An ‘unusually uncertain’ outlook

By: Martese Carton, Head of Intermediary Distribution

‘Unusually uncertain’ was how Andrew Bailey, the Governor of the Bank of England, described the current outlook for the economy. An understatement of the highest order.

With the UK now in the first phase of PM Boris Johnson’s roadmap for exiting lockdown, it’s time to look forward to what we can expect to face in a market that, as expected considerably slowed for the last two months.

What might help is to take a look back first at other crises that have hit the UK and the global economy to see if there is anything we can learn from them.

COVID-19 has had a devastating impact on human lives, economies and stock markets. We can see parallels between this pandemic and other crises from recent history, such as Black Monday in 1987, the Sars outbreak in 2003 and the global ‘credit crunch’ of 2007/8 – we can even add in the 2016 EU ‘Leave’ vote!

Those of us who have more than 10 years’ experience of the mortgage market will remember the 2007/8 financial crisis, when the collapse of the US sub-prime mortgage market triggered a domino effect across the global banking landscape. This resulted in the disappearance of 100% LTV loans and of course sub-prime mortgages, restrictions on lending, stricter criteria, a dip in house prices and the launch of many Government support schemes that survive to this day.

But the economy and indeed the mortgage market recovered, as we can expect them to do this time. Lending had reached record levels over the last couple of years. In 2019, £265.8bn of mortgage lending was made and 982,286 mortgages were agreed, so there is good reason for optimism that the current uncertain climate will rectify itself in time.

The Bank of England's latest Financial Stability Report anticipates a 16% drop in house prices. Latest figures published by UK Finance show one in seven mortgage holders has taken a payment holiday due to the coronavirus.

Unsurprisingly, the Bank also said that the number of new mortgage deals on offer had halved in just over a month as lenders focused on the deluge of payment holiday requests.

Against this backdrop, lenders have had to make some changes to the way they lend – albeit for the short term. Much of this is down to the higher risk environment we are all now operating in, typified by:

• Uncertainty about people’s future employment prospects – HMRC has estimated that nearly a quarter of the UK’s employees have been furloughed – that’s 6.3m jobs. Whilst the furlough scheme has been extended to October, the Government is keen to encourage as many companies as possible to start transitioning a return to work from August. It’s probably only then that we will see how many of these furloughed employees will retain their jobs and how many will be made redundant.
• Variances of the impact of COVID-19 in different industries – some industries have proved to be reasonably resilient during the crisis, but many such as tourism and hospitality have seen their revenue streams fall off a cliff. When assessing mortgage applications, lenders will need to consider the industry applicants work in to assess the longer term risks and thus the ability of a customer being able to meet their repayments. .
• Inability to conduct physical valuations – the benefits of conducting a physical valuation is so the lender can get a more detailed understanding of the property, its condition, amount of land and location. Whilst for standard properties, such as on a new build development, a remote or electronic method of valuation maybe appropriate, for some properties, a physical valuation is the only way of getting an accurate and true assessment. During lockdown, as physical valuations became impossible, lenders turned to AVM’s and desk-top valuations which meant that the availability of higher LTV loans were restricted. However, now that the lockdown restrictions are being relaxed physical valuations have returned and higher LTV mortgages are slowly becoming more available.
• Dealing with new processes and the volume of requests for payment holidays – such has been the speed and ferocity of the pandemic’s effects, many lenders have had to remodel many of their processes quickly and deal with a much greater demand for things like payment holidays and using video conferencing to stay in touch .

The good news is that, whilst devastating in its speed and impact on global economies, the reaction to the COVID-19 pandemic has been for the industry to pull together. Lenders, brokers and their customers have appreciated each other’s roles in the house buying and mortgage processes which should provide for some long-lasting positives. And, with many people experiencing new ways of working (and living) we may well see some new opportunities popping up.

Turning to 2021, the UK economy is anticipated to rebound by 15%, and get back to its pre-virus peak by the middle of next year.

With interest rates likely to remain very low for the foreseeable future and homeowners concerned about their finances, now may be a ripe time to talk to your customers about the different options, including perhaps longer term fixed rates to provide some certainty for them.

And, there will be people who have been largely unaffected by the pandemic who are chomping at the bit to move. So, there will still be plenty of opportunities for brokers to help their existing customers and attract new ones.