Private Finance's Weekly Mortgage Memo - 16th November 2020
This is our take on recent news in the mortgage market. Our views are often cited in several national publications, including; BBC News, The Times, Telegraph, City AM, FT Adviser and Daily Mail, as well as a number of key trade publications, so this should keep you ahead of the curve. If you have any questions on any of these stories, or would like further information, please do not hesitate to get in touch.
At a glance:
- A long wait for furloughed workers to get a mortgage…
- How will lenders calculate affordability for the self-employed in the long term? Long term manual underwriting
- Airbnb rentals now allowed under one major lenders mortgage criteria – will others follow suit?
A long wait for furloughed workers to get a mortgage…
With the furlough scheme now extended to March 2021 as of early this month, there are millions of people across the UK who will be unable to undertake a mortgage until they return to full-time employment. When furlough began, lenders would base an application on the furloughed income if the mortgage was affordable at this 80% of income level, however, as time has gone on lenders are perceiving those who have been on furlough for the long term as a more high risk proposition. The way they are treating these types of applicants suggests that they believe these roles are more likely to either not exist when the 31st of March 2021 comes around or that these individuals will find their income affected in the longer-term. Ultimately, many lenders will not accept furloughed income at all and others are requiring return to work letters from an employer stating the date they are set to return to work and the salary they will be on from that point – something which giving the uncertainty many employers cannot provide as what is to come is still an unknown...
- With the new lockdown it is predicted that there are up to 5.5 million on furlough (Institute for Employment Studies), this is a huge amount of people that are unable to get a mortgage, not able to remortgage and thus could be stuck with their current lender and move on to standard variable rate. If we consider joint applications with one furloughed worker and one full-time employed worker this will be even more people if they are unable to meet affordability on one income.
- NatWest for instance require that employed customers will need to have returned to work following any period of Furlough and received their first full month’s payslip before mortgage applications can be submitted and underwritten – this could mean some borrowers will be forced to wait until the end of April 2021 to undertake any mortgage applications increasing the financial pressure they are already under…
- Whilst unfortunately a number of these people will not have work to return too – it may create pent-up demand amongst those that do who are looking to purchase a new property as soon as they revert to full time work.
How will lenders calculate affordability for the self-employed in the long term? Long term manual underwriting
The economy is 8.2% smaller than it was last year and it is widely known that a huge number of self-employed people and business owners have been struggling as a result of the pandemic and in some cases incomes and profits will have been decimated over the year. This raises an interesting and important question given that in the next 6 months these much reduced incomes will be highlighted tax returns and company accounts… how will lenders calculate affordability going forward for these types of borrowers of which there will be millions? Lenders usually take an average of the last 2 years or the latest year if lower and thus there is a declining trend – this means that someone could have had 10 years of great income but this last year could negatively affect their borrowing potential. Of course, there are exceptions, and some lenders may look past this last year and use the year before, providing it is proven that income will return to pre-pandemic levels and given the uncertainty this would be very difficult to do at this point in time…
- Lenders will need to adapt and going forward underwriting self-employed case will take a great deal longer as we believe it will need to be far more manual that pre-Covid and this could be the case for the next 3 to 4 years!
- We believe this will create long term change to underwriting and accountants may need to play a key role in this and help lenders understand what has happened and how this will affect future years for which underwriters may need to see predictions.
Airbnb rentals now allowed under one major lenders mortgage criteria – will others follow suit?
Giving the meteoric rise of Airbnb and the way it has transformed the property rental market across the globe it is somewhat surprising that very few lenders include the ability to use services such as this and allow short term rentals for a limited period of time – it is only really Nationwide (on annexes) and Metrobank that do allow an element of short term letting and some other lenders allow this for a limited time on second homes. Otherwise borrowers who wish to do this need to use specific holiday let products on a buy-to-let basis that are not only more costly, but also mean the owner cannot occupy the property. Barclays however has recently broken with convention enabling residential borrowers to boost their income when they go away or utilise their annex or spare space for this purpose – ultimately this boosts a borrowers income and improves the affordability from a lenders perspective too.
- This has been a long time coming and is indicative of just how widespread the use of Airbnb and the like is.
- With a lender like Barclays offering this flexibility it becomes a unique selling point for a number of borrowers and thus we expect other lenders will follow suit to not lose out to the competition and once they do and this becomes a standard we may see a feedback loop emerge with more people dipping their toes in the water and trying Airbnb when they are away and monetising their primary residence.