We can understand why credit scoring is needed to manage risk, but the over-reliance on computer systems is definitely a concern.
As we all know lenders are becoming more and more reliant on credit scoring. There are good reasons for using these methods, although it can sometimes be frustrating when there are some lenders who are completely unable to add an element of human understanding to a case.
For example take the lender who cannot overturn a “credit score declined case” when there is substantial evidence to confirm that the problem was an error.
Also some lenders will use the credit file to establish current balances on credit cards even though these can take a couple of weeks to update. If a client repays their cards monthly then this is unlikely to be a good representation of their financial situation.
For those clients with no existing borrowing in place, particularly first time buyers, on occasions this can have a detrimental effect on a credit score.
Although the clients may have been renting for many years with bank statements to prove that payments have been easily met, they can still end up with a low credit score. It is in instances such as this when human intervention can be valuable.
Although there are things that we know impact upon the credit score calculation, lenders will not reveal their methodology in any detail for fear of data manipulation. Thankfully there is an element of choice in the market and there are some lenders who do not credit score. These lenders will undertake a credit search instead.
Although there will still be certain criteria for applicants to meet, it can be helpful for clients that would have failed a standard check purely due to their lack of existing credit. First time buyers might therefore have better luck with such lenders.
That said, in the first quarter of the year, some lenders have reported a marked increase in credit availability for those borrowers with less than a 25 per cent deposit. This is likely to continue into the second quarter of 2013.
According to the Bank of Scotland’s latest credit conditions survey, lenders have reported an overall increased availability of secured credit to households for a third consecutive quarter.
More good news comes in the form of the Chancellor’s Budget in which the Government has announced an extension of the First Buy scheme. This helps client to purchase a new build property through a shared equity mortgage. Under the scheme the client will have an 80 per cent share of the equity with the government holding the remaining 20 per cent.
This new scheme is called the Help to Buy scheme and the Government will provide a 20 per cent equity loan over a 25-year term. This differs from the current First Buy Scheme whereby the builder and the government provide the deposit on a joint basis.
In addition whilst the existing scheme is only available to first time buyers, Help to Buy will be open to both new entrants to the market and those moving home.
Clients who wish to purchase a home valued up to £600,000 (maximum of £280,000 under the First Buy scheme) will be eligible. The purchased property must be bought as a main residence and not for the purposes of buy to let or holiday home.
The Government expect that the Help to Buy scheme will assist 190,000 people to buy a new build home over the next three years.
Also to be borne in mind is the Home Builders Federation’s recently published report.
This revealed that local authorities granted building approvals for in excess of 45,000 new homes across England in the fourth quarter of 2012. This represents a year on year increase of 62 per cent and a rise of 33 per cent when set against the previous quarter.
The increase in residential permissions is hopefully a reflection of a positive outlook, but it is crucial that these increases be sustained. Building new homes could take millions off the social housing waiting lists and will also help new families gain a foothold on the property ladder. It could also create thousands of new jobs and thereby provide the country with a much needed economic boost.
* Trevor Law is a director with Merito Financial Services, chartered financial planners, based in Solihull.
E-mail: tilaw@meritofs.com
