October mortgage market ‘cliff edge’ could be less severe than feared: IMLA

Rozi Jones
14th September 2020
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"The mortgage market has remained strong and resilient in the face of Covid-19, and figures suggest that most borrowers will return from payment deferrals with little or no difficulty."

Concerns about a potential cliff edge scenario for the UK’s mortgage market on October 31st could be exaggerated, according to new research from The Intermediary Mortgage Lenders Association (IMLA).

The Association’s latest report suggests that the impact of Covid-19 support scheme closures could be less severe than anticipated, with lenders expecting between 0.5% and 5% of borrowers coming off payment deferrals entering arrears.

According to the report, lenders expect a further 1.5% of borrowers on ‘payment holidays’ to be able to make interest-only payments, meaning a large majority of borrowers are likely to successfully return to repaying their mortgage. Projections from the Bank of England also show that the number of furloughed workers is expected to fall to one million in October, far below the 9.4 million employees registered in June 2020.

However, the report acknowledges that the true impact of the Covid-19 crisis will only be known once emergency support measures including the Coronavirus Job Retention Scheme are wound down over the coming months.

Fears about the state of the economy have also led to restrictions on lending, particularly high LTV mortgages. IMLA says that while these changes by lenders are understandable, they "risk a ‘chicken and egg’ scenario", with the potential to exacerbate a downturn in the housing market by limiting options for first-time buyers to step onto the ladder.

IMLA’s report suggests that if the property market is able to remain robust and resilient beyond the closure of the support schemes and into early 2021, it could begin to see lenders normalising their criteria. This includes a return of higher LTV mortgages, including 90% and 95% products.

IMLA believes that the latest housing announcements from the Government, including the stamp duty holiday and planning changes, are "likely to come with a substantial multiplier effect for the economy". However, it has also emphasised that the Government will need to avoid a sharp end to the stamp duty exemption in March 2021, with the potential for a further cliff edge for the housing market next year that could delay lender decisions to normalise criteria.

Kate Davies, executive director of IMLA, said: “There have been some major concerns that Britain’s economy and the mortgage market could face a cliff edge when the furlough and payment holiday schemes conclude at the end of October, but this latest report from IMLA suggests that the impact might be less severe than anticipated. The mortgage market has remained strong and resilient in the face of Covid-19, and figures suggest that most borrowers will return from payment deferrals with little or no difficulty. The Government’s latest measures to cut stamp duty is also likely to have sparked further demand in the housing market.

“That said, the UK’s economic recovery from coronavirus is still far from assured. While the stamp duty exemption will provide a boost, the Government will need to be aware of the risk of another potential cliff edge for the housing market next March and they may even want to consider extending or phasing out the stamp duty holiday. Lenders are also well aware of the challenges facing consumers across the country, including first-time buyers, and they are eager to return to high loan-to-value mortgages as soon as it is prudent to do so.”

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