Excluding the dark days and high death rate of January, 2021 has so far been a cause for optimism. The coronavirus vaccination programme is going well and the end of lockdown restrictions is in sight.
But how will the mortgage market react to a radically altered world? Are we likely to see a spate of niche products tailored to the new ways we live and work?
The Intermediary Mortgage Lenders Association’s recent report – The New Normal – identified the 31 March stamp duty holiday deadline as the single biggest barrier to the market’s recovery in 2021.
However, the government’s recent decision to extend and taper the scheme has helped support the market and avoid disappointment for many buyers who might otherwise have missed out on the tax incentive.
Imla executive director Kate Davies says: “There will, of course, now be two further deadlines — 30 June and 30 September — and we are repeating the message that it will be important for estate agents, intermediaries, lenders and conveyancers to manage consumers’ expectations and encourage them to be realistic about the timescales required to complete transactions.”
Imla expects gross mortgage lending to rise to £283bn this year. It forecasts that gross lending in 2021 will be 17.3 per cent ahead of last year’s level, with lending for house purchases the main driver.
Busy year expected
But what do brokers think? Trinity Financial product and communications director Aaron Strutt says many brokers expect another busy year.
He says: “Lockdown, the stamp duty holiday extension and now the government’s push on 5 per cent mortgages are strong indicators that the mortgage market will be busy. Lenders have been inundated with applications and they are still offering cheap rates to most borrowers. The 10 per cent deposit deals have got better as competition has returned to this part of the market.”
A key factor that is almost forcing borrowers to use brokers is the complexity of the mortgage acceptance criteria. Many borrowers do not know where to start when it comes to mortgages, especially if they are self-employed, have missed payments, have taken payment holidays or have an unusual financial situation.
Stonebridge chief executive Rob Clifford says 2021 looks set to be a much better year than he had dared hope for. He predicts that gross mortgage lending could be as high as £270bn–£275bn.
“I also believe there is a great period ahead for intermediaries. Consumers have shown repeatedly and unequivocally that they prefer talking to an expert for advice — hence the intermediary share of the market has grown year on year for several years.
“Add to that consumer preference and the fact that many lenders have significantly downsized their in-house mortgage advice capability — signalling a continued move from branch-based, direct-to-consumer lending in favour of broker volumes — and I think all the signs are positive,” he says.
Polarised impact
When it comes to UK consumers’ finances, the effects of the pandemic are dramatically polarised and have further entrenched housing inequality.
Those in white-collar jobs who have been able to work from home have saved on commuting costs, while also saving cash usually spent on socialising, holidays and hobbies. At the other end of the scale, many low-income workers have suffered financially after being furloughed or laid off from jobs in the worst-hit sectors, such as hospitality and retail.
Some self-employed workers have been able to claim £21,570 in grants (with more to come), while others have received nothing.
“The impact of the pandemic on individuals’ lives has been very uneven, with some facing catastrophic changes and others hardly affected,” says Davies. “The wide range of outcomes is bound to spill over into the housing market.”
UK Finance data shows that more than 700,000 residential fixed-rate mortgages are due to reach maturity in 2021 — and many of these borrowers will want to remortgage.
While some consumers will find the process relatively straightforward, for others the impact of furlough, payment deferrals, salary cuts and job losses may make it a lot more difficult.
For first-time buyers, 2021 is likely to see the return of many products that were withdrawn at the start of the crisis. In its Budget, the government announced plans for a Mortgage Guarantee Scheme to enable more lenders to lend at 95 per cent loan-to-value. The scheme will help buyers — both first-timers and existing homeowners — to buy property up to the value of £600,000.
Outside the scheme, both Accord Mortgages and the Bank of Ireland have already returned to the 95 per cent LTV market.
Other innovative products seen so far in 2021 include Habito’s 40-year fixed-rate mortgage, which has received mixed reviews, and more ‘green’ lending for the environmentally minded.
Clifford points out that lenders will seek market share, which is good news for consumer choice and product innovation.
“That said,” he adds, “don’t expect a raft of products that climb up the credit curve or a material return to adverse lending, because both lender appetite for risk and regulatory constraints will stop anything too racy happening.
“However, in specialist niches, such as mortgages for the self-employed, for multi-generational buyers, for contract workers and even for portfolio buy-to-let, I think we will see more product availability.”
As an example of products for multi-generational buyers, Hinckley & Rugby Building Society recently relaunched its popular niche joint-borrower/sole-proprietor mortgage at 90 per cent LTV. The product allows older people to put their name on a mortgage to help younger borrowers who cannot afford the total loan based on their income. The product can work in reverse too — enabling younger family members to supp-ort older buyers who are retired or close to retirement.
