On the Treasury’s orders, mortgage lenders using the 95 per cent mortgage guarantee scheme can only lend to “creditworthy” borrowers.
Lenders using the scheme get government protection from some of the losses they may incur should the loan go bad.
Mortgage brokers argue, however, that banks with the government’s backing have set the credit score bar too high. They have reported even borrowers with an A credit rating are being declined.
Underwriting is so restrictive, brokers suspect higher-than-usual credit scoring is being applied to borrowers who have a five per cent deposit.
Simon Butler, head of mortgages, CMME, said: “Lender score cards appear to be far more stringent at higher LTVs than was the case pre-pandemic, despite the government shouldering part of the risk via the mortgage guarantee scheme.
“The summer months are a peak time for house buying and selling so the hope is that lenders relax their approach to further support the first time buyer and self-employed markets.”
On the launch of its 95 per cent mortgage deals Halifax made clear to brokers its credit score would be tougher than the one used in the past.
In an email to intermediaries, it wrote: “An enhanced credit score requirement will be applied to any applications on this scheme.”
NatWest does not accept 95 per cent LTV applications through brokers.
However Barclays said its 95 per cent credit score has been set in line with its existing policy, not higher. Nationwide said its credit score approach was aligned to its 90 per cent lending. Santander would not comment on its credit score level but said its 95 per cent lending volumes have returned to pre-pandemic levels. Santander will not offer any self-employed borrowers an LTV of more than 75 per cent.
HSBC said it worked hard to ensure its credit scoring policy was fair and appropriate to support its customers and levels of acceptance had been in line with the bank’s expectations since it launched using the mortgage guarantee scheme.
Yet getting a case past the underwriting team when the borrower has just a five per cent deposit is no mean feat, say brokers.
Simon Cutler, director, Blackdown Financial, said: “Even after an Agreement in Principle (AIP) comes through the underwriting is still really restrictive.
“To qualify for a 95 per cent mortgage your client has to have a 100 per cent clean record and a perfect credit score. Lenders like to market that they are offering these high LTV deals but when it comes to underwriting they try and trip you up.”
Richard Campo, managing director, Rose Capital Partners, says he hasn’t had many issues with not getting cases through at 95 per cent loan to value. His team order the credit report before submitting an AIP and they will not put the case through if there are any missed or late payments showing because they know it will not be approved.
But even Campo’s stringent approach to pre-qualifying borrowers does not have a 100 per cent success rate.
“We did have one case recently that was declined. It was completely squeaky clean we don’t know why it was rejected. Lenders are using tight scorecards and any wrinkle will kick it out.”
Campo said the issue may have been because the borrower worked in hospitality, although her job had not been affected by the coronavirus.
“Maybe banks are going sector specific when they decide who to lend 95 per cent to,” he added. “If I was a lender that’s what I’d do.”
Brokers agreed that to stand the best chance of getting your deal approved at 95 per cent LTV, extra leg work was needed. Support from business development managers was also invaluable.
Jane King, mortgage and equity release adviser, Ash-Ridge Private Finance said due to the high house prices in London, Surrey, Hampshire, Berkshire and Middlesex, where she advises, she is dealing with lots of enquiries from borrowers who need 95 per cent deals.
King says her first piece of advice to buyers is “prepare to cut your cloth,” because they’re not going to get an income multiple of five times their salary. After that King insists on seeing her clients’ payslips so she knows exactly how much they earn instead of using their estimation of earnings.
“You’d be amazed how many borrowers just take a stab at how much they earn, or lump in car allowance with their basic salary,” she said.
“Lenders aren’t out to trick you. The surprises come from the clients not telling you the full story.”
King says the lenders offering 95 per cent LTV have never liked adverse credit so their strict stance on clean credit is to expected. She admits, however, some of their policy decisions discount a lot of good buyers.
“Most won’t look at flats and most want PAYE borrowers and no furlough,” she said.
King praised Accord, a lender offering 95 per cent deals outside the government’s scheme, for its approach to reviewing self-employed applicants with a five per cent deposit.
She said Accord were happy to review cases for self-employed borrowers looking for a 95 per cent mortgage, and the outcome depended on the sector they work in and the condition of the accounts.
Cutler singled out Skipton Building Society, another lender offering mortgages outside the mortgage guarantee scheme.
He said: “The broker has to do a good job upfront and then with the help of a BDM, who knows exactly the underwriters’ appetite, you have chance of getting it through.”
Butler said the CMME team had recently decided to complete the decision in principle far earlier in the house buying process because of the volume of declines the firm has received at high LTVs.
CMME specialises in mortgages for contractors and self-employed borrowers. “This isn’t based on any concerns with adverse credit,” he added. “We regularly receive declines or alternative lending decisions for clients with clear records and low unsecured debts.”