"50% of homebuyers have been denied a mortgage in 2020 despite being offered one in principle."
Soon, other big players began to follow suit; over the coming weeks, the majority of lenders retreated from the 80% and above loan-to-value mortgage market, while others simply stopped lending altogether.
The decision by the big banks to leave the mortgage market was influenced by a number of factors. Firstly, as part of the lockdown measures implemented across the UK, the government discouraged people from moving home. In a bid to minimise human contact and potential transmission of the virus, onsite property viewings also stopped, resulting in estate agencies closing their doors. The property sector had effectively come to a standstill, and to reduce their risk exposure, the banks decided the best course of action was to retreat.
Secondly, and perhaps more importantly, the uncertainty surrounding the Covid-19 pandemic meant that it was virtually impossible to predict when and how the virus would be effectively contained. Were social distancing measures likely to be in effect for the rest of 2020? And what impact would this have on consumers, investors and businesses? These were just some of the questions that were being asked at the time.
Homebuyers left in the dark
As the UK slowly begins to transition out of the Covid-19 lockdown, it is only now that we are beginning to realise just how damaging the decision by the big banks to pull their mortgage products was for homebuyers.
Butterfield Mortgages Limited (BML) recently surveyed over 1,000 UK adults who are currently homeowners or in the process of buying a property. Of those, we found that 50% of homebuyers have been denied a mortgage in 2020 despite being offered one in principle. What’s more, almost a third (31%) of homebuyers said they have lost their deposit due to delays in getting a mortgage as a result of Covid-19. This is a concerning statistic which shows just how property buyers have been affected by the decision of lenders during lockdown.
Elsewhere, the survey found that 16% of homeowners have taken advantage of the UK government’s mortgage payment holiday scheme. However, an additional 14% said they wanted to use the scheme but have had difficulty applying for it through their mortgage provider.
A loss in confidence
The findings from the BML survey reveal how the decision by lenders to retreat from the market has affected property chains and prospective homebuyers. The financial repercussions that come with losing a deposit as a result of delays that are beyond the buyer’s control cannot be overlooked. The question now is whether these buyers have the confidence to once again engage with big banks given their actions during the lockdown period.
The UK real estate sector is slowly kicking back into gear. Transactions are rising and the government has been focusing on targeted reforms to ensure that buyers and sellers return to the market. In response, lenders are also returning and beginning to slowly put their products back on the shelf. However, it would be wrong to assume that all this symbolises the end of the Covid-19 pandemic.
In the immediate future, we could see a second wave of coronavirus cases as social distancing measures are relaxed. Depending on how serious this second wave is, the government could decide to once again put the country into lockdown. As was seen in late March and April, this might then lead to a second exodus of lenders from the market.
Taking a more long-term perspective, another concern is the possibility of an economic downturn as a result of Covid-19. The Bank of England has made it clear that negative interest rates are a possible solution that could be implemented if the economy does not kick back into gear. How will negative interest rates affect the mortgage market? And what will lenders do in response? These are just some of the questions homebuyers and sellers will be asking should the Bank of England lean towards this potential reform.
Where to turn?
Based on the findings from the BML research, there is no doubt a degree of hesitancy among homebuyers when it comes to applying for a mortgage. Importantly, many specialist mortgage providers have demonstrated the flexibility, creativity and commitment to meet the needs of their clients despite the obstacles posed by Covid-19. As a result, I believe there will be a significant shift in broker and borrower preferences from high street banks to smaller mortgage lenders who are more able to remain open for business during lockdown.
What the market is calling for is confidence and certainty, and these can only be achieved if homebuyers and brokers have the ability to engage with lenders who are able to arrange mortgages. Specialist mortgage providers are playing their part, and big banks would do well to take note of this.
