Private Finance's Weekly Mortgage Memo - 30th March 2021
This is our take on what is currently happening 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.
- Will the end of lockdown herald the end of the purchase boom?
- Mortgage borrowing reaches 5-year high in February
- The high deposit, low-income mortgage market…
Will the end of lockdown herald the end of the purchase boom?
We have noticed a distinct fall in the number of purchase enquiries over the course of the last few days and believe this could be linked to the relaxing of lockdown restrictions and thus may be indicative of a slowdown in the purchase market altogether. Throughout the Covid pandemic, distinct shifts have been seen as restrictions have changed, for instance, the end of the first lockdown marked a huge surge in demand as the property market reopened and the harsh recent lockdown marked a downturn in enquiries until people had adjusted to the restrictions that were in place.
- We believe that the purchase market will slow down until May/June by which time supply will have risen significantly as people start feeling comfortable with having visitors to their homes on a larger scale again and people have adjusted to the novelty of being able to venture out for dinner, drinks or to a gallery or the like again.
- As restrictions ease, providing there is no large resurgence in cases, we may see buyers looking at city properties again and moreover we may see less people looking altogether as the home becomes less important as a space, as it did pre-covid.
- The relaxation of working from home restrictions is likely to feed into that shift and while no one is expecting the 5-day working week in city centres again, people are looking forward to getting back to work and having to commute again, may lead them to re-think moves or put a stop to moving altogether.
- Despite this slowdown we do not think property prices are going to see any significant impact but are likely to stabilise as areas including city centres, who did not see huge growth in prices during the pandemic, come back to life and lure buyers back in.
Mortgage borrowing reaches 5-year high in February
The highest gross mortgage lending figure in 5 years was reached in February - £27.7bn, according to data from the Bank of England. Partly why as we reported last week there were a record number of completions occurring this month. This figure is 19% higher than February 2020, driven in part by buyers looking to take advantage of the SDLT holiday and indicative of the demand in the housing market since the Covid pandemic began. Net mortgage borrowing in February reached £6.2bn the highest figure since March 2016 and there were 87,700 mortgages approved, 19% higher than the same time a year ago.
- These figures highlight just how much demand there has been in the housing market, partly due to both the SDLT holiday and due to buyers changing demands from housing in the wake of the Covid pandemic.
- While the number of mortgages approved was down on November, following the huge levels of demand in the market at the tail end of last summer they still show a very buoyant housing and mortgage market.
- We do now expect these figures to start adjusting to more ‘normal’ levels in the coming months, but everything depends of what happens next with Covid, as the threat of further lockdowns could again drive a spike a purchases…
The high deposit, low-income mortgage market…
Recently, we have seen many clients with large deposits who do not understand why they can’t get them the standard residential mortgage they want, for example a buyer with a low income, who has recently had a large inheritance and wanting to purchase at £1m with a £500k mortgage, expecting to be able to easily get the loan based on the fact it is low risk to a bank due to the large amount of equity. However, the reality is more complicated, and it is often not simply based on a commercial decision from the banks, but rather their hands are tied by regulation. For a regulated lend (for one’s own home) lenders must prove that the loan is affordable based on a person’s income and they also have restrictions around income multiples, credit profiles, ages they can lend to, etc. – the same with all regulated lends. So how can you finance a purchase if your income is outside of the norm so cannot go to a mainstream lender?
- There are plenty of quirky lenders out there who can take a view on a commercial basis, but still are able to justify the lend to the regulators (if audited) by using different streams of income from the norm, for example:
- Asset slicing – If someone has £2m in an invested for example some lenders can take an estimated investment yield, say 5%, and use that as income even if not historically drawn and any dividends re-invested. On £2m this gives a £100k per year usable income for example. Another way lenders asset slice is taking a view that if someone has £2m and wants to take a 10 year mortgage, they could withdraw £200k per year for those 10 years from the fund and that “income” can be used to justify the loan.
- Taking into account future income – Where many newly self-employed people struggle is they don’t have the 2-3 years of accounts most lenders need to lend to them. If incomes are extremely good in the first year and would justify a lend when realistic projections are made some lenders can base income on just projections or just one year’s figures plus projections.
- Pre-funding – Again, if there is background wealth whether it be a company in the background with significant assets but little income due to re-investment, or other income bearing assets some lenders will accept monies on account with them for a 2–3-year loan period to help justify the lend by them not actually having a commitment of the mortgage due to it being pre-funded and on account already.
- High net worth exemptions – often taken advantage of by private banks, if someone has over £300k of income or over £3m of assets lenders can apply a high-net-worth exemption to regulations to justify a case based on the individual being more financially sophisticated and therefore allowing flexibilities outside the norm.