Mortgage lending is still not back at the level it was pre-pandemic despite the huge surge in demand from house buyers over the past 12 months, according to experts. While there has been a trickle of new 95% LTV mortgages following the launch of the government’s mortgage guarantee scheme, other areas are still falling short.
Self-employed applicants are being treated with caution, even though their income stream is often more resilient than salaried employees who could be made redundant overnight. Buyers in the travel and hospitality sectors are the hardest hit, due to ongoing Covid restrictions, together with anyone on furlough – with lenders expecting to see at least one and sometimes three payslips from a return to work.
It’s similar to 2009-10 when lenders tiptoed back to higher LTVs – first one or two go brave with tight underwriting, and as competition comes in pricing goes down. Ben Thompson, Deputy CEO, Mortgage Advice Bureau.
“If one looks at product count over the last 15 months it is significantly down on Q1 2020,” notes Ben Thompson, deputy CEO at Mortgage Advice Bureau (MAB). “What you are seeing is a gradual relaxation of criteria but that upper end at 95% is still very tight. It’s very similar to 2009-10 post financial crisis when lenders tiptoed back to higher LTVs – first one or two go brave with very tight underwriting, and gradually as competition comes in the pricing comes down and the underwriting becomes more tolerable.”
He says the 95% LTV market is not “fully functioning” yet but that it will gradually get easier – “providing we’ve got visibility of the end of this phase of the pandemic”. Thompson adds that one reason for the lack of mortgage products is simply because of the huge appetite in the property market. “Because demand is so strong, if I’m a lender I’m not compelled to relax my criteria, and if I’m not compelled to I’m not going to do it.
“One of the benefits of a slightly slowing market is you may see the reintroduction of slightly relaxed criteria, because they’ve got more operating process and appetite and bandwidth, so they’ve got much better visibility on what comes after that horrible first phase of COVID. So gradually the dial will get turned, and unless something comes along that is completely unforeseen, that’s what we expect to happen.”
Self-employed applicants are being treated with caution, even though their income stream is often more resilient than salaried employees who could be made redundant overnight.
Buyers suffering more than most are the self-employed, now representing roughly one in six people. “It’s still harder to get a mortgage if you are self-employed than in Q1 2020, though that’s gradually becoming easier as lenders are able to work out what that income cycle looks like and how it’s trending,” says Thompson.
“Every lender has a different approach. Some are seeing it as an opportunity to get good self-employed people on their books by being slightly more lenient, others may feel they are a bit overly exposed on the self-employed and are taking a different approach.”
Thompson says building societies tend to be the most understanding lenders, with Accord “fantastic”, though on the banking front, TSB has also been good.
Michelle Brook, who provides mortgage services to Belvoir estate agents, says there is a greater availability of mortgages now. “It would appear that lenders are being more accommodating and relaxing their criteria a little bit,” she says.
She agrees the self-employed are being particularly hard hit when looking for loans. “Lenders are still cautious when it comes to the self-employed and how their accounts look because of last year. They are all approaching this differently and we are finding that we have to speak to them all about each case before providing the relevant advice to our clients. The grants provided by the government and dips in income are a problem for lenders. We have to put a lot more work into these cases. Lenders, in the main, want to see trading at a good level to consider applications.”
Lenders are still cautious when it comes to the self-employed and how their accounts look because of last year. They are all approaching this differently. Michelle Brook MD, Brook FS Ltd.
Brook adds, however, that HSBC, Accord, Skipton and Halifax are particularly understanding in this area – while Accord was also one of the first lenders to come back with a 95% mortgage. In total, there are now about 25 95% products available.
When it comes to furloughed clients, she says most lenders now require clients to be back at work and expect one month’s payslip or a letter from employers to consider applications. HSBC and NatWest have been particularly helpful in this area.
Neil Price, head of operations at Embrace Financial Services, warns the 95% Mortgage Guarantee scheme has “created high expectations from all mortgage applicants that they will be eligible for a mortgage, no matter what”. He adds, “That’s when the conversations can get difficult but can also serve to highlight just how important it is to use a good financial adviser who is prepared to put the time and effort in to help the client. We’re finding we’re spending far more time in handling mortgage and remortgage enquiries, and that’s not just down to business volumes but also to the work involved in handling each case, especially the more complex ones.”
The Mortgage Guarantee scheme has created high expectations from all mortgage applicants that they will be eligible for a mortgage, no matter what. Neil Price, Head of Operations, Embrace Financial Services.
He notes that there’s been a rise in the number of applicants who have been on furlough or have adverse credit, perhaps because of the impact of Covid.
The buy-to-let market is still strong despite the pandemic – indeed demand has been “unprecedented”, according to Richard Rowntree managing director of mortgages for specialist lender Paragon. “Landlords are much more resilient than they were during the financial crisis. At that time, we had very big portfolios, highly leveraged, and once one or two properties fell over it went downhill pretty rapidly.
Landlords are more resilient than they were during the financial crisis. We had very big portfolios and once one or two properties fell over it went downhill rapidly. Richard Rowntree MD, Mortgages Paragon.
“That’s just not been the case here. We’ve seen price increases, so there is more equity in these portfolios. What we did see was a very cautious approach form landlords – at one point when payment holidays came into place one in five landlords took advantage of that, and obviously that raised a few questions for us.”
However, many landlords either passed on those payment holidays to tenants or used them to offer payment deferrals. “Today we are seeing less than 1% of any kind of default as a result of the pandemic,” adds Rowntree. He says demand “has returned massively” to student lets, despite – or perhaps because of – the fact that many students reverted to living with their parents for a while.
“Students have been trapped with their parents over the last few months, they would prefer to be with their friends somewhere,” he explains. “From a landlord’s perspective yields are highest in HMOs (houses in multiple occupation) than any other property, and as a professional landlord if you do have a couple of tenants move out for a period of time you can probably manage that better than someone moving out of a single-cell unit.”
One interesting development is the return of ‘amateur’ buy-to-let investors, who had started to wane as tax concessions were tightened in recent years. Rowntree says factors driving their return are low savings rates, an unpredictable stockmarket and a hedge against inflation, which is now beginning to tick up once more due to the cash the Government has been pumping into the economy through quantitative easing.
Has the boom peaked?
So, will the home-buying frenzy continue unabated? One big obstacle is the lack of stock coming onto the market. Brook at Belvoir cautions that the shortage of properties is now becoming acute, witnessed by the high level of agreements in principle that are stacking up and not progressing. “There is definitely a shortage of property and that is our biggest problem at the moment,” she says.
It’s a view echoed by Rowntree at Paragon. “I suspect there will be a bit of a cooling effect because stock is becoming an issue – if we don’t see stock increase we could run out of anything to sell in two and a half months,” he warns. “The combination of massive demand and the fact that people are being a bit hesitant letting anybody across the threshold of their properties, that combination will be a bit of a speed bump in terms of transactions.” He hopes rising prices will tempt a few potential sellers, but says affordability is also becoming a factor.
“We have seen is affordability start to be stretched – prices are now in double-digit rises, and that’s pushing some buyers out, even if they’ve got a deposit, on an affordability basis.
“Banks will be limited on how much high loan-to-income lending they can do – there are prudential constraints on that.”
Thompson at MAB adds, “It’s 11 months since that Stamp Duty break was announced and there were some ridiculously strong months in there. That activity is still very strong and that tells us a huge amount around consumer demand; we are not seeing any real slowdown in that appetite – what we need to see is a lot more supply in the market to get transactions further up.”