A return to normal or the beginning of a new mortgage market?

The last week or so has thankfully heralded a much more positive market environment, and it has been heartening to see lenders both returning to the market, while others demonstrate their ongoing appetite to lend with new products and new credit parameters.

Even with a welcome return to new lending and an inching back into the higher LTV space by a growing number of mainstream lenders,  it’s clear that this is a market quite different to that which existed pre-COVID-19.

After all, when it comes to affordability, criteria, underwriting and the particular guidance that each lender has issued, and each adviser now needs to comply with, then the consequences of the virus are clear and evident for all to witness.

This is likely to mean a more intense scrutiny of borrower fundamentals, and the need for advisers therefore to present client income in an even more structured and precise manner. Plus, of course, a focus will be placed far more on the last three months’ than was true before the lockdown began.

The change and challenge for advisers is obvious. Prior to March, how often would advisers have to assess and present furloughed earnings and income to lenders? What about clients who have recently had to accept a lower salary from their employer for a period? What about the self-employed and contractors and the need to present the long-term sustainability of their income levels? And then there’s how to evidence bonus, commission and overtime income, which may look distinctly different over the last few months than it did prior to COVID-19?

The income picture for UK employees was already growing more complicated with each passing month, prior to the pandemic having such a devastating impact, with traditional employment tenures continuing to change for millions of workers.

Now, we have an even more significantly complex picture – one which lenders have needed to assess the merits of quickly in order formulate policy, and one that might mean for a somewhat rocky ride for both advisers and their clients as they  navigate it.

Again, lest we forget, this is a situation that has been forced upon lenders and we should probably expect a period of learning on their behalf in the months ahead. Smooth sailing it might not be.

Added to this, and clearly an issue for the many millions of employees currently furloughed, is what happens in the future, notably at the end of July – when the terms of the Government furlough scheme look likely to change – and beyond that, the end of October, or indeed during the three months prior to this when we could see a phase-out of furlough.

The onus is going to be placed on individual employers in order to fund more of their furloughed staffs’ monthly income, with the Government contribution anticipated to be dropping to 60%, and then lower again as it works down to a point where the scheme will be removed completely.

This is likely to leave employers with some tough questions to answer during that period, because we are already hearing a number of economic commentators suggesting that thousands upon thousands of furloughed employees are effectively ‘working’ on borrowed time and may well be made redundant during 2020.

Again, for lenders this represents a significant challenge because, while they can’t stare into their crystal ball to establish how each borrower’s future work prospects look, they may well have a go at determining the level of risk of those who work in specific sectors. For instance, in which sectors is employment job stability most precarious? The hospitality industry? Retail? Entertainment? Air travel?

While other markets have already been deemed ‘fit to open’, others could be waiting a quite some time for relaxation and that puts further pressure on employers and how they might approach the ongoing furloughing of staff. Employees, and prospective borrowers, might consider their job to be safe presently, but the next few months could sadly change that. Might lenders therefore be even more cautious during this next period? It’s likely.

Even as we welcome the re-opening of the house sale/home move market, the underlying complexity has increased. Advisers may need to tread carefully here because there is the potential to damage client relationships if you’re unable to deliver solutions which would usually be readily available from the mortgage and protection market.

We all know that lenders have the capital and an appetite, but we don’t quite know how – mixed with this unprecedented economic and employment situation – it will translate into the availability of mortgage funding. It’s getting significantly more complex. Consumers need mortgage brokers more than ever.

 

Rob Clifford, Chief Executive of Stonebridge