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Credit crunch

First-time buyers are being punished by lenders’ credit-scoring criteria, leaving them unable to obtain a mortgage and preventing them from getting on the housing ladder, according to brokers.

First-time buyers are less likely to have a credit card or be on the electoral roll and can have frequent changes of address as a result of living in rented accommodation.

All these factors count against would-be borrowers by lowering their credit score. With high-street lenders relying heavily on automated credit-scoring systems, it regularly results in mortgage applications being rejected.

Lenders have reined in most types of lending since the financial crisis but first-time buyers and those looking to borrow at a higher loan-to-value have suffered in particular.

Compared with historic lending levels, the number of advances to first-time buyers is low. Lending to first-time buyers last November fell 19 by per cent in volume and 17 per cent in value compared with the same period in 2009. In November 2010, 16,400 loans were advanced, worth around £1.9bn, compared with 20,300 worth £2.3bn in 2009.

In the whole of 2009, lenders approved 196,900 loans for first-time buyers, which is half the 396,500 loans advanced in 2006.

Money Marketing revealed recently that PMS executive chairman John Malone is working with four of the major high-street lenders to ensure more first-time buyers are able to secure a mortgage.

Malone also recognises brokers have a role to play in educating borrowers about some of the factors influencing credit scores.

Emba group sales and marketing director Mike Fitzgerald says he has seen many first-time buyers disadvantaged by a lack of understanding of credit scoring. He says: “First-time buyers do not know they should be on the electoral roll. They do not know they should have had their bank account for a number of years. Some of them come in and say they do not have credit and your heart drops.

“Have a credit card, use it and pay it off each month. All those factors conspire to getting a better score.”

Fitzgerald agrees with Malone that lenders should adopt a different scoring process for first-time buyers. He says: “Underwriters should start underwriting first-time buyers in a different way as, without them, this country is in trouble.”

Abacus Financial director Matthew Fleming-Duffy understands lenders have to manage risk but thinks the industry should make a concerted effort to help first-time buyers.

He says: “Credit scoring is the best way of estab-lishing the potential risk of a new customer but it fails first-time buyers.

“They underpin the market. If they are not able to buy homes, house prices tend to slip.”

Fleming-Duffy suggests the possibility of state-backed banks Royal Bank of Scotland and Lloyds Banking Group helping to ease the strain on first-time buyers.
He says: “The Government should be applying some pressure on the state-owned banks on their lending practices.”

London & Country head of communications David Hollingworth doubts lenders will relax their criteria due to the inherent risks of lending at higher LTVs, which are the types of mortgage that first-time buyers typically look for.

He says: “I am not sure I can see lenders easing their credit scoring for first-time buyers. First-time buyer applications will typically be of higher LTV, which toughens up credit-scoring requirements. And, of course, their lack of a credit track record will make lenders nervous.”

Hollingworth also says credit scoring varies from lender to lender, making it difficult for borrowers to know what criteria they need to meet.

He says: “The difficulty with credit scoring is that there is no transparency over what exactly will benefit you and it is different from one lender to another. That is where a broker comes in.”

Savills Private Finance managing director Mark Harris believes lenders already take into account the fact first-time buyers might not have the same credit history as an established homeowner.

He says: “A first-time buyer is likely to have less in the way of credit and other required criteria but I think most lenders account for that. I would not imagine they would credit score an application for someone borrowing 40 per cent LTV of £600,000 in the same way they credit score someone wanting 95 per cent LTV of £150,000.”

He also rejects the idea of individually assessing first-time buyer applications, saying it is not possible for big lenders due to the volume of mortgage applications.

He says: “It is not practical for an Abbey or a Nationwide to manually underwrite each case – you have got to have a system.”

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