Why lenders are cracking down on the middle classes

Even the smallest of hiccups is leading to mortgage rejection, says Rachel Mortimer

Middle-class borrowers face a new mortgage crackdown as lenders tighten their criteria and the cost of living crisis hammers credit scores.

Affluent borrowers, who last year would have had no problem securing a loan, now face a toxic cocktail of higher interest rates, nervous lenders and unforgiving affordability tests. Mortgage brokers have reported that even six-figure earners’ borrowing plans are being scuppered by minor matters such as disputed parking tickets.

The number of middle-class borrowers – those with household incomes between £70,000 and £150,000 – with adverse credit searching for a mortgage has jumped by two thirds since 2019, according to the specialist lender Together. Scott Clay from the firm said: “We expect the share of borrowers with adverse credit to rise in the immediate term and this will not be restricted to lower-income households.

“We have already started to see this across middle and high earners. We will also see more potential borrowers being overlooked by some mainstream lenders because of factors such as missing a bill payment on a credit card.”

A survey by the lender of 7,000 adults found that more than a quarter of middle-class borrowers had been rejected for a mortgage in the past year because of a thin or impaired credit history. Each bank and building society has its own affordability benchmark that dictates how much it is willing to lend and the criteria borrowers must meet to secure a mortgage.

The test takes into account a household’s monthly income and outgoings, but also uses cost of living data from the Office for National Statistics, which have been updated to include large increases in energy, fuel and food costs this year.

Even the smallest blips on credit files or a lack of credit history can result in an automatic refusal from many high street names. Specialist lenders will accommodate an adverse credit history, but borrowers can expect to pay premium rates.

The particulars of risk models and credit scoring used by lenders to screen borrowers are a well-kept secret in the industry, but brokers are unanimous that tests have become more stringent in recent months.

Matthew Jackson of the mortgage broker Mint Financial Services said a growing number of applicants were being rejected as a result, especially when lenders used automated underwriting. He said: “This issue has been particularly rife among newly qualified professionals, who may have a great salary but not necessarily the bigger deposit to buy in cities or a particularly large credit file.

“I had a recent client who was a dentist on £120,000 a year, a salary that will only increase, and he failed a credit score because his deposit was only 10pc and he didn’t have a huge credit file. He was apoplectic. We are appealing, but historically he wouldn’t have had this problem. Had he applied for the mortgage last year it wouldn’t have been an issue.”

Anil Mistry of RNR Mortgage Solutions, another broker, said the smallest credit hiccup, such as a disputed parking fine or late credit card payment, was a problem with most mainstream lenders. He said: “Whether you earn £100,000 or £25,000 a year won’t make a difference to them. If an unpaid parking fine results in a county court judgment, it doesn’t matter how good the rest of your credit history or income is.”

This year marked the end of historically low interest rates, meaning that even if a household passes affordability checks, borrowing costs have hammered how much banks are willing to lend them. The average interest rate on a two-year fixed mortgage that requires a 20pc deposit has climbed from 2.35pc in December last year to 6.16pc this month. Someone who borrows £1m would pay £3,174 more interest each month than if they had taken out a mortgage last year – or £76,176 over the lifetime of a two-year deal.

Banks’ stress tests can change quickly, meaning would-be buyers may find they can borrow much less than they thought. Adrian Anderson of the broker Anderson Harris said: “Even one month can make a big difference. I submitted a £1.5m mortgage application in September shortly before the miniBudget. By October the affordability calculator showed my client’s mortgage capacity was £1.37m based on the current stress testing.”

‘I submitted a £1.5m application shortly before the mini-Budget. By October my client’s mortgage capacity was £1.37m’