Q In 2013 we bought our house on a Scottish island for £229,500 on a 16-year mortgage. I am 51, my husband 56, so we now have a mortgage for the next 12 years. The house is big but the kitchen is tiny, and we have a large family. We are thinking about having a new kitchen built and there seem to be two options. We can either build one in our dining room for about £17,000, which would look lovely. Or we can go for broke and knock down the small extension that houses our existing kitchen and loo, and build an extension with kitchen-diner, utility room and office opening on to our large garden, which would cost around £50,000.
We owe £96,500 on our mortgage and, as the house is valued at £275,000, we could remortgage to fund either option. The only problem is that our credit ratings aren’t perfect. My rating is good to excellent but my affordability score is poor. My husband’s is average. We do, however, have quite a lot of personal borrowing, and are asset-rich and cash-poor, largely as a result of funding three of our kids at university, which means that credit card usage is high.
I don’t want to apply for a remortgage to be refused and this credit application have a knock-on effect on further applications. So shall we wait six months to get our finances a bit more level and then apply, or bite the bullet and apply now, or just forget it? KM
A When assessing an application for credit, lenders will calculate their own credit score for you using their own unique formula, and do their own assessment of whether you can afford any new credit, such as an increased mortgage in your case. Lenders do not use the credit scores produced by credit reference agencies, which are for your eyes only and designed to give you an idea of how lenders will view you and how likely you are to be offered their best deals.
What lenders do look at is how much you owe compared with your income, how much of your available credit you are using and how much spare cash you have after paying living expenses. They will also take into account the historical information held by credit reference agencies, which tells them how well you manage your debts and whether you have missed repayments, as well as whether you have defaulted on any loans and/or been declared bankrupt in the past six years.
You don’t need a credit reference agency score to tell you that if your mortgage and other debt repayments are – or will be – more than 80 per cent of your income, you are likely to be refused more credit. As you will be if you are maxed out on your credit cards and only making the minimum repayment each month. Lenders will also take a dim view if you have missed repayments in the past, because they worry about history repeating itself.
So yes, it would be a good idea to get your finances in order before applying for a mortgage. If you are turned down for a loan, you are right in thinking that it would have an impact on future mortgage applications. However, making a soft application, by talking to your current lender, for example, and getting an “in principle” agreement, won’t. A chat with your mortgage lender should also help you make your mind up about which kitchen-improvement option to go for. If you are not able to borrow £50,000, you won’t be able to have the big extension. If you can’t borrow an extra £17,000 either, you can forget a bigger kitchen altogether. But equally, you may find that you can borrow enough to fund a project that falls somewhere between the two options.
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