Will a trust deed prevent you from buying a home?
13th June 2011
In the current sensitive mortgage market it’s natural that those who wish to buy a home in the future are nervous about entering into a trust deed to deal with problem debts. The fear is that the negative impact of a trust deed on a credit record will effectively render the mortgage market ‘closed’, even after the trust deed has finished. In this article we will explain why, for some people, avoiding a trust deed for this reason may actually make the situation worse.
Shelter (the housing charity) recently made mention of a poll in a press release about first time buyers. Some people would assume these possible purchasers would like to see free and easy mortgage money available. In fact the conclusions were quite different. This group understood that such mortgage lending in fact leads to rising house prices and instability that could cause them financial and personal harm in the future.
The FSA seems to concur; they have pushed mortgage lenders towards stricter tests to check any mortgages they provide are manageable for the borrower. The CML (representing mortgage lenders) also agrees. They already have a commitment in principle, including income checking, affordability tests and interest-rate stress tests.
If the lenders, regulators and borrowers all agree their tighter mortgage lending makes sense it’s clear that tight lending will be with us for some time. What does this mean for an individual struggling with heavy debts but who is avoiding a trust deed in the hope this will boost their future house purchase chances?
Firstly you’re going to need a deposit to buy a home. If unsecured debts are draining your spare cash you may not be able to save for this deposit. This will keep you off the housing ladder unless you have the luxury of borrowing a lump sum from family members (or being given it).
Secondly, you’re going to have to pass an ‘affordability test’ in order to obtain a mortgage. It’s not as simple as ‘3.5 times earnings’ these days. Lenders will typically look at your commitments as well as your income. If you have high personal debt repayments then these will count against your capacity to borrow on a mortgage. For this reason you may not find you can borrow the sum you need.
Finally you need to be aware of ‘interest rate stress testing’. The mortgage lender doesn’t just want to know you can afford a mortgage on today’s cheap rates. They want to know whether you’ll be able to afford should interest rates revert to their historical levels of five or six per cent. Being able to just about afford a particular mortgage today doesn’t mean you’ll get it.
Commencing a protected trust deed will certainly hurt your credit record. It will appear on your credit file for six years and certain mortgage lenders will ask about it even after this time period is complete.
However, failing to deal with debt through measures such as a Scottish trust deed could have serious consequences further down the line. If your debt repayments are currently unaffordable it seems extremely questionable whether avoiding dealing with them will help you to obtain the mortgage you require.
A trust deed is not a suitable option for everyone and other options do exist. If you have problem debt levels you may already be excluded from the property market without even knowing it. Dealing with the debts effectively may, in the long-run, grant access to the housing market sooner than struggling to manage major debts for a prolonged period.
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