Private Finance's Weekly Mortgage Memo - 8th March 2021
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.
- The expectation vs the reality of 95% mortgages
- Good news for self-employed borrowers
- Open banking: Speeding up self-employed mortgage applications
The expectation vs the reality of 95% mortgages
This announcement will be good news for a number of potential borrowers, however there is definite disconnect between what borrowers expect and the reality. We have had many enquiries following the announcement and it is clear from some of these enquiries that is has created unrealistic expectations… from borrowers thinking they can buy at 95% of £800,000 with £25,000 of income with the new scheme, to borrowers thinking they may be able to borrow the 5% from a lender to make it a 100% loan also! Happy to talk through some examples of this but I did have one client surprised when I pointed out that the monthly payments for what they wanted would likely be 2x their net monthly income.
- The reality is 95% borrowing will not be cheap, with rates for 90% LTV at >3% we can expect 95% mortgages to priced higher at around 4%. However, what is interesting here is the fact that the government is underwriting a portion of this borrowing and de-risking the loan to some degree, which could enable lenders to reduce rates and this in turn could force rates down at 90% too, which is good news for higher LTV borrowers.
- Like with 90% borrowing Loan-to-income rations will be capped at a lower multiple due to the levels of borrowing and with the high rates that go with this territory, this proposition will be unaffordable for many borrowers.
- It is beneficial however to high income earners in major cities like London, who are stuck in the rent cycle and thus are unable to afford to save for a big deposit but could afford high repayments.
Good news for self-employed borrowers
Two major mainstream lenders have just announced that they are relaxing self-employed criteria, with some significant changes. For instance, Santander are increasing LTV from 60% up to 75% and TSB are removing the LTV cap entirely, with it reverting to 90%. Moreover, TSB are also allowing digressionary income and increasing the potential term to 40 years, which increases affordability for borrowers.
- It has been a tough last 12 months for the self-employed when it comes to getting a mortgage. Lenders optimism for a swift economic recovery is leading to these relaxed criteria which is great news for self-employed borrowers. We expect other lenders to follow suit imminently.
- It should still be noted that self-employed borrowers will still be subject to greater scrutiny than those who are employed for the time being and will still need to show that their income either has not been affected or is on the way to solid recovery in the wake of the Covid pandemic. We can still expect there to be a higher level of scrutiny for potentially a couple of years as lenders work on average historic levels of income for the self-employed so if a large dip was seen in the 2020-21 tax year then lenders may need to understand this dip and take a view on a self-employed persons level of borrowing/income.
Open banking: Speeding up self-employed mortgage applications
HSBC have partnered with Experian and are allowing ‘Open Banking’ – this enables self-employed borrowers to share their business banks statements electronically, significantly reducing processing times. Most lenders require 3 months of business bank statements, which involve manual underwriting, this approach on the other hand brings a degree of automation to the process, saving time, both for the lender and for the self-employed borrower…
- Currently processing times for self-employed borrowers can be significant due to the high levels of scrutiny in the underwriting process. This will hopefully reduce these and reduce the amount of paperwork borrowers need – streamlining the process which is more good news for self-employed applicants…