COVID-19’s long-term impact on mortgage lending

My biggest takeaway from the COVID-19 pandemic so far? Previously resolute lenders' mortgage criteria are no longer set in stone. They have become dynamic, reactive and tenuous.

Each month, week, and day, borrowing terms change. Lenders seem not to work to an ethos or an 'ideal', as they have done up until now. Instead, they introduce or amend criteria based on the latest data sets and figures impacting industry sectors.

The new 'normal', so far as such a thing exists, includes lenders:

• withdrawing 85% to 90% LTV products without warning;
• performing U-turns on mortgage offers on applications that conformed to criteria only hours before;
• introducing stricter lending criteria, including new risk factors, and
• subjecting brokers to long delays, due to staffing levels and the incumbent market.

This combination has presented many challenges for mortgage brokers and consumers alike. We're all having to navigate a maze of changes and a complex set of hereto unheard of circumstances.

Risk and the new mortgage 'rule book'

Honestly? It feels like lenders have torn up the pre-COVID-19 'rule book' for mortgage lending. In its place, we have a new, dynamic one that they're writing on the fly!

The main reason for this ad hoc playbook is that lenders are factoring in a potential tidal wave of risk.

There are new threats, like furloughed workers and industries affected by lockdown. Then, old ones resurfacing, like redundancies, house price insecurity and (probable) significant economic downturn.

If this feels like the carnage after the financial crises of 2007/2008, that's because it is like that. Only this time, it could get a lot worse before it gets better.

To understand what lenders are going through right now, we need to understand their lending model.

The effect of new risk on industry sectors

First, remember above all else that mortgage lending is a risk-based business. Lenders use complex algorithms that sift through data to determine if you're a suitable borrower.

Often, lenders automate this process, bypassing the humanity of an underwriter. But they're updating these algorithms daily based on their information sources. And that's key to the peaks and troughs (lots of troughs) that we're seeing.

Imagine that you work in an industry that the bank considers to be a high risk. Let's use hospitality, retail or entertainment as examples.

This year, we should have had the European Nations' Cup and the Tokyo Olympics.

Pubs full, merchandise a-plenty and a surefire surge in electrical consumables sales.

With a click of a finger, all that's gone.

The High Street is silent and all that merchandise is stuck in a warehouse or port because nobody wants it.

Instead of lenders seeing those industries as stable or low risk, the opposite is now true.

If you work in any industry subject to lenders' new risk factors, tread carefully. Lenders will assess your affordability against stricter criteria!

The evidence of daily change to lending criteria

You don't have to look far to see evidence of these changes in play. Have you tried using a lenders affordability calculator recently? We have: WOW! This happened to one of our brokers:

A mortgage enquiry came in in the usual manner. Our broker demonstrated what the client could borrow based on a lender's calculator. Yet when he input the same figures the next day, the top borrowing amount had plunged by 10%!

Really!?

Don't get me wrong. It's not that banks don't want to lend. They're just trying to figure out to whom they can lend.

It's the proverbial: stuck between a rock and a hard place. Factor in that they're working well below operational capacity, and it only compounds the problem.

For weeks, now, we've seen a more deliberate, cautious and stricter approach to lending. I believe this is likely to continue for the foreseeable future.

Borrowers most likely to feel the effects of this new outlook are, you've guessed it:

• the self-employed;
• limited company directors;
• contractors;
• freelancers.

Lenders are examining these types of clients with a fine-toothed comb.

Change of emphasis on what lenders deem risk

Choosing a specialist mortgage adviser has never been so important. They can help you build as strong a case as possible to show you can afford repayments. They'll also help remove areas of concern any lender might have, which is just as important!

If you've enquired about a mortgage with a bank recently, you'll have noticed their change of tack. The first question they ask now is:
"Which industry do you work in?",
not:
"How much do you earn?".

This is significant!

We're continually submitting mortgage applications for fixed term contractors on a daily/hourly rate. Pre-pandemic, lenders weren't overly concerned about time remaining in the current contract.

But what we're seeing now is perhaps the beginning of a worrying trend. If you're in an industry on their watch list, they could ask for 3-months remaining on your contract. Even then, they could still ask for evidence of a contract extension.

How the new criteria have affected how much you can borrow

Lenders are also placing tighter restrictions on income multiples. For instance, Nationwide has slashed its income multiplier. They used to apply a multiplier of 4½-to-5 times a contractor's gross contract income. They've now temporarily restricted that affordability multiplier to 2-to-2½.

So, before the pandemic, a contractor on a day rate of £250 with good credit could borrow up to £260,000. Under their new criteria, that potential's plummeted to only £130,000. And that's irrespective of the industry the contractor works in.

The building society has opted for this blanket approach to contractors. Luckily, Nationwide aren't typical of most contractor friendly lenders.

The writing was on the wall

Back on May 11th, I posted the article, "Mortgage Payment Holidays: Good or Bad for Contractors?". Therein, I tried to discourage contractors from taking a 'mortgage payment holiday'. That was unless they were genuinely struggling to make repayments, of course.

The reason I went down this path—and it was a lonely one, for a while—was that I could foresee problems. I've seen the market's ups and downs over the last decade and a half. I could see lenders penalising borrowers looking to remortgage with a different lender.

I wish it wasn't so, but this scenario now seems to have transpired.

Yes, it was good of the government to tell borrowers they could take a mortgage payment holiday. But it was the ambiguity of the "without it affecting their credit history" that was the problem.

It was like The Gold Rush. People couldn't put their repayments on hold quick enough. The culmination was big enough to send lenders' various risk departments into tailspin.

And now, we see that payment holidays are actually forming a part of the new lending criteria.

Why shouldn't lenders factor this new risk in?

If your industry was affected by furlough, what's to stop the same happening again? There is no greater risk to lenders than another lockdown and/or payment holiday.

Please, talk to us

The bottom line: nothing is certain in the mortgage lending world, any longer. The goalposts are moving daily, and in all manner of directions.

The key to anyone's mortgage success is choosing a broker best equipped to work on their behalf. That means knowing how and why you work the way you do. It means a broker in touch with the kaleidoscope of lenders every single day.

For our clients, that means brokers who know what it means to be self-employed. All of ours are, and proud of it.

If you're struggling to make sense of the contractor and/or mortgage market, pick up the phone. We're waiting to have a genuine, confidential, no obligation chat. If for no other reason than to put your mind at rest, to confirm that the world isn't against you, talk to us.

As the saying goes, it's good to talk. And it just so happens we got where we are by being bloody good listeners. Thank you.