Mortgage Solutions spoke to advisers to get their insight on how current and potential borrowers can withstand an economic downturn as well as their observations and learnings from the previous crash.
Richard Campo, founder of Rose Capital Partners, said: “Each and every recession is different, if we do indeed tip into one this time around.
“The 2008 credit crunch was just that, due to well-documented issues, lending ground to a halt from the high of 2007. What we are facing in 2020 is an affordability squeeze, off the back of record levels of debt on both a personal and national level and now rocketing living costs.”
During the 2008 financial crisis, lenders shut up shop due to a lack of liquidity, but Aaron Strutt, head of PR and communications at Trinity Financial, noted this was not the case this time around.
Although some product ranges have been withdrawn in recent weeks to protect service levels put under strain by high volumes of business, Strutt said: “Lenders are still providing mortgages and still have an appetite to lend; they’re still keen. Also, there are different regulations from how it was previously.”
A determined market
Strutt said while nothing was certain, the mood of the Bank of England’s governor towards the prospect of a recession suggested it was likely to happen.
However, he said people may not be willing to take as much caution.
He added: “The shame of it is things have come around quite quickly from the last recession; we had the Brexit referendum in 2016 which took years to clear up, then the pandemic which was only shifted with the stamp duty holiday. So, there’s been a lot of difficulties over the last 10 or 12 years.
“Seems like we’ve been through a fair amount quite recently.”
Strutt said that raised the question as to whether people would be prepared to limit spending as they had already faced periods where they were made to put their lives on hold, “so they might not want to again”.
Campo said for those who were able to, “if this recession, downturn, or whatever you want to call it, follows the usual path, buying sooner rather than later will benefit you”.
The housing market always has peaks and troughs, he added, so buying in a recession could result in inevitable gains particularly for investors.
Campo said: “Another trend of every cycle is that if prices do come down, there hits a point where it is an opportunity for first-time buyers. They jump into the market, prices stabilise and we are back on an upward trend again. Until the next large, unexpected thing happens.”
Karen Noye, mortgage spokesperson at Quilter, issued a warning on impulsive decisions.
She said: “The important thing here is not to do anything hastily, there is still a demand for property so the downturn may not be as much as expected or suggested. The key is always to get advice first, so you fully know your options before making any decisions.”
Noye also suggested making mortgage overpayments where possible to hedge against falling house prices and prevent the possibility of slipping into negative equity.
High risk lending
Campo said lenders were now “so much more astute than they have been in the past” and were already decreasing loan sizes for those with dependents or debts. He said he would not be surprised if they also “stiffened their score card” for those in jobs which were more vulnerable to people reducing their spending.
Strutt said employment levels were still high but acknowledged that the central bank suggested this could change.
Campo posited that lenders may reign in their scope of business further, if the finances of people came under more pressure.
He continued to say most recessions followed a predictable course of events with lenders asking for higher deposits, offering less generous income multiples and tightening criteria which put borrowing at a premium.
Campo said such a squeeze could continue until house prices fell or there was government intervention, pointing to the support the mortgage and housing markets received at the height of the pandemic.
“However, if lenders are more sophisticated as I believe they are, this cycle will be felt in the perceived higher risk areas rather than blanket criteria changes, which – while a nightmare to work with as a broker – is a really good thing for the market in general as it stops wholesale changes where they aren’t needed,” he added.
What borrowers can do
Noye said borrowers should look at the expiry date of their mortgage and consider remortgaging six months early.
She also said those on variable or tracker rates who were worried should speak to a mortgage adviser to explore their options.
An emergency fund, insurance policies and speaking to lenders about any available support was also suggested. Additionally, Noye said people should try to clear any debts and cancel subscriptions.
Strutt recognised that cutting expenses was easier said than done and suggested interest-only mortgages as a solution where viable.
He added: “I suppose this time the difficulty is that so many people have full capital repayment mortgages which are potentially quite expensive and big commitment to stick to.
“There are people who have probably stretched themselves and taken more generous loan to income multiples to get the property they want.”
Noye also said people potentially borrowed more this time round due to how house prices had escalated over the years.
Campo added: “This situation in 2022 is almost the reverse of 2008 as lenders are well capitalised but certain households and companies are very exposed. I also believe this downturn will be much shallower and shorter than 2008.”
He said the market would not be as impacted like it was during 2008, Covid or Brexit.
Campo continued: “The major issues lie with commercial loans, heavily indebted companies or households. As rates rise, and costs go up, they will feel the pinch the fastest and most at risk.”
