The COVID-19 pandemic has had a large and immediate impact on economic activity in the UK, with a potentially deep recession looming ahead.
While it may be tempting to draw parallels between the coronavirus pandemic and the crash of 2008, there are also fundamental differences between these two “one in a generation” crises. To ensure the mortgage market is ready for what lies ahead, it’s important that we learn lessons from the Credit Crunch, as well as from how we have adapted to our new ways of working in the current situation.
The Great Health Crisis 2020 vs The Credit Crunch 2008
The 2008 economic crisis was a slow burn stemming from the actions of financial institutions across the world. In contrast, COVID-19 has resulted in a sudden, sharp fall in economic activity across all sectors caused by an unprecedented event that no one saw coming at the beginning of this year.
The bruising downturn in 2008 was set off by an overheated housing market. The use of subprime mortgage backed securities led to an asset bubble that collided with a sustained period of relaxed credit, both within financial institutions themselves, but also in the way that money was lent too generously to some borrowers.
As mortgage lenders struggled, they rescinded offers and started withdrawing products. It seemed that the era of the 100% mortgage was over and banks would only consider lending to borrowers with a substantial deposit and good credit record. The buy-to-let (BTL) market went from 39 lenders with 2,000 products to a low point of just 5 lenders with a heavily reduced 98 products on offer.
In contrast, the BTL market hasn’t been quite so affected this time around. On the 16th March 2020, there were 48 BTL lenders with 1,846 products. By the end of April, this had only decreased a small amount with 42 lenders offering 786 products, with three lenders stating they have plans to re-enter the market in the future. In fact, by May, Moneyfacts.co.uk found that the number of BTL deals – fixed and variable – available at all loan-to-values had increased by 283, a sure sign that the sector was bouncing back. 1
How has the crisis impacted BTL portfolios?
The immediate impact of coronavirus on the BTL is the effect on rental yields. Landlords have the option of seeking respite through Mortgage Payment Holidays (MPH) if their tenants are struggling to pay rent. However, we have seen little sign of payment pressure among their businesses and brokers and landlord bodies have been quick to caution the use of MPH as there will likely be a lookback on future financing exercises to see what landlords did during this time.
BTL currently accounts for 15% of new lending within the residential UK mortgage market, and we are hopeful that the Chancellor’s recent decision to cut Stamp Duty will go some way towards providing a much-needed boost to the BTL sector. Although the current 3% stamp duty loading for BTL properties remains, Keystone data shows that landlords could make a stamp duty saving of approximately 40% based on a property value of £333,000 - the average property value of our landlord customers.
This will undoubtedly be a key driver in increasing the willingness and capacity of landlords to pick themselves up and move forward in the latter months of 2020.
Lessons for the future
One of the biggest impacts of the COVID-19 outbreak on the housing sector has been the move to remote working and, as a result, technology has become integral to keeping businesses open. The digitalisation of the mortgage market has been on the agenda for many years; however, this crisis has been the trigger point for the whole of the industry to adopt a digital approach. At Keystone, we have certainly accelerated new processes which will not be rolled back going forward. For example, the use of video conferencing tools means broker and BDM communications have been able to continue almost without any disruption.
Despite the turbulence we have experienced over the past few months, there are encouraging signs that landlords still view BTL as an appealing way to make positive returns on their investment. Indeed, recent research from Legal & General Mortgage Club shows that nearly three in five landlords (57%) say the crisis has had no impact on their plans to stay in the market. We are hopeful that as we move towards the end of the year, we will have greater clarity on the true impact of COVID-19 and we will see the sector to continue to regain confidence.