Wealthcast: The state of the UK mortgage market – current and future

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Recorded on 30 April 2020

This transcript has been lightly edited for clarity.

How has the lockdown affected the process of trying to secure a mortgage?

Ian Henning: Well, the lockdown certainly has had a big impact on the mortgage market. Mainly because, with people unable to leave their homes barring essential services, what we’re finding now is that there’s actually a lot of processes that need to be followed for the mortgage to take place that have stopped. Valuations, for example, can’t be carried out, which will particularly affect the purchase applications from the conveyancing side. They also can’t go through with the completions now because you can’t get people moving houses at this stage. So, we’ve seen that side of the mortgage market completely freeze, which is an unprecedented event. This freeze has already had an impact on transaction volumes, which is likely to persist until June at the earliest and that’s mainly due to the timing lag you have when purchasing a property.

A survey done by RICS, which is the Registered Institute of Chartered Surveyors, estimates that we will see potentially a 20% – 40% reduction in transaction volumes, which will be based on the five-year average in 2020 and although – and now this is off the back of properties transactions which were, up until March, about 0.3% higher compared to where they were in 2019. So that’s a significant change from what we expected beginning part of this year. They do, however, suspect that transaction volumes should recover to at least 60% – 80% of the five-year average by 2021. So, the consensus is that this is going to be a short-term freeze and once we can get valuers back out and to the properties we should be able to start seeing property volumes increasing again.

Are desktop evaluations allowed and acceptable?

Neil Ambrose: In the most part a lot of the lenders are trying to accommodate where they can. Desktop valuations or automated valuations are their first choice. Where they’re not able to do that then they’re going onto the physical valuations, which at this point have been halted. Having said that, what we’ve seen is lenders have changed how they view lending in the sense that they’ve restricted lending in a lot of cases to 60%. We have, over the last few weeks, seen some lenders changing, going right up to 85% loans. It depends on the lender that we’re going to and how they’re able to conduct the evaluations.

Bill Monty: In terms of the restrictions of the loan-to-value, a lot of that has to do with the lender’s appetite for risk at the moment. Now Saville’s residential research team have given a publication this month and within that have given an expectation that short-term prices are expected to fall in the order of five to 10 percent. This figure is based on the expectation that the economic downturn will be sharp and short-lived. Whilst this is an expectation, lenders will only get a feel once valuers are able to go to the properties and value them again. Until then, this is why a lot of lenders are trying to de-risk their portfolios and that’s why they’re reducing the loan-to-values.

IH: We’ve also seen lenders reducing the types of lending they’ll look at. Some lenders have stopped lending on flats because it’s hard to get accurate desktop valuations on them, so they’ve changed their criteria. Now they’ll only look at houses, for example. We are seeing a big shift with some lenders criteria.

NA: Some lenders have shut down lending altogether because of their funding models and what we’ve also seen with the introduction of payment holidays is that some lenders are fearful that the uptake is going to be quite big. I’ve had recent dealings with a lender who shut down completely because of their funding model. If their entire book were to take a three-month payment holiday, that would equate to 12 million pounds a quarter for them alone. That also has something to do with the restrictions we’re seeing on loans. As Bill said, yes the price reductions will probably come in once things lift, but more so it’s around the lenders’ exposure to the market.

If we have a reduction in valuation, does this present an opportunity for buyers post lockdown?

BM: Definitely. Especially on the non-resident side. We’ve had a devaluation of Sterling since the Brexit vote was passed and we have a lot of international investors looking to capitalise on that, especially prior to changes happening next year.

For people who have been in the process of a transfer, how has the lockdown affected them?

IH: A lot of these people are sitting in limbo. A mortgage chain often takes place where you’ve got a buyer buying your property and you’re buying an onward property. That’s had a big impact. We’ve already seen a couple of chains fall apart because of all the uncertainty out there. Or you’ve got instances where they were right up to exchange and now they’ve had to pause. There are instances where contracts have been exchanged and there were due completion dates – so if for legal purposes you are required to complete, the government is allowing that to proceed. However, anyone pre-exchange that side of the market has just stopped. So, now you’re reliant on hopefully your chain maintaining and not falling apart which does start to add strain.

NA: To add to that, where you’ve got buy-to-lets in the process of exchanging or completing, there’s a lot of concern from the buyer where they’ll complete on a property, be liable for the mortgage and not able to have the property tenanted. Coming back to the same question of payment holidays, if somebody’s invested in a property, they now can’t cover the mortgage because there’s no tenant, they ask to now have a three month payment holiday. Regarding the question about the lender’s risk, we’re seeing quite a lot of knock-on effects on that. Where we’re quite fortunate is in doing the remortgages, where clients can get onto a better rate at this point.

IH: But lenders are being accommodating, so we are seeing a lot of lenders where mortgage offers have been issued in the past, and if they were maybe three or six months, most lenders are looking to extend those so clients don’t have to worry about their finance expiring and having to go through that whole process again. Lenders are trying where they can.

BM: It’s not just on that area. There is still some positive news as well in terms of the new builds that are completing. Normally when a new build completes you need to arrange the finance quite soon afterwards or the developer can take hold of the deposit and cancel your agreement with them. What I’ve noticed on the new build side is a lot of developers are extending that completion date, which allows a lot of investors more time to arrange these mortgages, and hopefully once the valuation market comes back they can then proceed with the completion. There are some positives.

Have you seen an increase in the rate of remortgages that are being requested?

NA: Not necessarily an increase in requests, but there’s been a lot of requests around the reduction in the Bank of England rates and how this will affect clients, and at this point we haven’t seen many rates coming down. In fact, there are some lenders who have put rates up. What we have seen is variable rates pulled from the market altogether, so where clients would have gone on to a tracker mortgage, that is still happening, but clients can no longer apply for a new tracker or variable rate mortgage.

