The coronavirus pandemic is set to have a lasting financial impact on millions of borrowers. Whether it is a period on furlough, a payment holiday, a shift in earnings or a change of career path, almost every client is presenting new challenges for brokers.
Furthermore, constantly changing criteria and a purchase market in overdrive thanks to the extended stamp duty holiday are adding to brokers’ workload.
Simple applications are few and far between, with many advisers starting to feel as if complex clients are becoming the new mainstream.
“When I had an old-fashioned ‘vanilla’ case the other day, I almost fell off my chair,” says Ash Ridge director Jane King. “But, even then, the lender came back and asked for a billion bits of paper.”
King’s experience is reflected in figures for March from Legal & General Mortgage Club’s SmartrCriteria tool, which shows an increase in broker searches for mortgages to suit borrowers with financial complications, such as credit impairments, furloughed earnings or multi-stream income.
Meanwhile, official data shows that more than 700,000 borrowers have found it difficult to keep up with mortgage payments in the past year. The government’s Household Resilience Study found that the main reasons for such difficulties were: being furloughed on reduced pay — 34%; working fewer hours/less overtime — 31%; unemployment — 25%; and an increase in other costs — 19%.
Some of those struggling have opted for a mortgage payment holiday, with UK Finance figures showing that 130,000 borrowers still had a deferral in place in December 2020, down from 1.8 million at the peak last June.
‘Parallel universe’
For advisers, these are a lot of factors to contend with, particularly as the Financial Conduct Authority found in its coronavirus Financial Lives Survey last October that 53% of adults were displaying at least one “characteristic of vulnerability”. It means a lot of care and attention is required, and the work involved in each application is likely to be higher than usual.
Adverse Money director Michelle Leyland says: “If we thought things were complicated before Covid-19, we have just leapt into a completely new, parallel universe of complex criteria. Praise be for the likes of criteria platforms such as Knowledge Bank keeping us up to date on the major and minor changes that lenders seem to be making daily.
“There are no two lenders with the same criteria at the moment, so out of the 103 lenders on our panel that certainly makes for an interesting challenge. What this means for individuals with complex incomes — such as the self-employed, limited company directors, those on zero-hours contracts, furloughed workers and those with less than a perfect credit score — is that it is a minefield.”
Leyland says it has become essential for borrowers to speak to a broker who is experienced in this sector of the market. She worries for those who attempt to go direct.
“We are in unprecedented times and lenders have had to keep moving the goalposts to accommodate risk factors. But it has become impossible for consumers to completely comprehend what is going on. If they go direct and are subsequently declined, they may just give up.”
For Leyland there have been some standout lenders for particular types of client.
“Leeds Building Society has been fantastic with my first-time buyer clients, who have no adverse credit but only have a ‘good’ credit score due to lack of history. It seems like everyone else at 95% LTV will only pass clients with ‘excellent’ scores.
“Precise is my go-to for complex new-build cases. Its affordability is excellent and its ‘Right first time’ checklist has helped me get two offers through in under two weeks.
“Kensington has also saved the day on a couple of my cases. In one instance a previous broker had embellished the borrower’s score so it was falling outside the scope of high-street lenders. Kensington also accepts the latest year’s income for self-employed borrowers, which can be very useful.”
Deferred payments
Lenders have also accommodated borrowers who had to defer payments during the pandemic, according to Altura Mortgage Finance director Rob Gill.
“Despite concerns within the industry at the time the scheme was announced, I’ve placed numerous mortgages for borrowers who took payment holidays last year but went on to resume repayments. These included a £1m-plus remortgage for an executive out of work when Covid hit who then secured a new job; and a remortgage for the owner of a substantial healthcare business that faced obvious challenges in the pandemic. I also placed a buy-to-let remortgage to fund the purchase of an additional property for a couple who were both self-employed.
“All of these cases were agreed with mainstream lenders – in no particular order: NatWest, BM Solutions, Santander and Barclays.”
King has had a similarly positive experience with most lenders in their treatment of borrowers who have taken payment holidays.
