Think before you apply online

On the internet, a few clicks can take you to a good deal for a mortgage. But click a few more times, and you can quickly do long-term damage to your credit rating, even without taking out a single loan.

On the internet, a few clicks can take you to a good deal for a mortgage. But click a few more times, and you can quickly do long-term damage to your credit rating, even without taking out a single loan.

The problem is being caused by "agreements in principle". Lenders promote the idea of these provisional mortgage offers as a quick and easy way for homebuyers to find out whether they qualify for a loan. The agreements are also touted as a way to speed up the homebuying process, by sorting out much of the financial paperwork as early as possible.

As mortgage companies move from relying on simple multiples of the buyer's salary to loans based on so-called affordability, agreements in principle might also be the only sure way for buyers to discover exactly how much they have available to spend.

"First-time buyers especially want to look at what they can borrow," says David Hollingworth, a director at mortgage brokers London & Country. "As lenders are basing this more on affordability rather than multiples, buyers are turning to agreements in principle to establish this."

The problem for buyers is that most lenders carry out a credit check as part of the agreement in principle process. And most of these checks leave a "footprint" on the applicant's credit file, regardless of whether they go on to borrow the money. Too many credit checks on an individual's file can make it hard for them to arrange a loan, and the fact that a lender has checked the file stays on record for six years.

The ease of use that makes offers in principle attractive to buyers contributes to the problems they can create. It is perfectly possible to enter details on six lenders' websites in the course of an evening. Mortgage brokers say first-time buyers are most likely to fall foul of the credit checking system, by applying for several agreements in principle, early in their house search.

Last year, the Financial Services Authority, the Council of Mortgage Lenders and the credit reference agencies agreed to address the problem. The credit agency Equifax, for example, now offers a wider range of checks to lenders, including identity searches and quotation searches, so that they do not need to request a full credit check unless they need that level of information. Lenders have been asked to update their systems handling agreements in principle, so that their checks do not leave footprints. So far, the mortgage broker Charcol estimates that only 20 per cent of lenders have systems that work in this way, although that minority includes Halifax, the UK's largest mortgage lender.

Elliot Nathan, product development manager at Charcol, says that the problem with multiple agreements in principle is made worse by electronic processing of mortgage applications. Online applications can be rejected automatically because of information the system does not know how to handle.

"If you are talking to a computer, your application could be kicked back and that would leave a further footprint on your credit file and it affects your credit record," he says. Automated systems, Nathan says, may reject applications that a human underwriter will accept.

Buyers who have obtained multiple mortgage agreements in principle can ask the lenders concerned to remove them from their file, but the lender is not obliged to do so. And if a mortgage application is rejected for credit reference reasons, it is worth checking why. If the cause is multiple credit checks, it might be possible to persuade the lender to disregard these.

But Equifax external affairs director, Neil Munro, says that for the homebuyer prevention is most definitely better than cure. Lenders should warn consumers if an agreement in principle will involve a full credit check, and ask for consent.

Lenders might not explain, though, whether a search will leave a footprint. This means that homebuyers should be cautious, and only apply for a mortgage agreement when they really need it.

"If there is a problem, you can raise a query with us or with the lender," he says. "If you feel you were not properly made aware that there would be a search, we would take that up on your behalf."

But the financial service industry needs to speed up its steps to resolve the problem. "It does not affect a huge number of people," says Charcol's Nathan. "But it is a problem we want to see eradicated."