Should you hold off or act quickly in property buying and selling plans? Our take on coronavirus' impact on the housing market, mortgages and remortgages.
There are some scenarios where I am advising people to hold steady to see how the crisis unfolds. Throughout this blog I’m going to talk about the only situation that requires quick action remortgaging. I believe a) property prices will drop and b) mortgage lenders will tighten up. Whether dealing with me or going elsewhere, if you’re looking to remortgage for any reason, do it quickly.
I’ve included some general discussion and then some examples in italics, feel free to skip to the examples
Only two weeks ago the world was quite different. We were enjoying a property price bounce after Brexit and the election. The economy finally looked ready for a sustained period of growth, this was good news for property owners and investors. It goes without saying, but things are now different. We are most likely now looking at a recession and property price drop.
If prices are about to drop, mortgages lenders will look at your case much more favourably now than they will in a few weeks’ time.
Example 1 – Repaying Credit Cards
If you owe £100k on a £150k house, you are mortgaged to 75% Loan-to-Value LTV. If you wanted to draw out £20k to pay off that credit card, you’d be left with a £120k mortgage on a £150k house. But what if prices are about to drop 15%? The house would now be worth £127.5k, this would mortgage you to approx. 95% LTV.
You may not be able to get a 95% mortgage (as many can’t). This scenario can be worsened if that credit card is currently on an interest-free deal, due to expire. If we are about to hit a recession those cards can be harder to come by. Paying the interest on that card might cost that person around £500 per month.
Example 2 – Portfolio Buy to Let Landlord
As some of you will know, when you own four or more buy to let properties you now have to meet the government’s ‘stress test’. You need to be mortgaged to 75% LTV across your entire portfolio while meeting certain affordability calculations. Say somebody reading this is currently levered to 70% across their portfolio. Relatively, a safe place to be. Let’s have a look at how that changes as prices fall
Beyond a 5% price drop would result in this landlord exceeding the portfolio landlord limit of 75% LTV. If this landlord then wants to buy another property, they wouldn’t be able to. Or should there be an issue, and the Landlord wants to remortgage to withdraw funds to fix it. They wouldn’t then be able to.
Property prices tend to move slower than other asset classes, like stocks, which can be seen changing from second to second. If you buy a share on the FTSE 100 you can agree the price instantly and you will own it within three business days. Property on the other hand takes time. A standard purchase can take 6 weeks if things go smoothly, and 2-6 months if they don’t. Property price indexes use either the valuations or completed sale prices. These take time to collate and so are considered ‘lagging’ indicators. Even when a valuer’s opinion is used, that opinion will need to refer to sales comparables from the local area from the last 6 months. This creates a ‘drag’, a tendency to weigh more towards how prices have been over the last 6 months rather than their momentum now.
Added to this are the people involved. Estate agents’, and sellers’ incentives are to keep prices rising. The difficulty is, agents are usually the ones you’d ask for an opinion on prices.
So, if the indicators are lagging, prices moving slowly and the experts have skin in the game, how do you know if prices are about to drop? Only reasoning and intuition. They could have dropped already, but it may take a few weeks for the numbers to show it and the people around you may not want to see it.
There are three ways Lenders control the kind of business they do:
Regarding criteria, it can take lenders time to adjust policies. Sometimes changes are subtle and are designed to cut out a certain type of customer. For example, a year ago it was fairly easy to get a mortgage based on one year’s accounts with a high street lender. Now they will do it, but only with an appropriate reason as to why we can only provide one year. They likely wanted to cut out the borrowers who had just had an exceptionally good year and would go back to their normal level of earnings next year. For this, or other rules there are always borderline cases. It may become harder to place those borderline cases
For price; even though interest rates have just been set at their lowest ever level, there will still be some kinds of business that lenders won’t want. At the moment, the powers of competition are keeping ‘specialist’ rates low, but I would not be surprised if more specialist cases see higher rates down the line. Banks keep careful watch on what mixture of business they’re doing, if they want to reduce exposure to a certain risky area they will raise the price.
Lastly, credit score. It’s not commonly understood that lenders’ credit scores really don’t follow your Experian/Equifax score all that closely. They use much of the same information, but are asking a different question. The standard credit scores are very good for telling credit card providers, personal loan lenders, car finance companies etc the likelihood of you making your payments. For mortgage lenders, they want to know ‘how reliable is this person at making payments, how risky is their specific mortgage/property, and how does this fit in with all the other business I’m doing’. Now, imagine asking that question in a period of sustained growth, then repeat during the crisis. These algorithms take time to adapt, I imagine they will tighten during the current period.
Example 3 – Complex Self Employed
Let’s take a person with a complex income, the sort of case that would be considered ‘borderline’ for most lenders. I recently dealt with a client who was a UK based contractor for an American company, was paid in dollars and spent around six months a year in various overseas locations. We were able to get this case placed with a lender after some effort. When things begin to tighten these ‘riskier’ cases are the first to suffer. If this person were looking to remortgage now, I’d advise them to get this case submitted as soon as possible.
Example 4 – Adverse Credit
Since 2008, the last six months has been the best time to get a mortgage if you have bad credit. Missed payments, CCJs, Debt Management Plans can all be accommodated. I have a case on my desk at the moment for a client with an unsettled £1.8k CCJ from 18 months ago. I could place this with either of two lenders. On Friday, one of the lenders withdrew the appropriate product, so we now have only the one lender to deal with.
Example 5 – Affordability
At the moment, lenders will happily lend around 4.75x a person’s income for a purchase. Some will stretch to 5.5x. When I started in mortgages in 2006 this was 3.5-4x. In a recession, lenders will start to cut ‘riskiest’ areas first.
I recently had a client who failed affordability with the first two of three highstreet lenders. With the third, we were able to get the case to pass with a five year fixed rate. It’s these kinds of options I expect to get cut. I wouldn’t be surprised if the average income multiple starts to come down across the industry too.
To conclude, I believe there will be a property price drop and mortgage lenders will gradually tighten. It won’t happen overnight, it will cascade down from the most risky areas first. Two specialist lenders made product withdrawals on Friday, which for me signals the start. I will never push for sales or business, but if you need to remortgage for any reason I’d strongly recommend putting this through a broker who can work quickly.
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The guidance and/or advice contained within this website is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK. Not all products and services mentioned are regulated by the Financial Conduct Authority. Your home may be repossessed if you not keep up repayments on your mortgage or secured debt