Specialist lending
MT Finance commercial director Gareth Lewis says there will be a growing need for specialist lending and products, but the question is whether the bigger lenders will be able to accommodate this.
“I would suggest the answer is no, which is where specialist lenders will step in; it’s a brilliant opportunity for them,” he says. “The age-old thing about a common-sense approach to lending, which is something the bridging industry is very much predicated upon, will really come into its own.
“The problem is that, as lenders grow, everything becomes more automated and score-card driven. The lender can’t do manual underwriting in the same way it did when it was a smaller concern, so it doesn’t have the flexibility to look at things in a different way.”
Lewis points out that not all deals underwritten by specialist lenders are risky. For example, you could have an applicant on furlough waiting for their hairdressing business to reopen, with a calendar fully booked for April and May. However, because they are on furlough, many lenders will not lend to them.
There has been much discussion of some of the more permanent changes to the economy and people’s lives that may result from the pandemic. Lifestyles have changed with millions of office workers becoming accustomed to working from home. Many are questioning whether they will ever return to the office full time, or if it is necessary to remain living in London. Others have taken on second jobs or ‘side hustles’.
SPF Private Clients chief executive Mark Harris says: “The market has been moving towards a multi-niche market for some years, with the pandemic serving to compound that environment. The classic ‘single income source’ borrower looking for three times income is not the market it was. The need for advice, whether you are buying your first home, utilising all incomes or growing a BTL portfolio, remains greater than ever.
“The changing pattern of consumer needs — with larger properties potentially further out from the centre of cities and towns, with home offices — could see a growth in additional borrowing, refurbishment products and second-property lending.”
Being locked down at home for months has given millions of Brits the chance to assess their home and how it could be improved. Many people will be remortgaging to release funds to renovate their property.
Lewis says: “We have already seen an uptick in lending for renovations and will continue to do so. Homeowners are looking for the opportunity to add floor space and develop in the garden — perhaps adding a summer house for a home office or gym.
“People are investing more in their homes because they have been spending more time in them.”
Holiday lets
Another possible area for growth is holiday-let mortgages. The pandemic has made overseas travel all but impossible and we don’t yet know when we will be able to travel abroad free of restrictions or quarantine. This has led to a boom in UK holiday bookings.
Your Mortgage Decisions director Dominik Lipnicki says: “The pandemic has also shown many holidaymakers that one can have a great holiday in the UK. This may well continue, meaning more holiday-let mortgages and second-home purchases.
“While many have suffered financially over the past 12 months, some are actually better off, working from home and not spending money on commuting, going out or taking expensive foreign holidays, meaning that some will now be able to make that holiday purchase that would have been unrealistic this time last year.”
The pandemic has generally been bad news for a lot of self-employed workers. Not only were many excluded from the government’s Self-Employment Income Support Scheme, but others saw their ability to obtain a mortgage impacted too.
The rollercoaster nature of the economy and the income patterns of the self-employed during 2020 and 2021 could continue to make it tricky for self-employed applicants to get the mortgage they need. Charcol product technical manager Nick Morrey says: “The self-employed, whose income has been affected during the pandemic, will increasingly find their affordability being hit as their 2020/21 tax-year figures start to become available.
“These are likely to be lower than in 2019/20 and, as lenders often take an average of the most recent two years, this will put downward pressure on the amounts that can be borrowed. Lenders also worry if the figures drop by a certain percentage because it can indicate a failing business. Many self-employed will now fall into that category, but their businesses will be fine.”
In some cases, a self-employed borrower with an excellent record of income but a six-month blip during the pandemic will be judged over the short term, even though the prospects for their business look positive.
“I can see that the self-employed, where their business has been severely affected by the pandemic, will continue to find it difficult to obtain a mortgage,” says Lipnicki.
“My hope is that lenders will become flexible enough to look at pre-pandemic income as well as current income, once we are open for business, of course.
“My fear is that lenders will all just fish in the same pool of borrowers and offer few solutions to those who have suffered the most over the past 12 months.”
Perhaps the biggest lesson of 2020 is that anything can happen. But, ultimately, even post pandemic, the underlying drivers in the UK housing market remain the same — there simply is not enough housing stock to meet demand.
Buyers from overseas, who were absent for most of last year thanks to the inability to travel, are likely to return. The BTL market is going nowhere, with long-term fundamentals concerning supply and demand still present.
Property investors are optimistic about the future and, with interest rates low and stockmarkets volatile, bricks and mortar remain the investment of choice for many.
