What a ‘mare! Bigger deposits are the next hurdle for contractor homebuyers
Exactly as it is in my other interests of horses and politics, a week is clearly a long time in the housing market.
Only seven days ago it was ‘Yay’ for all those contractors who understandably wanted 90% lending products to see them through the coronavirus crisis and beyond, but now it’s ‘Neigh,’ writes John Yerou of Freelancer Financials, a mortgage specialist for contractors.
In fact, on June 3rd we outlined to ContractorUK readers how lenders had reintroduced 10% deposit mortgages. Well, technically as of 8pm on June 5th but definitely as of yesterday, June 10th, all bets are off! All mortgage lenders have now withdrawn their 90% LTV mortgage products.
Putting the cart before the horse
This 90% LTV mortgage sector is by far the most competitive and popular by volume. Many first-time buyers, not fancying the 5% Help-to-Buy alternative, aspire to save 10% deposit. Sadly, today, that 10% is no longer enough.
The overarching reason for lenders' mass withdrawal from the sector is sheer volume, on two counts. First, not all lenders had begun to reintroduce 10% deposit mortgages. So, when the government announced the reopening of the housing market on May 13th, demand was bound to outstrip supply. It’s a ‘free rein’ the government gave, which they might now regret.
Of those lenders that did offer 10% deposits, some had existing backlogs of completions from before lockdown. On top of that, almost all banks have ongoing resource management issues as many of their staff continue to work from home. In order to protect their existing clients, they have withdrawn their low deposit mortgages.
Was it too early to reintroduce low deposit lending? In hindsight, probably yes.
Flogging a dead horse
No doubt some lenders will get back in the saddle quicker than others. But for all lenders to withdraw from the 90% LTV track on the very same day, shows how unprepared they were for the gallop of new enquiries.
It's bad enough for the banks and building societies whose staff reside in this country. But spare a thought for those lenders with call centres in India and throughout Asia. Coronavirus is by no means under control there, which is not to say that it's fully under control here, making staffing an arduous task.
What is clear is that some lenders will have to think more strategically than others before they're ready to accept the herd of new mortgage applications. It's okay for the government to give the flag fall for the housing market’s reopening. But if lenders haven't the staff nor buyers the deposit, that the market is open for business is a moot point.
You can lead a horse to water…
While lenders are now open for business, a bit like a serious flutterer on race day, they are choosing carefully what business they're open for. Here's an overview (sourced from financial portal Mortgage Strategy) of which lenders tried, but failed, to reintroduce 90 LTV loans:
Accord first tried to increase interest rates on 10% deposit mortgages to stem demand. When that didn't work, they withdrew all 90% LTV products. Their official statement confirms:
"To ensure we can maintain the standards expected of us, we have taken the difficult decision to temporarily withdraw the range."
- Virgin and Clydesdale
Virgin Money and Clydesdale are two of the biggest and most amenable contractor mortgage lenders.
For them to have withdrawn their 90% LTV product simultaneously is a real kicker.
As part of the same group, the lenders' official line was the same; stating:
“We will continue to manage this closely and will let you know as soon as we can launch 90 per cent LTV products.”
- Furness Building Society
Furness is another lender with a good contactor track record. However, they've fallen foul of demand, too.
In their statement, they confirmed that their decision to withdraw 90 LTV mortgages was due to:
"Greater than expected application volumes from brokers."
Likewise, they will consider 90 LTV products, "Once service levels allow."
The TSB has gone a step further. The bank has even begun to withdraw some of its 80-85% LTV (20%-15% deposit) mortgages, in what could be the start of an even more worrying trend. In a review of its current offering, TSB said it:
"has removed its 80 to 85 per cent LTV two-year fix at 1.44 per cent, its three-year fix at 1.74 per cent, and its five-year fix at 1.84 per cent."
Don't look a gift horse in the mouth
The real ‘charley horse’ in all this is a survey of 8,000 people undertaken by Reallymoving. Its results suggest that house prices will plummet by a painful 3.8% in August. Seasonally adjusted, that drop equates to a potentially plan-changing, back-breaking 5.1% in real-terms. As I said in last week's piece, London and the South East are by no means exempt.
Those results (admittedly, yet to be borne out), eradicate 5% deposit mortgages as a viable lending option in one fell swoop. The step to withdraw 10% deposit mortgages was, thus, inevitable.
But my very real concern is for those who've taken out a mortgage just before COVID-19 got underway. What none of us in the industry wants to see is the creation of another generation of ‘mortgage prisoners.’
While prevention of this scenario is another factor for the government to consider at the highest level, homeowners do have options open to them. Remortgages with the same lender and switching to an interest-only mortgage are just two tactics you should be chomping at the bit to explore.
On the home straight
If you have concerns about your home falling into negative equity, talk to your lender. Or, to get a wider perspective without the blinkers on, talk to an independent broker about your options. Remember, the mortgage landscape isn't the provenance of a one-horse town.
Find out more about contractor mortgages here.