How covid-19 is (still) affecting contractor mortgage lending

You may not have realised, but the government unlocked the 'lockdowned' property market on May 13th. At least, technically-speaking.

And in practice too because since then, we’ve seen a noticeable increase in mortgage enquiries from self-employed freelancers and limited company contractors alike.

Since then and right up to today in fact – early June, first-time buyers and home-movers seem especially keen to get moving in spite of the best efforts of covid-19, writes John Yerou, founder of Freelancer Financials, a mortgage specialist for contractors.

So after two months of lockdown, it’s encouraging to see how many buyers are still eager to press ahead with their housing plans. But before I go into detail, I want to say one thing: it's more important than ever that contractors and self-employed professionals seek the support and guidance of an experienced, specialist mortgage broker. Exactly why, is outlined below.

Low deposit mortgages on the back burner

It's a critical time for the property market and all associated parties. Lenders are yet to return to their higher loan-to-value (LTV) mortgages, which we know are vital for first-time buyers. And the majority of lenders are not in a rush to do so.

Uncertainty from all quarters is seeing lenders update their mortgage lending criteria not by the day, but by the hour! In fact, we’ve seen examples of people submitting applications based on the lender’s criteria at the time, but being returned as rejected due to the underwriter from the same lender being aware of other ‘risk factors’ being advised.  An experienced mortgage adviser can help navigate this unprecedented, dynamic maze of hurdles.

Since the UK went into lockdown, most lenders have removed the bulk of their low deposit mortgage range. These are the high LTV mortgage products, with deposits of 5% and 10%.

However, virtually all of these 90%-95% LTV mortgages were removed, meaning borrowing began with 15% and 20% deposits, or 80%-85% LTV. At one point, some lenders were accepting no less than 40% deposit for some products!

We have noticed this restriction easing over the past few weeks, however. A few lenders have reintroduced some 90% LTV mortgages, but mainly on loans below £500,000.

The housing market is reopen (technically)

Since social distancing and lockdown began, more than 370,000 house purchases have been on hold, according to Zoopla. This huge number includes a backlog of thousands of mortgage applications waiting to be offered for completion.

Until this backlog is cleared, lenders continue to withhold high LTV, low deposit, mortgages from the market. The main reason isn't spite or greed; rather, it's to reduce new or potential mortgage enquiries clogging the system further. Lenders just haven't got the operational resources to cope with large volumes of fresh enquiries.

Their main goal and focus right now is to ensure they can support existing customers and those applications still in the pipeline. While this is ongoing, the May 13th  government announcement to introduce social distancing throughout the property market and give the all-clear for agency re-openings, valuations and rental and sales processes, has pressured lenders into accepting new enquiries, which they're doing gradually.

It's not only lenders struggling; this backlog applied to valuations too. Valuers have not been able to view properties for the best part of two months. As Mortgage Strategy reported last week: ‘The Valuation Backlog is [the] First Hurdle.’ In short, the mortgage market faces around three more weeks before the 60,000 or so delayed valuations are cleared.

‘Down Valuation’ of properties trend looks set to continue

When it comes to house prices, some commentators predict a fall of between 5-10% in the near future. This is understandable, as lenders will likely want a clearer picture of the property landscape before returning to high-LTV, low deposit lending.

Even before coronavirus and lockdown affected our lives, we were noticing more down-valuations by lenders. This was especially true in the traditional strongholds of London and the South East. Properties over the £1m mark were also not holding their values as they had done historically.

That was before lockdown. We now face long-term uncertainty as we assess covid-19’s impact on the housing market. During this time, surveyors are likely to take a more reserved approach to valuing properties. This will definitely adversely impact first-time buyers with smaller deposits and those whose affordability is tight against top-line borrowing.

Another key component affecting house prices in the coming months is the impact of covid-19 on employment. Specifically, contract-renewals and earnings capacity and how they align with general confidence in the housing market.

A heady mix of those factors will affect how much contractors will be able to borrow. Lenders and surveyors will already be factoring these potential 'risk' elements into their lending policies and criteria.

Repossession: not off the cards forever

The government and the Financial Conduct Authority have been strong in protecting borrowers from having their homes repossessed. For homeowners who continue to struggle to meet mortgage payments, they're not so clear on how long this protection will last.

