Credit scoring abandoned by mortgage lender

Posted in 'Credit Score' by Barry Stamp

23 April 2010

Legal & General Mortgage Club has launched a new product which is not assessed using credit scoring.

Martin Smith, head of mortgages at L&G, says '...Ditching credit scoring is an innovative, back to basics way of looking at lending...'

The product is a 2-year fixed rate mortgage at 3.35%, with a £1,399 administration fee and a £100 booking fee. The maximum loan-to-value ratio allowable is 75% and the funding is provided by the Hanley Economic Building Society.

In practice, many smaller mortgage lenders do not rely upon credit scoring, and most mortgage lenders use credit scoring only in conjunction with tight lending policies, such as maximum loan-to-value ratios and income multiples, which are generally regarded as the ‘traditional’ way of underwriting mortgages.

Credit scoring was first introduced to mortgage lending in the UK at Cannon Lincoln, in 1987, where it was used successfully to underwrite significantly more ‘good’ new business than had been possible using traditional techniques, also cutting down significantly the time taken to reach a decision. Nowadays, most major lenders, such as the Halifax, use scoring not just to assess credit, but also to assess the risk of fraud, and all still frame their lending products within lending policies that include the loan-to-value – which incidentally is by far the most predictive element on any mortgage scorecard.

Going ‘back to basics’ carries with it some problems, as subjective lending has been proven on countless occasions to be less efficient than decisions made by scorecards, letting in more bad debt, and not giving the same protection from bias that an automated scorecard can deliver.

L&G says the move will assist 'complex, prime cases', which is perhaps an indication of a 'cherry picking' approach. For the vast majority of consumers with a less than 5 star credit rating, and with no complex borrowing requirement, it will probably be quicker and cheaper to go elsewhere.

For many people thinking about remortgaging, it’s crucial to do your sums very carefully, as the cost of changing lenders and the fees involved can quickly erode any potential savings. In many cases, if further monies are required (most remortgages are to fund a new kitchen, extension, car, boat or to consolidate credit card debt), a simple unsecured personal loan can be a quicker, less complex and cheaper solution. For example, a loan of up to £14,000 from Alliance & Leicester carries no fees, costs 7.8% and would cost £280.76 per month over 60 months. And by paying the additional loan over the expected lifetime of the asset rather than the full remaining term of your mortgage, you’ll save a fortune in interest over the long term.

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