The Bank of England rate has come down to 0.1%, but lenders haven’t reduced their lending in line with that yet because they haven’t fully felt the effect of what we’ve seen with the lockdown and the three month payment holidays potentially that they would have to weather. For the time being, we’ve not seen rates reduced. It’s tying in to where clients are getting to the end of their mortgage and where we are still able to get them a better deal because of the automated valuations. In some instances, going back to their existing lender isn’t possible because that particular lender may have closed to new business, including product switches, so we as mortgage brokers would then have to find the next best solution for our clients.

Moving to the non-resident mortgage market, has there been a change in applications from this side?

NA: From the non-res side, there’s definitely been an increase that I’ve seen in terms of the enquiries. There’s also been a lot of concern from a lot of the investors around how will the applications progress, in the sense that do we start an application today because we can’t necessarily get a valuation done. What we have seen is certainly from my side a lot of interest in new builds where the lenders have shut applications purely because they can’t do the physical valuations. As Bill mentioned a little bit earlier in the conversation, it is potentially an advantage to the investor because it allows them more time to get their application process done and to get the mortgage offer out, which at the moment is going to take longer than it would have taken prior to the lockdown.

BM: In addition to what Neil has been saying, I certainly have seen quite a large increase in enquiries which is great especially in the time that we’re in, but what I’m starting to see on the enquiry side on the non-resident market is a lot of new enquires from the Asian market such as Hong Kong, Singapore, Malaysia etc. What I have started to find is they’re in COVID-19 about four to six weeks ahead of the rest of the world. Whilst they’re coming out of it, a lot of them are starting to see opportunities in the UK market and are starting to move forward with that.

However, on the lenders side, whilst we are still in the lockdown on the offshore side, because we have such a small pool of lenders, I’m starting to find lenders have taken two approaches of this route in accepting applications. The first route is not accepting any applications up until the valuers are able to re-enter the market, and the other route is accepting applications and underwriting the process up until the point of valuation. On the offshore side, it is much longer than the onshore in terms of processing. What we can see is from application to valuation point taking anywhere between a month to two months, so these lenders are trying to take a step forward in that so once the valuation issue has been lifted, they can then move directly onto the point of going to the valuation and onto offer.

NA: Just to add to that, it also works to the advantage of the investor, because a lot of these lenders will require payment for valuation. In these uncertain times where investors are able to get to a certain point in the application, for example getting underwritten all the way to valuation without physically paying for the valuation, they will know at that point whether they are capable of going ahead. As we’re in these uncertain times, it’s really difficult to know what the lenders’ approaches are going to be, and we’re seeing an increase in requirement requests from lenders.

IH: That’s quite key there, Neil, because lenders are asking more questions that can increase your application time. So for borrowers, even when the property was due to be completed in six months or so, it really is prudent to start those applications as soon as we can, particularly where you’ve got clients in the Asian market or where there’s distance between you. Some of these lenders still require original documentation, so when getting posted packages out, it just helps us make sure you can get that case in and get it processed without the client getting to a point where time becomes critical and stress levels go up.

Sean Ritchie: So, if you are interested in applying for a UK mortgage as a non-resident, take action now.

IH: I would definitely agree with that, yes. The earlier you can start that process the better, particularly not just from application but also from a research perspective. Speaking to these banks, a lot of them publish some rates and some banks price the deal according to the strength of the case, so what you really need to do is spend a bit of time initially speaking to those lenders to find out what they’re offering and what the packaging lists are going to be. That can be quite a manual process, which can take quite a bit of time. Particularly now, because you can’t just call a bank, you might just have to deal with them via email. Having that time to put the options together for a client first and then being able to apply post that, giving us more time, just makes that process a lot easier.

Are there any last thoughts or advice you’d give to somebody who may be looking for a UK mortgage?

NA: The advice that I would give would be to make contact with an advisor as soon as possible. Some of the clients that I have won over have actually gone to brokers that don’t charge a fee who have not been able to help the clients. And I think it’s purely because there’s a lot of work that needs to happen at the moment and if the advisors aren’t charging a fee, they’re not earning any money on it. Speak to somebody as soon as you can to get the process going.

IH: I do think that although there is a lot of uncertainty out there, this will create potential buying opportunities to investors. We only have to look at what prices have done over the last ten years and since the global financial crisis back in 2008 to see what’s happened. When we look at the nationwide house price index, that shows that on average UK property prices have increased by 33% and in London those prices increased by nearly 70%, so therefore anyone who was brave enough to purchase shortly after the crisis saw a sharp rebound in property prices from 2009 onwards. Now we are in a very different market although we haven’t seen property prices drop as yet, if they do fall by five to 10 percent as Bill mentioned earlier, it could open up a great buying opportunity and I would say particularly in the new build development space where developers might be looking to offload their stock, particularly as completions are coming up. So, when we factor that in, and with the longer term forecast by RICS seeing prices rising again within the net 12 months, I do believe it creates a great window of opportunity to potentially benefit from some great property deals out there.

BM: I echo that. What I discuss with my clients is making sure they understand that what Sable International does is a little bit different. We provide advice, not sales, and when we are going through that research process with our clients, we’re going through that process with them hand-in-hand, discussing their short term views as well their long term. And whilst there may be buying opportunities at the moment in the market, there’s also concerns down the road that we need talk through, discuss in detail and make sure we help them make the best decision they can.

That’s it for this edition of the Wealthcast. If you’re interested in more expert analysis and opinion, or have any questions, you can email us at mortgages@sableinternational.com or leave a comment below.