“I don’t think there has been much of a problem. Either it does not come up on the application form or it shows in the credit score, but lenders do not seem to mind it and I have not had a single case declined on these grounds.”
Nevertheless, King has had “a few clients who have been upset because the lender has recorded payment holidays as missed payments, which it shouldn’t have. I have had to write a stiff letter to the lender to stop that”.
However, Heron Financial director Matt Coulson has encountered a few situations where he feels that lenders have not been fair to struggling borrowers.
“I can understand why a new lender would want to make sure that the borrower was up to date with payments before it allowed a new deal to be taken out.
“But the case I found trickiest to explain to a client was where they had taken a payment holiday and wanted to do a rate switch with their existing lender. They could not proceed unless they not only resumed payments but also made up the shortfall of payments that had been deferred, which for many borrowers would run to thousands of pounds.
“To me that feels harsh. The borrower has taken a mortgage holiday because they are in financial difficulties, but then they are unable to avoid going onto the standard variable rate. It feels like a punishment and it does not sit well.”
Freelancer obstacles
For King, freelancers are facing the biggest obstacles.
“The self-employed and contractors have been treated appallingly by most lenders. I’m furious,” she says.
“The main sticking point for me is that some are now trying to forecast future earnings. But accountants do not like doing forecasts and they are not going to be able to do them with the way things are at the moment. How on earth are they going to predict profits for the next financial year?”
Santander was praised by advisers recently for saying it would disregard 2020/21 earnings for those who had been negatively affected by the pandemic. Yet at the same time the lender has temporarily restricted LTVs of self-employed customers to 75% unless they are existing borrowers who are moving home.
Coulson has found Clydesdale Bank and Bank of Ireland helpful with some difficult cases lately.
“We had a borrower who was able to get a loan amount that we did not think would be possible, thanks to the way that Clydesdale was willing to assess their income. The client was a 23% shareholder in the family business and the lender was able to look at a combination of salary and profits, whereas the normal underwriting stance would be that, unless you owned at least 25% of the business, lenders would not be able to consider any of the profits,” he says.
In another recent case, Coulson says Bank of Ireland went “above and beyond”.
He explains: “The client had been told by pretty much every broker that it would be tricky to get a mortgage because they were on furlough. They were due to go back on a part-time basis temporarily before resuming full-time hours further down the line – it was a phased return.
“We were able to get the employer to confirm everything and the underwriter was happy to accept the fact that the client would be going back to full-time hours in a couple of months. It meant that we were able to obtain a mortgage based on their full salary.”
Long-term scars
The long-term economic consequences of the Covid crisis remain to be seen, but it is likely there will be significant changes to the way we work and some people will be financially scarred for years.
Even with all the support measures from the chancellor, some industries have been particularly badly hit. For those working in the worst-affected sectors, there is the potential for trouble where, two or three years down the line, we see applicants with several defaults or county court judgments on their credit files, and they will struggle to get a mortgage.
On the flipside, many people have been able to transition easily to a home-based role and they are finding they have not spent money on commuting or holidays over the past year, so finally they have managed to save a deposit and buy a house.
It feels as though the market is divided into the haves and the have-nots.
To avoid discriminating against those who have fallen on hard times, it will be important for lenders to acknowledge that the situation some borrowers have faced this past year is not normal and not their fault, says Coulson.
He believes a common-sense and compassionate approach is needed.
King agrees and stresses that lenders will need to move away from a “tick-box” attitude to underwriting.
“Smaller building societies have always been good at this, where you find that you can speak to an underwriter or a business development manager.”
She accepts that it is not easy for large lenders to replicate this model at scale.
“With big banks, everything is automated and computerised, but sometimes human intervention is needed. I think they will have to become more flexible and give individuals the authority to sometimes take a view on a case.”
If there is one silver lining for brokers in the post-pandemic mortgage market, it is that the complexity of criteria and the diversity of borrowers’ needs will make the role of independent advice more important than ever.
