Phantom mortgages: Can first-time buyers find a deal?
First-time buyers are being disappointed to find that the attractive mortgage deals being advertised by high street banks do not actually exist, according to brokers.
Industry insiders claim house buyers are being turned down for high loan-to-value (LTV) mortgages despite meeting the criteria, as banks are keen to minimise their risk in a falling market - yet are under pressure to keep up lending levels.
Sarah Routledge looks into the phenomenon of 'phantom mortgages'.
Curious case of the disappearing mortgage
Several banks and building societies, including Abbey, Cheltenham & Gloucester, Halifax, the Post Office, RBS NatWest and Yorkshire Building Society, are advertising mortgages with only a ten per cent deposit.
But several brokers have been reporting customers being turned down for no apparent reason.
Many are concerned the lack of finance available to first-time buyers - who typically have a smaller deposit - could be a danger for the market as a whole.
Martin Gilsenan at Email Mortgages, says: "A far more pressing issue is that lenders say they are offering 90 per cent mortgages but in reality they do not. There is no cohesion on mortgage lending.
"By refusing mortgages to first-time buyers, there is the potential for more danger than three years ago of lending to people who could not afford it."
Melanie Bien, director of Savills Private Finance, says she has heard complaints from brokers that lenders are not accepting people onto mortgages they claim to offer.
"One broker had a Nationwide rep confirm a month ago that they were doing 90 per cent deals in branches but the credit score was so high that very few clients obtained one.
"Another broker was told off the record by another lender not to send in anything over 75 per cent LTV as it was unlikely to get approval due to scoring," she says.
Ms Bien continues: "As we know, the government is keen for banks to offer high LTV deals so it may be that they are just paying lip service. The reality of offering a high LTV deal is that the lender needs a lot more capital in place to back it than they do on a lower LTV deal.
"The housing market would benefit from more higher-value LTV deals. First-time buyers in particular find it difficult to drum up a big deposit and if they can't get on the housing ladder, the market as a whole grinds to a halt."
Credit scoring
However, another broker says the products certainly exist - they are just harder than ever to get.
"I have certainly not heard of fake products," the broker says, "but banks are warning that applicants must have exceptional credit."
The Building Societies Association (BSA) says this is because lenders need to be more responsible in their decisions and this is affecting borrowers.
A spokesperson explains: "With lenders anxious to minimise risk, borrowers seeking high loan to value products are going to have to meet very tight approval criteria which means that although many may apply, they may not all be successful.
"With property prices continuing to fall, borrowers need to think very carefully about the implications of borrowing at a high loan to value, since they could soon find themselves in negative equity.
"Building societies have arrears rates that are much lower than the industry average demonstrating their responsible attitude to lending decisions, which unfortunately means that applicants may find that their applications are rejected."
Lenders who are offering high loan-to-value mortgages are much fussier about who they lend to, and appear to be turning down good applicants for no good reason.
They are available - but only to those with near-perfect credit scores.
Ray Boulger, from mortgage brokers John Charcol, says his firm has managed to find mortgages at 90 per cent for some clients.
"But for some people we have expected to get one and it has been declined because of their credit score," he adds.
The higher the value of the loan, the more capital banks are required to hold back, which is making lenders reluctant to offer mortgages without a substantial deposit, Mr Boulger explains.
If a lender wants to cut down on the amount of 90 per cent mortgages it can write, there are a few things it can do, according to Mr Boulger.
"Obviously it can make the loans more expensive, by raising the interest rate, or they can change the income multiplier to require a higher salary. Or they can make it less transparent and change the credit score."
Each bank has its own system of scoring, and this will include factors such as your credit history, whether you are on the electoral roll, how long you have been at your current address, how long you have been in your current job and even how long you have held your current account.
"In some ways, lenders are looking for reasons to decline applications rather than accept them," he adds.
Getting on the ladder
But there are ways buyers with smaller deposits can get a foot on the property ladder, Mr Boulger says.
"Consider talking to an independent broker, like ourselves," he says.
"If you have been turned down because of your credit score, we can find a lender who has a more 'human approach' to underwriting - in some cases, it is just a matter of 'computer says no'."
Brokers are more likely to know which lender is more likely to approve your application, and which will turn you down, so if you are struggling to find a lender who will accept you, a broker may be able to help.
It may also be worth approaching your own bank. Many lenders, including Abbey, Yorkshire Building Society and Nottingham Building Society, offer savings accounts for customers saving toward their first home, with cashback granted on approval of the mortgage.
If you have a history of regular saving with your bank, they may look on this favourably when deciding whether to lend to you.
But if you think building up a deposit of ten per cent is unrealistic, it may be worth considering a new-build home, Mr Boulger says.
Some developers, keen to sell their homes, are offering an interest-free loan of up to 25 per cent to buyers for around five years, which can be used as a deposit for the mortgage.
"The beauty of these deals is the mortgage you take out is based on 75 per cent of the home's value, allowing buyers to access better deals," Mr Boulger adds.
Some buyers will also be able to take advantage of government homebuy schemes, "but the developers' schemes are much simpler," says Mr Boulger.
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