How the mortgage market has been impacted by Covid-19
It’s been almost a year since the world went into freefall and we were panic buying toilet paper and wondering if this was the End of Days. Businesses and individuals slowly started adjusting to a new way of existing, fearful that this wasn’t just a quick blip, but something more permanent. Mortgage lenders were no exception and they appeared unprepared, unsure of how to react and what lending policies needed urgent amendment.
Fast forward to February 2021 and lenders are still in a state of flux, with very little homogeneity between them, leaving house buyers, investors and remortgage applicants scratching their heads. As a mortgage broker, I am well versed in the lack of consistency between lenders and I have learnt the various quirks of each, knowing instinctively which lender is best for a particular client, even if the black and white lending policy suggests something different. With Covid-19 however, this has been made more complicated and the research stage of each application has become a much bigger part of the process.
There are several areas where lenders have changed policy to protect themselves against a raft of future repossessions:
This is slowly starting to ease, but virtually all lenders stopped accepting any form of variable pay for employed applicants. This included bonuses, commission and overtime, which for many applicants formed a major part of their remuneration. Faced with a substantially lower level of “acceptable income”, applicants were unable to achieve the level of borrowing needed to proceed, forcing buyers to think smaller and refinance applicants being stuck with their existing lender.
Lenders were quick to offer these and many mortgage owners thought of them as “free money” and were quick to apply. However, what some of them didn’t realise was that the payments were added to the mortgage balance (increasing the size of the loan) and it left them unable to refinance until payments had resumed and in some cases, the full arrears had been cleared.
Many employees stuck on furlough were frustrated by having their income capped and being unable to work during the monotony of lockdown. This frustration was compounded when they discovered that most lenders were not accepting furloughed income and required one full payslip before they would consider a new mortgage application and with furloughed income capped at £2500pcm, only smaller loan sizes were possible even then.
Applicants working in businesses most affected by the pandemic were being asked a raft of additional questions, as lenders were concerned about the sustainability of income from those working in certain sectors. Applicants working in the leisure and entertainment sectors are being asked additional questions about the strength of the company they work for or own.
However, the biggest impact of Covid-19 on the mortgage market has been felt by those who own and run their own companies. Additional questions about how their business has been affected by Covid-19, the use of Government assistance, Accountant’s projections and the analysis of business bank statements, are all now fairly standard amongst lenders and has resulted in far fewer applications from those self-employed. Applicants with seasonal variation in turnover are being penalised when their last 3 months income showing in bank statements, don’t support the same or higher turnover as last year, when averaged and annualised. Some lenders are simply refusing to lend above 60% LTV to self-employed applicants, regardless of the strength of their business.
There was a slow, but steady increase in product rates across the board from March until October, as lenders were unable to keep up with demand and decided to “stem the flow of new applications” by increasing product rates. The cynical among us will suspect this to be profiteering rather than a genuine desire to reduce applications. Thankfully, rates have started to reduce and we are almost at pre-pandemic levels, albeit only at lower loan-to-values.
Another major impact has been felt by those wanting higher LTV’s. For several months there were virtually no 90% products available and those at 85% were becoming increasingly scarce and more expensive. This has eased up recently, with several lenders dipping their toes back in the higher LTV market, but sadly the rates are a barrier to entry to all but the very brave or desperate. I estimate the rates to be at least 1% higher than this time last year.
With lenders having the majority of their staff working from home, it was inevitable that service times would be affected. Typically, the time taken to go from application to offer has doubled since early last year, although there have been some notable exceptions. The mortgage process is still quicker than the conveyancing process, so in most cases it’s not the mortgage that slows down a purchase.
During the first lockdown, valuers were unable to visit properties which caused a major problem for high LTV and more expensive transactions, as lenders were unable to rely on Desktop and Automated valuations. Thankfully, with the easing of restrictions in the current lockdown, surveyors are being allowed into properties and this part of the process has gladly returned to normal. However, we have seen valuers being extremely pessimistic on value – both capital and rental – especially on flats in towns and cities, compared to houses in more rural locations, as they take an unfavourable stance on the future sustainability of high prices, largely fuelled by the stamp duty holiday.
The mortgage market is no stranger to change. We’ve had the EU impose a raft of restrictions, forcing lenders to standardise certain aspects of the mortgage process. We’ve had tax changes that have impacted the viability of buy-to-let market. We’ve had Brexit indecision impacting people’s views on whether to buy or not. We’ve seen Bank of England base rate changes cause confusion over how long an applicant should “fix” their rate for. Without doubt, however, these have been overshadowed by the impact of a Global Pandemic and whilst banks are still keen to lend, it’s with a huge amount of caution – although I’m sure they’d argue they are simply “being responsible lenders”.
Dominic Sharp BSc (Hons), CeMAP
Senior Mortgage Adviser, Carbon FC Ltd