How has the lockdown affected mortgage lending?

Back in January after having eaten too much lovely food over Christmas and already looking forward to brighter days after another wet and windy autumn I was very much looking forward to what I consider my favourite time of year – Spring. Who would have thought that Monday March 23 would not be remembered primarily for the Spring Equinox but for the first day of lockdown.

Loan to Values Reduced

Later that week lenders announced some significant changes to what loan to values (the percentage of mortgage to the value of the property) would be acceptable given that valuers were no longer allowed to go to a property and do a physical internal valuation. In a matter of a few days it went from 95% loan to value to as low as 50% loan to value! Halifax and Barclays capped their loan to value at 60% for example and the Coventry Building Society capped their lending at 50% loan to value on flats!

Mortgage lenders were relying on ‘automated’ or ‘desktop’ valuations for houses where as in general valuations on flats were put on hold until physical valuations were allowed to take place. An automated valuation is where the lenders valuer will look at what similar properties have sold for in the area using an algorithm and produce a figure. A desktop valuation is similar and may also include the valuer looking at Google street view for example to give a more accurate figure.

Fortunately, loan to values have improved but most lenders now require a minimum of 15% deposit with a very limited number lending with a 10% deposit. It makes it harder for first time buyers now who need a larger deposit for their first home.

Employed & Furlough (Coronavirus Job Retention Scheme)

As well as the loan to values having been reduced lenders needed to be mindful as to how people’s income might be affected by the lockdown. It affects employed and self-employed people differently. We’ll consider look employed individuals first.

For those employees who had been furloughed lenders would now base their lending on the furloughed pay (or full pay if the employer had topped it up). This will of course change when the scheme ends at the end of October.

Some lenders will not factor in commission for example now when they consider how much they will lend with others needing a minimum of 3 months of commission to include it for affordability purposes. This is because given the recession some lender feel that employers may stop paying bonuses and commission.

Self Employed & the Self-Employed Income Support Scheme

For self employed it is not as straight forward. Different occupations have been affected differently. Those whose income has been unaffected by the lockdown then lenders will accept historic earnings. For those whose income stopped or reduced since March then lenders take differing views. These cases are looked at manually by underwriters. If the turnover/income is lower than historic net profits then lenders may lend less. Those working in the travel, restaurant, and leisure industries have been particularly affected.

It has become even more of a challenge with some lenders for sole traders or partnerships where they have taken a grant under the Self-Employed Income Support Scheme. For individuals that have received the maximum grant of £7,500 in June for example some lenders will base their income for affordability purposes on £30,000 (based on the fact that £7,500 was meant to be for 3 months pay this figure annualised). If your net profit was for example £48,000 in the year to April 2019 or say £60,000 in the year to April 2020 then this restriction can have a huge impact, potentially reducing the mortgage lending by up to £150,000 in this latter example! Fortunately, not all lenders take this approach.

Lender Service Levels Poor

Lenders have been hit by a quadruple whammy that has affected their service levels. Firstly, with lenders’ staff working from home it has reduced their capacity compared to what they were used to doing volume wise in an office although this has improved.

Secondly, with around 1 in 5 households requesting a mortgage payment holiday many staff working in the new mortgage departments were moved to handle phone calls from existing customers seeking mortgage payment holidays. This tapping of resources therefore reducing capacity in new lending areas.

Thirdly, as valuations and viewings were not able to take place end March, April and May lenders were playing catch up and swamped by the volume of applications. Fourthly, underwriters are now reviewing applications manually for self-employed applicants and assessing on a case by base basis. This has caused a large backlog in itself.

It can often take 30 minutes to get through to some mortgage lenders with decisions in principle taking up to 2 weeks to get agreed and 4 weeks to review documents on full applications with some lenders. The good news is that many are quicker than this.

Lenders Nervous

Lenders are nervous about lending at high loan to values. Probably a mixture of being stretched with their service even at 85% loan to value plus also not wanting to be overloaded with applications should they decide to lend at 90% loan to value. There may also be some nervousness about what might happen to property values should there be many redundancies as the Coronavirus Job Retention Scheme comes to an end at the end of October and more redundancies follow over the coming months.

Lenders Do Actually Want to Lend

Lenders do want to lend and do want to ‘fill their boots’ given the big drop in business in the second quarter. However, they do need to be responsible. What they don’t want is to agree to lend if your income has been severely affected by the lockdown. They don’t want you phoning them up the day after completion for example asking for a mortgage payment holiday.

Whilst some lenders are being unfair in my view to the self-employed others are trying to be fair. It has made my job even more of a challenge to get a mortgage for many clients. That said if I think there is a good case and common sense would suggest someone might lend then in most cases I get the result. I just have to work even harder to achieve it but I thrive on the challenge!