Published On: Tue, Jun 25th, 2019

Cheap mortgages: Why mortgage rates can rise due to credit score – even DURING repayment | Personal Finance | Finance

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A mortgage may be the way in which a person is able to become a homeowner. In order to get a mortgage, the lender will check a person’s credit score. The credit rating that a person has may affect whether or not the lender will decide to offer them the loan. What’s more, it may be that those with a poor credit rating are not offered lower interest rates.

The Money Advice Service website explains exactly what a poor credit rating can mean for you.

In addition to the possibility of being charged higher interest rates, it may mean that a person gets a smaller credit limit, or is rejected altogether.

“A lender doesn’t have to give you the interest rate they are advertising or that you see in best buy tables on comparison websites,” the website states.

Some lenders will determine rates on a “rate-for-risk” price system.

This means that the rate that a borrower is offered is dependent on the risk that the lender thinks they may represent when it comes to not paying the credit back on time.

The Money Advice Service also explains what the “representative APR” means when borrowers look at advertised loans.

“At least 51 per cent (just over half) of people applying for the product will pay this APR or better,” it states.

The money advice experts also explain how there are some instances in which all borrowers may pay this rate.

However, some lenders may also use the “rate-for-risk” pricing for up to 49 per cent of those it lends money to – hence potentially charging a higher rate of interest to these people.

“Before you apply for credit, ask the lender what APR and interest rate you will be charged,” the Money Advice Service warns.

“If they need to do a credit reference check before quoting this, ask if they can use a ‘quotation search’ (which doesn’t leave a mark on your credit file).”

If a borrower’s credit score changes while they are still paying off the mortgage, then it may be that the existing interest rate is affected – and could therefore rise.

The Money Advice Service says: “Essentially this means that if you fall into a certain group based on your credit rating, and the lender decides that group is now a higher risk than previously, they might put up the interest rate for all the people in that group.

“So even if you’ve been a good customer and always paid on time, you could suddenly face a hike in rates.

“That’s why maintaining a good credit rating is essential even if you’re not looking to borrow any more money.”

READ MORE: Mortgage free: Homeowners reveal simple lifestyle choices which helped to pay off mortgage

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