First-timers locked out as lenders use credit ratings to avoid risk

Published on Thursday 12 August 2010 14:37

First-time buyers remain frozen out of the housing market despite lender claims of making more deals available to borrowers with modest deposits. And the repercussions for the Scottish economy are potentially dire, experts warn, with housebuilders unable to kick-start activity when the country faces a severe housing shortage.

In the week that Prime Minister David Cameron said credit reference agencies would be used in tracing fraudulent benefit claims, new evidence shows how much lenders rely on the same agencies to limit their exposure to first-time buyers.

Officially, lenders are opening up to first-time buyers more than at any time in the past three years. There are now more than 150 mortgages available at a loan-to-value (LTV) of 90 per cent, compared with 71 a year ago. And new Moneyfacts research shows that the average cost of a two-year fixed-rate mortgage for borrowers with a 10 per cent deposit is now 6.15 per cent, compared with 6.48 per cent six months ago.

The reality is different, however. Three years after the crunch began, the big high street lenders continue to leave the typical first-time buyer out in the cold. Even those who can comfortably provide a deposit of 10 per cent or more - about 15,000 for the average property in Scotland - are being rejected if lenders can find the tiniest blip on the borrower's credit record, evidence increasingly suggests.

Melanie Bien, director of mortgage broker Private Finance, said: "It seems many lenders are paying lip service to higher LTVs, saying they will do 90 per cent, when many perfectly good applicants are rejected because they don't really want 'risky' borrowers on their books."

The biggest credit reference agencies, notably Experian and Equifax, consequently play a crucial role in today's mortgage market. Lenders have long used credit reports to help assess a borrower's record for meeting repayment obligations, but brokers say the records are now used excessively in making lending decisions. Neil Harrison, marketing and performance manager at Edinburgh Solicitors' Property Centre, said: "They are picking up on small details that perhaps are not important in the context of whether they can repay the mortgage.They are jumping too far in terms of risk management."

Ray Boulger, senior technical manager at broker John Charcol, concurred: "Borrowers are being rejected at record rates, often for very minor indiscretions like being late with a credit card payment, and one major lender admits privately to rejecting 90 per cent of the applications it receives for 90 per cent LTV mortgages."

Late payments, rather than non-payments, are now sufficient reason for lenders to decline cases.

David Rolleston, director of Mortgage Advice Brokerage in Glasgow, recommends his clients set up direct debits with their credit card provider so at the very least the minimum payment is made on time.

The problem lies with the big names that dominate the mortgage market, including Lloyds, RBS, Santander, HSBC and Nationwide. Ralph Colquhoun, of MortgageFirst in Glasgow, pointed out that this dominance means the applicants they reject have nowhere else to go.

"The big lenders are trying to encourage others to lend more because they are worried that with so few lenders left they are over-exposed to the UK mortgage market."

Consequently borrowers do not know where to turn. Those who rely on the best-buy tables - a growing majority - are likely to find that the "computer says no". Boulger pointed out that with the exception of the Lloyds brands, most big lenders try to inhibit shopping around by leaving a hard footprint even when customers ask merely for a decision in principle rather than making a full mortgage application.

"This blatantly contravenes FSA rules, with only a few footprints needed to crucify a credit score," Boulger noted.

Lenders are hamstrung to an extent by capital adequacy requirements that mean the higher the LTV, the more capital they need to put to one side. But Jonathan Fair, chief executive of Homes for Scotland, said lenders were not focusing sufficiently on practical affordability, so that the Scottish house building industry is starved of the first-time buyers it needs.

"The demand for new homes is there, but what's changed dramatically is access to mortgage lending and the terms of that lending. None of us would encourage unwise lending, but it has gone completely the other way," said Fair.

Marlyn Boal, a sales director at Stewart Milne Homes, said the first-time buyer lending drought had severe repercussions not only for Scotland's housebuilders, but the country's economy.

"Building has slowed down because new builds are tied to sales rates - that's why so many jobs have been lost in the industry. If banks lend more to first-time buyers to stimulate the housing market, that would generate more sales and housebuilding would start up again."

But a spokeswoman for Lloyds Banking Group said: "It's right that we review every case carefully. Applications are successful in the significant majority of cases.We have one of the broadest product ranges, designed to help people on to and up the ladder, and we're here to support them all the way," she said.