It is safe to say that the last couple of months have been challenging for the mortgage lending market. Economies have ground to a halt, property valuations have been frozen with many mainstream property transactions left in limbo. The vast majority of traditional banks have withdrawn from the lending market although, in light of the UK government’s recent announcements, there are signs that the wheels of commerce are starting to roll again. However, before you consider remortgaging it is worthwhile taking an overview of the market and where we are at the moment.
Wholesale money markets
From the moment traditional banks began to withdraw from the mortgage market we saw a gradual increase in wholesale money market rates. The perceived increased degree of risk associated with the coronavirus prompted money market participants to demand higher rates. So, we are in a relatively bizarre scenario whereby base rates across the world have flatlined, the UK rate currently stands at 0.1% with the ECB base rate flirting with negative territory, but mortgage rates have ticked up.
Property markets around the world are also reopening at different speeds although there is certainly movement in the right direction. As a consequence we will see some wholesale money market lenders returning to the market thereby introducing a greater degree of competition. Whether we will see a significant reduction in lending rates in the short term is debatable. That said, the reintroduction of additional competition should at the very worst cap/limit any further short-term increases in lending/mortgage rates.
Mortgage lenders
The worldwide mortgage market is traditionally split into three well-defined areas which are traditional banks, private banks and niche lenders. At the moment the vast majority of traditional lenders are not yet fully operational leaving private banks and niche lenders to service funding requests. It is important not to confuse the more flexible nature of private banks/niche lenders, compared to their traditional counterparts, with increased risk. They still require collateral, still check a client’s financial strength and still have limits as to how far they can go with regards to LTVs and income multiples. However, it is safe to say that without private banks and niche lenders the majority of mortgage lending would have ground to a halt.
Capping LTVs
Of the mortgage lenders who decided to maintain a presence in the market during these challenging times, we saw a capping of the LTV ratio at lower levels. This made perfect sense because reducing the rate created a higher degree of “headroom” between the value of a property and the level of debt. However, slowly but surely we are starting to see LTV ratios creep higher but there is still caution across the market amid concerns of a potential second wave of Covid.
Capital raisings
In recent weeks a number of our clients have stepped forward looking to raise capital and increase their liquidity ahead of potentially attractive investment opportunities. It is fair to say that not all banks are accommodating of capital raisings at the moment while there is still a degree of uncertainty regarding property valuations. As various elements of the lockdown are removed we should see a greater degree of confidence returning to the markets and more opportunities to raise capital.
Automated Valuation Model (AVM)
While a small number of companies continued to carry out property valuations during the lockdown, the vast majority of mortgage lenders have reverted to the AVM system. We know from experience that many private banks already had this system in place with some of the more proactive building societies following suit. In light of recent changes announced by governments around the world we should slowly see a return to more traditional valuation methods. However, the AVM system has been very effective during these challenging few weeks and some lenders may continue with this strategy in the short term – at least until there is greater certainty.
Remortgages
It would be unfair to suggest that mortgage lending for new buyers has disappeared but it is certainly less competitive and less widely available than prior to the lockdown. The situation regarding remortgaging is very different. The majority of remortgage lenders active in the market today tend to use the AVM method thereby resulting in far speedier agreements compared to property purchases. That said, liquidity in the wholesale money markets is limited and tough negotiations will be required to secure the best terms.
HSBC have been completing remortgages using desktop valuations with no maximum funding level. The situation is slightly different with private bank Coutts, where they still use the AVM method although there is an upper limit of £3 million. As worldwide base rates are unlikely to move significantly higher in the short medium term we are seeing a growing appetite for base rate linked mortgages. However, there are still some competitive fixed rate deals out there.
We recently secured attractive remortgaging rates for some of our clients using Coutts and Godiva:-
Mortgage lender: Coutts
LTV ratio: 75%
Valuation: Desktop AVM model up to £3 million
Mortgage type: Residential
Mortgage rate: 2.09% two year fixed
Mortgage lender: Godiva
LTV ratio: 75%
Valuation: Desktop AVM model (no predetermined lending limit)
Mortgage type: Buy to Let
Mortgage rate: 2.35% five year fixed
Returning back to normality
Slowly but surely we are seeing signs of increased activity in the mortgage lending market with some traditional lenders returning. The lifting of lockdown restrictions in many countries across the world has been cautiously welcomed by the property investors although there are still challenges ahead. It will take time to unravel some of the deals left in limbo, mortgage rates could be volatile for some time to come and we don’t yet have a full complement of mortgage lenders, but there are encouraging signs.
More than ever it is vital to research the whole market to secure remortgaging on the most competitive terms and lowest rates. This is where our contacts across traditional banks, private banks and niche lenders are priceless. We know who to approach, when to approach them and the information that they require in order to secure the best deals.
Summary
While the withdrawal of numerous traditional mortgage lenders certainly caught the attention of the media, for many private banks and niche lenders it has been business as usual during the coronavirus pandemic. Remortgaging has certainly been much easier than raising capital for a property purchase – due in the main to the uncertainty surrounding property values. The use of the AVM method for valuing property has allowed many lenders to remain competitive even in the current environment. Yes, we have seen LTV ratios fall slightly in order to increase headroom but this trend is starting to turn in light of the lifting of lockdown restrictions.
The anomaly whereby wholesale money market rates have increased while base rates have flatlined was to be expected with the greater perceived degree of risk. We should hopefully see this trend reverse in the short to medium term as slowly but surely mortgage/property markets return to a degree of normality. As an independent broker, we have access to more than 300 worldwide lenders allowing us to negotiate the best remortgaging terms in the market. If we can be of any assistance in these challenging times please do not hesitate to contact us.
