These are difficult times for anyone who wants to buy a home. Despite the government’s attempt to reinvigorate the market with a temporary stamp-duty holiday on properties costing up to £500,000 in England and Northern Ireland, unless you have a large deposit you could face a struggle.
During the crisis lenders have pulled mortgages, with those for borrowers with small deposits disappearing fastest. Some of the big banks and building societies have started to return to the market – last week saw 90% deals launched by Coventry building society and Metro Bank, and, from Monday, Nationwide building society will also be offering them.
But the choice is still limited, and lenders are asking a lot more questions than they were before lockdown.
What’s on offer
Since lockdown, the number of mortgages on the market has plummeted by almost half. Most deals that have gone are those where buyers need a deposit of 5% or 10%. According to financial data firm Moneyfacts, in March there were 779 products for borrowers with a 10% deposit, while the figure is now closer to 70.
For those with 5% deposits, the options are even narrower – in March there were 391, now just 14, and many of those are specialist products, says Eleanor Williams from Moneyfacts.
“This includes guarantor and family-assist mortgages, such as Barclays’ Springboard mortgage, and those open only to applications from selected professions, or from those in specific lending areas, such as those offered by Furness Building Society that reflect its principles as a mutual to continue to support those in their local area,” she says.
Matters are made worse by low interest rates, she says, which mean anyone saving is not seeing their money grow.
The stamp-duty holiday will give extra cash to movers and to first-time buyers spending more than £300,000. But for many, it won’t make up for the loss of 95% mortgages, says Simon Gammon, managing partner of mortgage broker Knight Frank Finance. “The stamp duty cut is not going to make that up, so, if anything, it is more frustrating for first-time buyers,” he says.
Blink and you miss it
With little choice at 90%, borrowers have needed to be on the ball to get their hands on the few mortgages that are available.
Coventry building society came back into the 90% mortgage market early last week, but not for long – it took applications for the deals between 8am on Tuesday and 8pm on Wednesday, saying the flash sale was to ensure good customer service.
Other lenders are taking a different approach to rationing mortgages. HSBC has been offering 90% home loans throughout the crisis but, since April, has limited the number of applications it accepts each day. “A small number of lenders cannot take all the business at higher loan-to-values and hence this action has been necessary,” says the bank. “We will, of course, continue to review the situation regularly and hope it isn’t too long before the market returns closer to normal.”
Nationwide building society will return to the high loan-to-value mortgage market from 20 July, with a 90% mortgage for first-time buyers. It’s re-entry is expected to be a game-changer. It has promised not to limit the number of mortgages available each day, and, as the country’s largest building society, should have more capacity to cope than smaller lenders. Metro Bank, too, has put its 90% home loans on more general release, and is not restricting them to new borrowers.
More questions
Anyone who wants a mortgage at a high loan-to-value should expect a lot of questions. Most lenders have added new terms and conditions to their deals, increasing the number of hurdles would-be borrowers need to get over.
“You are going to have to be a good-quality borrower to access a 90% mortgage,” says David Hollingworth of mortgage brokers London & Country. So anyone looking to remortgage or move may be asked if they have taken a payment holiday. “If you say ‘yes’, you can expect a more forensic examination of why,” says Gammon. “The same would apply if you have been furloughed.” He says he has not seen lenders say upfront that they will not take on borrowers who have taken a payment break, but, after scrutiny, some have been unable to borrow as much as they hoped.
Coventry building society is clear about furloughing: it is only willing to offer loans of up to 65% of a property’s value to anyone currently paid through the scheme. Metro Bank has also ruled out furloughed applicants for these deals – and when you return from furlough you must have evidence of three months’ full pay to apply.
Borrowers may also face more questions about how they raised the money for their deposit. Although help from other people is still allowed, at Nationwide, buyers will only be able to take out a 90% mortgage if they have contributed to the down payment themselves.
Lenders are also asking for more from self-employed borrowers. “Back in February lenders would ask for three years’ business bank statements and base the lending on that,” says Gammon. “Now they want statements for the last three months to see how your business has been trading.” Hollingworth says lenders are keen to see “what income can be evidenced”. For the self-employed or anyone furloughed and on a reduced income this could mean being offered a mortgage based on this sum, rather than what you would expect to earn normally.
A frustrating future
It will be some time before mortgages which require only small deposits will return, said Gammon.
“I don’t envisage lenders rushing back to the 95% mortgage market – they will want to see what happens as the furlough scheme unwinds, and also what happens to prices,” he says.
“I don’t think 95% mortgages are going to be back before the end of the year.”
Case study: ‘Every little bit counts’
Niamh Spence is looking for a house near Manchester. The 29-year-old PR manager is selling a property she bought with an ex-partner and hoping to move into a place of her own.
“I’m looking at around the £130,000 to £140,000 mark so I will benefit from the stamp duty cut. Every little bit counts, so I’m pleased about that. If you think before lockdown there were 95% mortgages, I’ve had to find extra for the deposit to meet the new requirements of lenders only supplying 85%. The problem is, there are barely no mortgages for 10% deposits and it’s so competitive – my broker says that if you don’t get in first thing in the morning you can’t get one from banks such as HSBC.”
Spence is currently furloughed, which hasn’t helped. “My mortgage in principle is based on me being on a furlough wage. Until I get back to work I can’t borrow any more, so I’m looking for something based on what I can do currently.
“I know plenty of people who are in the same position and I’m lucky to be returning to work as I know there are many who are facing redundancy. I’m selling to a first-time buyer and I’m not in a chain, but it is hard. I wish the government had encouraged lenders to come back to offer mortgages to those with 5% as asking for 10% or 15% can mean the difference of £5,000 or £10,000.”
Reference: Hilary Osborne and Shane Hickey, 'Mortgages still in lockdown despite stamp-duty holiday' - https://www.theguardian.com/money/2020/jul/19/mortgages-still-in-lockdown-despite-stamp-duty-holiday
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