Lenders reject nine out of 10 applicants – welcome to the 90 per cent loan

First time buyers have seen an increase in mortgages just for them, but banks are still making it hard

Banks and building societies are tripping over themselves to be seen as helping first-time buyers – arguably the most sidelined group of borrowers since credit crunch hit nearly three years ago.

Several lenders in recent months, including the Co-operative Bank, the Post Office and Yorkshire and Britannia building societies, have re-entered the 90 per cent loan to value market with some fanfare.

The cost of 90 per cent deals is falling too. On 23 July, the Yorkshire announced the launch of a marketleading two-year fixed-rate deal for borrowers with a 10 per cent deposit, priced at 4.95 per cent with a £995 fee. The lender is also offering a three-year alternative priced at 5.69 per cent.

"At the Yorkshire, we're trying to help as many people as possible obtain a mortgage – and offering fixed-rate loans to borrowers with a 10 per cent deposit is just one of the steps we have taken," said the lender's product manager, Tom Girling.

But the reality is that a large chunk of applicants are turned down for 90 per cent deals. For reasons of "commercial sensitivity" lenders operating in the arena refused to specify the exact proportion of declined loans. But, according to Ray Boulger, senior technical manager at broker John Charcol, at least one of the "big six" lenders (Lloyds, Santander, RBS, HSBC, Nationwide and Barclays) turns down a staggering 90 per cent of applicants.

"Basically, the higher the loan-to -value, the more likely it is that your application will be rejected," he says. "This is especially true with larger lenders that use their own credit scoring systems based on information accessed through a credit reference agency. The lender will give each applicant a score and if it's anything less than the one required for a 90 per cent mortgage deal, it's a case of 'the computer says no'."

A flat refusal may not even necessarily stem from a blot on your credit file – such as missed credit card or utility bill payment or county court judgment, adds Mr Boulger. "Many first-time buyers don't have a record of borrowing at all. This means they can't prove they are reliable payers so are declined on this basis. Unlike murder where it's a case of innocent until proven guilty, credit scoring deems you guilty until proven innocent."

Even if your credit score is active and impeccable, first-timers with only a 10 per cent deposit – that's still £16,934 according to house prices figures published by Nationwide on Thursday – can be turned down purely on a lender's own business requirements. "Banks and building societies may not want to change the qualifying criteria for their 90 per cent mortgage deal but they don't want more business on it either, so will just increase the credit scoring threshold borrowers need to qualify," says Mr Boulger.

What's more, lenders are not held accountable for the proportion of applications they accept or decline on their advertised mortgage deals – and don't even have to reveal the results of their credit scoring, says Melanie Bien, director at broker Private Finance. "This makes it very difficult to know exactly why so many cases are rejected."

Theses "cloak and dagger" tactics employed by lenders can present a danger for first-timers who, on being turned down, are likely to make further applications. Neil Munroe, external affairs director at credit agency Equifax, said: "Too many searches in a short space of time will ring alarm bells for the next lender and may affect your credit score. The reality is one rejection can lead to others."

To rub salt in the wound, some lenders require an application fee up front, usually between £100 and £200, meaning this money is lost if the application is rejected. Some 90 per cent lenders however, such as the Post Office, collect the arrangement fee (£999 for its 5.45 per cent two-year fix) at the point of completion, which mitigates this risk. But even if you have paid up front, it's still worth calling the lender and putting your case forward for a refund if you are rejected.

First-timers may be better off approaching smaller lenders for a 90 per cent mortgage – such as Dudley, Cumberland and Furness building societies – to improve chances of being accepted. "Smaller lenders tend to run a credit check, rather than give a score, and underwrite each case on a more individual basis," says Mr Boulger.

Using a mortgage broker may also boost your chances. "A good broker will know which lenders certain borrowers will be best suited to and – perhaps more importantly – which lenders that advertise a 90 per cent offering are likely to produce the goods within the required time scale," says Andrew Montlake at broker Coreco.

Applicants approaching lenders directly should ask the lender to carry out an initial "quotation search" rather than a "formal search" against their credit file. "Unlike formal searches that stay on your credit file for one year, quotation searches are not visible to other lenders," says Mr Munroe.

Figures from the Council of Mortgage Lenders paint a relatively bleak picture for first-time buyers, in spite of recent "improvements" within the 90 per cent lending arena. The most recent data reveal that 14,800 loans were handed out to first-timers in May this year. This compares to 19,700 for the same month two years earlier and 32,900 in May 2007. Further CML figures show the average advance to first-time buyers is about 75 per cent.

"The truth is that, these days, lenders neither want nor need to do much lending at 90 per cent loan to value," says Ms Bien at Private Finance. "It means lenders have to tie up more funds as new 'capital adequacy rules' require banks to set aside more capital to offset the associated higher risks. And with less money available to lend anyway, banks would rather cherry-pick lower-risk borrowers who have bigger deposits than 10 per cent."

Sue Anderson at the CML adds that conditions are unlikely to improve. "The amount of lending undertaken on a high loan to value basis will remain more subdued than in the pre-crunch years, even when market conditions are more favourable," she says.

Banks are reluctant to admit that 90 per cent lending amounts to "bad business". Catherine Laycock at the Co-operative Bank (offering a three-year tracker at 4.29 per cent) says: "As a responsible lender, we are prudent to lend only what borrowers can afford and, as such, our acceptance rate for 90 per cent deals are slightly lower than for the rest of our lending."