COVID-19’s Impact on Mortgage Availability and Accessibility
Posted by John Yerou
on June 5th, 2020 15:20pm in
Last Updated on June 9th, 2020 12:24pm.
On the face of it, here we are: moving tentatively towards the other side of lockdown. As an industry, a nation, a world of one people, we’ve longed for the lifting of lockdown restrictions since their imposition. So, now that we’re within touching distance, what does ‘back to normal’ mean?
COVID-19’s impact has turned most people’s lives upside down. For contractors in particular, the pandemic has had a huge impact on mortgage availability. But we’ve all faced different hurdles, both at home and at work. The experience has left many of us bruised, battered and unsure of what happens next.
- Slim pickings for low deposit mortgages;
- Update, 9th June, 2020: Lenders withdraw 10% deposit mortgages until further notice;
- The problem with mortgage payment holidays (especially if you don’t need them);
- Alternatives to payment holidays;
- Extra checks for new mortgage applications;
- Remortgaging Options;
Slim pickings for low deposit mortgages
Neither the mortgage nor housing markets escaped the wrath of coronavirus, and are suffering still. Whilst green shoots of positivity are beginning to appear, they will need time to take a firm root and blossom. We urge patience and understanding as we adjust to this brave, new world.
For one, the availability of low deposit mortgages, those for 5% deposit holders, has fallen away to insignificance. These 95% LTV mortgages will be amongst the last to return to lenders’ shelves, and maybe not for some time yet.
We are starting to see lenders bring back 10% deposit mortgage deals. But this is by no means all lenders. Of those that are, they’re predominantly offering 90% LTV on mortgage loans below £500K.
Update, 9th June, 2020: Lenders withdraw 10% deposit mortgages until further notice
As of 8 pm last night (8th June), all mortgage lenders have withdrawn 10% deposit mortgages from their shelves until further notice.
Virgin and Clydesdale led the way “after being flooded with applications”, with other lenders soon following suit.
The default market position is now 15% and/or 20% deposit mortgages as the lowest point of entry onto the property ladder.
No lender or organisation has yet offered a timescale for the reintroduction of low deposit mortgages.
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In time, the mortgage market will adjust to accommodate borrowers with smaller deposits. But we only expect their return once banks and building societies have had chance to unblock their pipelines.
The continuing uncertainty around the impact of COVID-19 will play a part in the short- and mid-term mortgage availability. But lenders are also having to prioritise their efforts towards supporting existing customers, all the time managing their own operational capacities.
Like other businesses, lenders have had to adapt their workforces during lockdown to work mainly from home. The influx of new mortgage applications may have slowed to a trickle, but they’ve had to handle tens of thousands of payment holiday enquiries.
The problem with mortgage payment holidays (especially if you don’t need them)
The FCA introduced a range of new measures to support borrowers hit by the impact of COVID-19. One was a ban on repossessions during this time of uncertainty. They also offered payment ‘holidays’ on loans, credit cards and mortgages for borrowers struggling to meet their agreed repayment schedules.
As it became clear the crisis would stretch on further, the FCA went on to revise their initial statement. They extended both the ban on repossessions and the mortgage payment holiday facility until 31st October, 2020.
The caveat to those extensions is that those who can afford to restart payments should do so at their first opportunity. This is a sentiment we’ve echoed, warning against payment holidays for those who don’t need them.
The extension of the mortgage payment holiday will be welcome news for borrowers who are genuinely struggling. But what are the potential consequences of taking a holiday? Both the ability to get credit and future mortgage costs could be the premium vacationing borrowers pay.
Does a double negative make a positive?
The FCA has stated that taking a mortgage payment holiday should not have a negative impact on credit files. However, it’s important to note that lenders will use information recorded now when making future lending decisions.
Taking a mortgage payment holiday when you needn’t have done will give lenders a distinct impression of you, that either:
- your income has been impacted by coronavirus and you struggle financially during periods of lockdown;
- you’ve taken advantage of the situation this time; what’s to say you won’t again?
So, what if you’re approaching the end of your fixed term and you don’t want to fall onto the lender’s SVR? Will a lender consider you seriously for a mortgage? They may well ask if you took advantage of the scheme; and, if so, for how long.
Despite not impacting your credit file per se, it will be there for lenders to see. So, yes! Needlessly taking a holiday may still affect your ability to borrow in the future. How much extra ‘risk’ lenders apportion to that decision will depend on your circumstances and the lender in question.
Mortgage payment holidays are not ‘free money’
It is critical that borrowers understand that this scheme is for a payment deferral, not a cancellation. The money you’re technically borrowing you will have to pay back to the lender.