The FCA has said its guidance will be reviewed on a quarterly basis. On that basis, one would expect the current protection measures to be in place until end June 2020.

At the heart of the current stance is the government’s strategy to keep the public in their homes to prevent the spreading of infection. But this could all change once the government has a handle on the virus and they remove lockdown restrictions.

At that point, the lenders would be no longer beholden to the government and repossessions could soar. This would have a knock-on negative effect on the housing market, making lenders' approach to borrowers even more cautious.

Which lenders are stepping forward with high-LTV lending? 

The return to low deposit borrowing will be a case of who is willing to step forward first! Some lenders have opened the gates to 90% LTV including HSBC, Accord, Clydesdale, Virgin and Skipton.

Of those, sadly HSBC doesn’t assess a contractor’s affordability based on their contract rate, they only use accounts. But Accord, Clydesdale, Virgin and Skipton are contractor-friendly.

We’re optimistic that more lenders will follow suit in the coming weeks and months as long as the market and economy remain stable enough. But we have to factor in the earlier point that, for many lenders, operational capacity remains an important issue. Until they clear their backlog, they won’t be opening their doors to high-LTV lending. For everyone concerned, a glut of new enquiries threatens to be the straw that broke the camel's back.

The covid-19 crisis has changed everything mortgage-related; not just now, but over the mid- and likely in the long-term, too. While we are seeing signs of pent up demand and frustration, lenders are being responsible by taking the reopening process step-by-step.

How does the coronavirus crisis impact contractors' ability to get a mortgage?

The impact of lockdown has had little impact if the LTV required is below 80% (20% deposit) and the mortgage loan less than £500,000. However, for those loans greater than 85% LTV (15% deposit, or less), the 'due diligence' process lenders carry out is more demanding.

The result is that lenders are requesting additional information and documentation to support mortgage applications. This can include:

1. Latest bank statements, evidencing contract earnings (or lack of);
2. A minimum of 1-2 months left to run on the current contract;
3. For contractors with less than one month remaining, proof of a new contract or contract extension;
4. Confirmation from your employer/client that you’re able to work from home;
5. Have there been any changes or delays to your schedule of pay?

In short, they need to know how covid-19 has affected your working situation as a contractor. How this will impact on borrowing once the dust has settled, we can only wait to see. But there's clearly a new risk factor on the planet that, before December 2019, nobody even knew was a threat.

Better news if you need to remortgage

Existing homeowners can still remortgage their home, despite the disruption caused by coronavirus. But it’s important to start the process early, at least 3-4 months before your current interest rate ends. With lenders operational resources stretched, applications are taking longer than usual to process.

Applications will be longer yet if you want to make changes to your current borrowing amount or your mortgage term. If you want to borrow much more than your home was previously valued at, lenders will have to send a valuer around, which will add a delay of its own.

Also, please be aware that there are fewer mortgages available today. However, the fall in the Bank of England’s base rate in March to 0.1% means that mortgage rates are exceptionally low for those that are available. This will be especially true if you have a chunk of equity in your home. Or, if you have a substantial deposit and can get 80%-LTV or lower, the interest rate could be exceptional if you go through the right channels.

(N.B. Be very aware of the massive downside and risk of approaching the high-street direct as a freelancer or contractor. It's bad enough for specialist income like yours at the best of times! Now? Well, we actually liken it to you pushing a financial self-destruct button!)

Product Transfer is often more cost effective than a lender's SVR

Alternatively, you could switch to a new deal with your existing lender. This is a 'product transfer', and could be the quickest way to get onto a better deal. But, again: check first with a mortgage broker before you do anything. They can discuss all the options available and many of the specialist brokers are not charging a broker fee for remortgaging your property!

What we don't want to happen is for homeowners to needlessly fall onto the lender's Standard Variable Rate when their existing deal ends. Slipping onto an SVR could cost you significantly more than your current monthly repayment amount.

Remember, if you don’t take action, most lenders automatically put you on their higher rate. After everything we've been through, paying more than you need seems a bitter pill to swallow.

Final thought

That's all for now. As soon as we get more firm developments and a longer-term prognosis for contractor mortgage lending amid the pandemic and as the coronavirus lockdown lifts, we'll update ContractorUK readers accordingly.

Editor's Note: You can read more about contractor mortgages here.