An update from Private Finance on the current lending landscape
It has been a tumultuous few months, going from a housing market placed into a state of suspended animation by the initial lockdown to one defined by frenzied activity – to such an extent we have seen prices rise to the highest on record, in spite of the economic turmoil.
Below you will find an update on the current mortgage market, which remains restrictive, even for borrowers who historically would have been strong lending propositions, such as company directors. Lenders remain cautious, and rates have and are increasing for all but the lowest risk lending propositions (circa 60% LTV and below), are significantly higher when borrowers are trying to maximise loan size and lending criteria has been tightened.
However, with light at the end of the tunnel of the Covid pandemic being presented by the vaccine, we may see lenders becoming more bullish in the coming weeks as borrowing at institutional levels remains incredibly cheap. We have recently seen the return of one lender at 90% LTV, albeit with expensive rates, and more could follow and competition on rates will ensue…
With access to every lender on the market and strong relationships with specialist lenders, we can provide you with access to bespoke lending solutions in certain circumstances, so whilst the market may be becoming increasingly restrictive, if there is a potential solution we will find it for you...
Below you will find some of the most recent major changes in the mortgage market that are likely to affect the greatest number of borrowers:
Significant reduction in income multiples:
Barclays, one of the largest mortgage lenders in the UK, suddenly changed their loan-to-Income multiple from 5.5 x income to 4.49 and other lenders followed suit and now there are very few lenders who will consider above 5 x income, and these are only relevant in very specific circumstances. The 0.5 x difference in borrowing can be significant in terms of the property one can afford and could mean the difference between a flat and a house or a buyer having to rethink their search to a different area.
Lenders pushing borrowers towards longer terms
3 and 5-year fixed rates are highly competitive at present and there has been competition from lenders in this space, with the best rates for these terms at near parity at 1.27% and 1.3% respectively. Lenders are encouraging borrowers to take longer terms to ride out the wave of uncertainty and 3 and 5-year products seem to have replaced 2-year products as the key battleground for lenders competing for business. It is important to remember that longer-terms may not be for everyone, while they suit second-steppers, they are not necessarily the best choice for first time buyers.
Higher LTV market remains restrictive and significant rate rises have been the norm
The 90% mortgage market has been effectively extinct over the last few months of and those lenders that were coming into the market, they were only offering products available for a very brief period; such as TSB who launched a 5-year fixed rate mortgage deal aimed at first time buyers who have a deposit of 10 or 15%, but for one day only! However, now one lender has returned 90% to their core range and we expect others to follow, but this level of borrowing is now highly expensive, and the difference between 90% and 85% can be significant and in the range of an additional 1.5% per annum. We have seen significant increases in rates across the board at higher LTVs, even at 80% – one recent example being from mainstream lender, who increased their rates at 80% LTV or higher by 0.57% on 2-year products. Lenders are seeking to increase margins on higher-risk borrowers to account for the economic uncertainty, and they can do so currently without reducing demand. Currently, if you want to achieve the lowest rates on offer you will need a deposit of at least 25%...
Applicants with income affected by Covid
Covid has created a very specific set of circumstances, from furlough to mortgage holidays, all of which affect applications. With the furlough scheme having been extended to March we have seen lenders stop accepting applications from furloughed workers, whether this income is topped up by their employer or not. This is a blow to the millions of workers still on furlough and is indicative of the cautious approach lenders are taking at present and their fear that these workers may not have jobs to return to come the end of the scheme. Moreover, while mortgage holidays may not affect your credit score, they significantly affect an applicants future ability to borrow, as in effect the borrower has announced to the lender that they cannot afford their mortgage in its current incarnation. The same goes for CBILS and Bounce Back Loans, they too suggest to lenders that a business is struggling and with the advent of further Covid-related restrictions announced today, lenders are going to scrutinise the affordability of these cases even further.
Self-employed and controlling directors
With SMEs bearing the brunt of the economic fallout from Covid it is no surprise that lenders are scrutinising these types of borrowers to a greater extent and LTV and income multiples have been curtailed by lenders across the board. Borrowers need to expect lengthy questionnaires designed to ascertain the long-term viability and profitability of any busines, and this includes providing business bank statements and again having these thoroughly scrutinised. Moreover, if a client’s business is deemed to be in an “at risk” industry i.e. hospitality or entertainment, they are likely to very much struggle to find a lender who will consider their application at present.