be considered alongside an assessment of affordability and any other adverse items showing on your credit records.
Getting a mortgage with settled DMP
If you are looking for a mortgage having settled a DMP, the first thing do is to get a copy of your credit report. Check first that the basics are correct – contact details and electoral roll registration. Incidentally, if you are not on the electoral roll, register as soon as possible, and make sure it shows in your credit report. Not being on the electoral roll, or being on, but it not showing on your credit report, can adversely impact your credit score.
Next, check the actual credit details. Are there any defaults showing for debts that are now settled? If so, write to the companies involved and ask if they will update the status of the debt from default to satisfied. They are not obliged to do that, but if they are prepared to, then those defaults will be noted as such on the report.
Are there any incorrectly recorded adverse details? If so, again, write to the companies involved and ask for those entries to be removed. (Copy the letter to the credit reference agency as well.)
Take steps to rebuild your credit history. Borrow a small amount and pay it back as agreed – or take out a credit card with a small credit limit, use it every month (perhaps for groceries or petrol) and pay it off in full each time. A good tip is to set up a direct debit to ensure the minimum payment is always made on time and thus not show as a late or missed payment on your credit file should you forget to pay by the due date.
How do I get a mortgage with a DMP?
A mortgage broker with specific experience of helping people with debt management plans will be able to search the mortgage market for the lender and mortgage deal that best meet your circumstances. Often, this means getting a mortgage from a more specialised lender rather than one of the big name banks or building societies. Here at Just Mortgage Brokers we have experience in this field and can help find the mortgage that is right for you – contact us today to discuss how we can help.