Homebuyers struggle with strict lending criteria for 95% mortgages

Despite large numbers of enquiries, online mortgage broker Trussle reported that just 1% of its completions in July 2021 were for 95% mortgages, as buyers face stricter lending criteria than higher LTV alternatives.

What is happening with 95% mortgages?

The UK government launched the Mortgage Guarantee Scheme in April 2021 to “support a new generation in realising the dream of home ownership” by guaranteeing mortgages with as little as a 5% deposit.

This means that the government “guarantees” the proportion of the mortgage over 80% - so, for a 95% mortgage, the government would cover the remaining 15%. If the homeowner then defaults on their mortgage payments, the government will step in and compensate the lender for the portion over 80%.

The scheme was designed to encourage lenders to reintroduce 95% mortgages, after the vast majority were withdrawn during the pandemic over concerns that buyers would not be able to keep up with repayments. There are currently 49 lenders on the UK market offering 95% mortgages, though this is still significantly less than the peak of 949 in November 2019.

There has been plenty of interest in 95% mortgages since the scheme launched, with Trussle reporting they made up 26% of all mortgage enquiries in March 2021, but the strict lending criteria has meant that few applications have actually been successful. Trussle stated that just 1% of all mortgage completions in July 2021 came from 95% deals.

Most interest in 95% mortgages comes from first-time buyers, who made up 60% of all enquiries at Trussle, with second-time buyers and remortgagers representing 34% and 6% respectively.

Due to the high LTV and the subsequent higher risk involved, 95% mortgages are subject to stricter lending criteria, requiring a higher credit score, while gifted deposits are not permitted, and flats and new build properties are also exempt. These factors come together to create a narrow eligibility window for many homebuyers.

However, while 95% mortgages remain out of reach for many homebuyers, other high LTV mortgage options have been proving popular in recent months. 90% mortgages accounted for 10% of Trussle completions in June 2021, the highest level since August 2020.

How to boost your chances of meeting high LTV mortgage lending criteria

1) Make sure your credit report is accurate

First things first: you need to be able to prove to your lender that you are able to keep up with regular mortgage repayments. Lenders use your credit history to determine if this can be reasonably expected of you, so it is crucial to check how you measure up before you apply for a mortgage to make sure you are going to make the best first impression. There are three credit reference agencies in the UK which lenders can use to calculate your credit score - Experian, Equifax and TransUnion - and some companies such as Clearscore offer free credit rating checks that can show you an estimation of your score. Keep an eye out for any inaccuracies or mistakes on your credit history, as these could mean the difference between getting a high LTV mortgage, or being refused outright.

2) Improve your credit score

Once you have identified and amended any faults on your credit report, you should be thinking of ways that you can boost your credit score to give you the best chance of being approved for a high LTV mortgage. Your credit report takes into account your financial history over the past 6 years, including how you have handled any credit cards, loans, overdrafts, and even utility bills. Ideally, you want to have a demonstrable history of consistent, on-time payments across all of these areas, but there are other ways you can boost your score. Make sure you are enrolled on the electoral register (click here to apply), as this can be a make-or-break factor for lenders, and try not to apply for credit in the 6 months leading up to your mortgage application. Head to our article “How to improve your credit score quickly” for more tips.

3) Use your rental payments to boost your credit score

If, like many first-time homebuyers, you’re currently renting, you can use your rental payment history to boost your credit score using the Rental Exchange Initiative. The scheme incorporates your rental payments, in the same way as a homeowner’s mortgage payments would be, and includes them in your Experian credit file. Obviously, if you have any late or missed rent instalments, this could negatively affect your credit score. However, if you make consistent payments over a long period of time, your credit score could get a boost from your demonstrated reliability and put you in better stead for being approved for a high LTV mortgage.