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Are mortgage lenders on holiday?

Matthew Arena | Brilliant Solutions
|
1st July 2020
Matthew Arena, Managing Director of Brilliant Solutions
"There is certainly one-off deferred demand and a surge of people seeking a change after over one hundred days in their own homes."

Following the recent announcements about the relaxation of restrictions, holiday let demand in the UK has soared. Trapped in their homes for months, the great British public has decided it is time for a change.

They may be avoiding foreign travel because of the restriction of funds or nervousness about their employment; perhaps Covid-19 regulations or the desire to socialise easily with friends and family is influencing their decision: who knows? One thing is certain - the staycation is very much back in vogue.

Sustainability

Is this significant increase sustainable? In its entirety, probably not. But there is certainly one-off deferred demand and a surge of people seeking a change after over one hundred days in their own homes. High demand levels are surely sustainable for the short and medium term, as the UK looks to be heading for an uncertain end to 2020 with the end of the furlough scheme and the likely economic shock hits. That will only increase the demand for UK holiday lets. Other factors such as the value of sterling, airline turmoil and Brexit may all support this increased demand. The future looks good for holiday lets.

Delays

So why is the mortgage market slow to react to this positive outlook? Whilst the trends are overwhelmingly encouraging, both in the immediate term and the longer term, there are still huge obstacles to consider.

Waves

So much of the holiday let space operates in a free cancellation market, on which a second wave would have an immediate and significant impact. Lending with a risk of a second wave still present is clearly a risky proposition.

Economic uncertainty

Whilst the economic uncertainty is a positive in terms of demand, it still places question marks over both property prices and income. Like it or not, the risk of holiday let owners subsidising income they have lost elsewhere is greater now than it was before, so the borrower’s propensity to repay has fallen. That is a double-edged sword for lenders; capital risk and income risk are up, despite the demand for the core proposition being stronger.

Towels Down

Roma have jumped into this space seeking to plug a clear gap and taking a sensible assessment of the risk v reward in the sector. The market characteristics and the lack of competition mean that there is huge margin available for lenders in this sector and Roma is a lender that understands pricing for risk. This lender has a very hands-on approach to the property and borrower which will allow it to make sensible decisions on the risks presented by each case. This lending approach is not feasible for the majority.

Where to pitch your tent

Demand is notoriously localised, so those with an existing level of experience and local knowledge will clearly remain interested. Expect these to return quicker than others; indeed, Swansea Building Society and Furness would be two of our lenders that would fit this category, along with the Principality.

Lenders that have that localised sector experience and who can manually assess the borrower’s ability to protect against the short-term risks mentioned above will surely be re-entering. Indeed, the return to market of some lenders has seen them looking to verify the applicant’s income or savings levels as a means of overcoming the short-term uncertainty. LTVs are also not traditionally very high so there is also protection there.

When you have experience, local knowledge and mitigate the short-term risks through criteria, the sector looks safe. Without all of these, it is not a destination of choice just yet. So, whilst our enquiry levels have increased in this area and we are getting deals done, we don’t expect these mortgages to return to normal for a little while yet. After all, lenders are also staying close to home in the current climate.

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