Banks and building societies are not ‘gifting’ you that money. They will add it onto your mortgage and you will pay interest. The actual amount, when and how will be determined by your agreement with the lender.
In conclusion, mortgage payment holidays should be a last resort. There are other options available to borrowers.
Alternatives to payment holidays
During the pandemic, we’ve advised hundreds of contractors on their options, purely as part of our service. We’ve been privileged to help over 650 contractors update their current mortgages, all without us earning a penny from the process.
Contractors do have options, and can still reduce monthly outgoings without taking a holiday, including:
- switching to an interest only mortgage for a defined term;
- switching to a longer term than your current mortgage to make monthly payments more affordable.
Switching to an interest only mortgage could have a massive positive effect on your monthly cashflow. True, you will forego paying off any of the capital for the agreed term, so the amount you owe will not reduce. However, as you’re paying only the interest on the mortgage loan, your disposable income will increase.
If you’d rather continue ‘paying off’ your mortgage, you can extend its term. If, for example, you’re on a 15- or 20-year mortgage, you could extend it to a 20-, 25- or even 30-year deal. Switching to a longer term would make sense only by taking into account how many years you have left on your current mortgage.
So, in both instances, conditions will apply. And in both instances, talk to a broker or your lender about the effect of switching before making a decision.
If you’re still unsure, talk to us in 100% confidence. As we’ve already seen 650+ contractors through the process during this pandemic, chances are we can advise you, too!
Extra checks for new mortgage applications
If you’re employed, lenders are now conducting extra checks. They’ll look into whether you have been furloughed, or if you work in an industry that’s been highly impacted by coronavirus.
Self-employed people face extra scrutiny, too. Lenders no longer want to see the bare 2-3 years accounts. They now also want to ensure that your business is still viable and able to continue.
Neither are contractors excluded from further checks; lenders are asking for the following updated information:
- the latest 3-months bank statements, evidencing contract earnings;
- proof of a new contract or contract extension for those with less than six weeks to run;
- confirmation from your employer/client that you’re able to work from home;
- details of any changes or delays to your schedule of pay.
The bottom line: they want to know how COVID-19 has affected your working situation as a contractor.
Do not take a mortgage payment holiday if you have plans to remortgage anytime soon! Unless you’re planning on getting a product transfer with your existing lender, keep up your regular payments. We can’t state this clearly enough.
The recent reduction in the Bank of England base rate has created a resurgence in lender competition. They are fighting to provide the most favourable lending options to their clients. Incredibly, we are seeing rates as low as 1% at 60% LTV (at time of writing).
Contractors will want a piece of this action, but their current situation is making them doubt whether they’ll be accepted.
It’s understandable. Some contractors haven’t had their contracts renewed. Others are coming to the end of their current contract. Some limited company contractors have even furloughed themselves.
We can help contractors remortgage with their current lender, helping them avoid simply accepting their lender’s standard variable rate with a whimper. N.B. We do not charge a fee for this service!
How ‘Down Valuing’ could add another curveball
On its own, the above scenario may not seem so important or even relevant to you. But before you write it off, you need to know how far lenders are going in order to make sure they can continue providing services.
From their perspective, they are struggling to find the resources to deal with mortgage applications and completions.
On top of that, they are backed up to the hilt with applications, both those that have sat in the pipeline and new ones.
If you understand that, you’ll see why not all have reintroduced 90% LTV (10% deposit) mortgages.
Negative equity and housing market predictions (hint: no positives!)
Why lenders have been, and still are reticent in reintroducing 90% LTV mortgages is the market value of houses in general. Conservative estimates predict that house price values will drop by 5-10%.
This is especially true for the traditional stalwarts of house price security, London and the South East!! Some commentators are even predicting a wilder 20% decline in the value of homes across the board. Can you imagine? Well, here’s a scenario:
Imagine a lender issues you a 90% LTV mortgage (10% deposit). Next, and within weeks, your house price drops by 10%; what then? The reality is, you’ll be on the ‘negative equity’ waterline, thus high risk for your lender (and for you!).
Whilst lenders have shown patience during lockdown, that softly-softly approach to homeowners struggling to pay won’t last forever.
Thus, imagine further: post-lockdown, you fall behind with your repayments. Your contract ends and/or it’s not renewed. The missed payments are the straw across the camel’s back that sends your home into negative equity.
And worse, what if you’ve taken a mortgage payment holiday, even when you didn’t need to?
You will have no wriggle room, and lenders will begin to take action later in the year.
So, are you still thinking of taking a break from your mortgage payments just because you can? That you didn’t may be your saving grace if house prices fall, as is widely predicted. Remember, you do have options; use them wisely!!
Author: John Yerou
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.