Vulnerable borrowers and first-timers most at risk from Covid-hit mortgage market – FCA Insight
The findings were detailed in an article from the Financial Conduct Authority (FCA) which highlighted a slow rebound may produce “further widening of intergenerational disparities”.
The research found clear access to the mortgage market had been reduced for first-time buyers and those with limited savings, and further effects of the pandemic could hit vulnerable people.
“Should this trend continue it risks widening the gap between established homeowners and those hoping to become property owners, between younger and older generations,” it said.
“Even in a scenario where the mortgage market remains fairly resilient overall, the market contours and structure may be shaped further by the pandemic, with potential consequences for vulnerable borrowers.”
High LTV borrowing contracts
Published on its Insight website, the paper was written by FCA head of research Karen Croxson and household finance technical specialist Philippe Bracke who analysed mortgage industry data through to the end of August.
They noted there had been a significant drop in high loan to value (LTV) lending and a notable increase in rates for this segment.
And while the market was beginning to recover there could be significant side effects of a fragmented or limited return to operations.
“One change may be more lasting,” they said.
“If the drop in availability of high LTV mortgages persists, along with increased rates for these products, this will impact lower income, lower wealth borrowers disproportionately.
“With these households more likely to be younger, this in turn may imply further widening of intergenerational disparities.”
Capital raising important for economy
In contrast, while remortgaging was largely stable the number of people taking out equity when doing so dropped dramatically.
If this trend continued that could also hit the national economy, they warned.
“As might be expected, the pace of remortgaging was interrupted by the onset of the lockdown, but has remained within the range of remortgaging activity seen over the previous five years,” they said.
“In comparison with the gyrations seen in home-buying this amounts to remarkable stability and suggests people were still able to switch provider – a positive indicator for competition in this market.
“Again though, those remortgaging are typically established homeowners with significant equity. So, we may be looking at another example of how recent events have been less damaging to the financial outlook and choices available to older generations, while restricting the choices of younger first-time buyers.”
They added: “If future data releases show that equity extraction bounces back, it will be a reassuring signal for the economy, given the role that housing wealth plays in consumer behaviour.”
Unemployment and economic downturn to push house prices down next year, brokers say
The three per cent decline recorded by Smart Money People was the average of the responses of the survey. When asked what the scale of change in house prices could be, the answers of the 490 mortgage brokers questioned varied between a 40 per cent decline while more optimistic responses predicted a 25 per cent rise.
Overall, the study of 490 mortgage brokers found 80 per cent expected property prices to decline or stall by the final quarter of next year.
Rising unemployment levels and a recession are perceived to be the biggest threat for the housing market next year, as half of brokers said this would negatively affect prices over the following 12 months.
The brokers believed these circumstances would be a consequence of the pandemic, as 47 per cent cited the coronavirus as a reason for falling house prices.
Other brokers felt wider changes in the market would cause a decline, with 49 per cent naming the end of the stamp duty holiday and changes to the Help to Buy scheme as reasons for any downward trends.
Brexit was perceived to be the lesser threat among brokers as just 13 per cent expected it to influence prices.
Jacqueline Dewey, CEO of Smart Money People, said: “House prices this year have continued to grow at a rate that many would have found surprising when the impact of coronavirus was first seen in March.
“However, it’s clear from many brokers that the stamp duty holiday has created a spike in demand as many people try to complete their housing transactions before it is scheduled to end in March 2021.”
“It will be interesting to see whether their predictions are correct when we consider that the recession could deepen next year,” she added.
Negative rates ‘on the table’ as base rate held and further £150bn injected into economy
The bank’s Monetary Policy Committee (MPC) voted unanimously to keep its base rate at 0.1 per cent where it has been since March, the lowest in its history.
Members also voted unanimously to increase the target stock of purchased UK government bonds, also known as quantitative easing, by an extra £150bn, on top of the existing £100bn programme.
This takes the total stock of government bond purchases to £875bn.
Minutes from the meeting noted that Covid will weigh on near-term spending to a greater extent than projected in August, leading to a decline in GDP in Q4 2020. GDP will be around nine per cent lower in Q1 2021 than in Q4 2019.
However, household spending and GDP are expected to pick up in Q1 2021, as lockdown restrictions loosen.
GDP will also be impacted by Brexit on 1 January 2021 though the MPC assumed the UK would move to a free trade agreement with the European Union.
But the MPC judged there is “spare capacity in the economy” as with the unemployment rate rising to 4.5 per cent in the three months to August, “it is likely that labour market slack has increased by more than implied by this measure”.
It stated: “The extended Coronavirus Job Retention Scheme and new Job Support Scheme will mitigate significantly the impact of weaker economic activity on the labour market.
“The unemployment rate is expected to peak at around 7.75 per cent in Q2 2021. Beyond that point, spare capacity is expected to be eroded as activity picks up, and a small degree of excess demand emerges over the second half of the forecast period.”
Turning to inflation, the MPC noted that while the figure increased to 0.5 per cent in September, this remained well below the two per cent target. However, it is expected to remain at, or just above 0.5 per cent during most of the winter. But it will “rise quite sharply” towards the target due to lower energy prices and VAT.
As such, the MPC said inflation is projected to be two per cent in two years’ time.
It added: “The outlook for the economy remains unusually uncertain.
“It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom. It also depends on the responses of households, businesses and financial markets to these developments.
The committee added that if the outlook for inflation weakens, it was ready to take whatever additional action is necessary to achieve its remit.
“The committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the two per cent inflation target sustainably.”
‘Negative interest rates certainly on the table’
Laith Khalaf, financial analyst at AJ Bell, said the central bank is beginning to “run out of dry powder” as it now holds almost half the gilt market and interest rates are already close to zero.
“That means if the central bank wants to boost the economy further, it may resort to even more extraordinary measures than we have today,” he said.
“Negative interest rates are certainly on the table. The bank is seriously weighing this up and has written to bank chiefs to see if they can handle it. QE could also shift towards different assets, such as more corporate bonds, high yield bonds and even equities, as has happened in Japan.”
“Much will depend on how the pandemic, social restrictions and the government’s fiscal response proceed from here. For the moment markets are pricing in a 40 per cent chance of an interest rate cut next year, and it’s fair to say that markets have consistently underestimated the capacity for monetary policy to loosen ever since the financial crisis.”
Khalaf added the situation was terrible news for cash savers, who have endured more than ten years of ultra-low interest rates.
“This money is slowly but surely losing its buying power, even though inflation is currently so low. That won’t be the case for too long, as inflation is expected to move back towards two per cent in the first half of next year as lower energy prices fall out of the equation,” he added.
FCA chiefs fail to explain why borrowers were not told payment holidays would affect lending decisions
In a session with the Treasury Select Committee, neither FCA chief executive Nikhil Rathi or chairman Charles Randell explained why it took so long for consumers to be told about the impact of taking a payment holiday.
Rathi and Randell were being grilled on the subject by Labour MP for Mitcham and Morden Siobhain McDonagh.
McDonagh set out the timeline of the details being published compared to statements from ministers and the FCA.
“On 18 March the business secretary reassured those seeking a three-month payment break that it would not impact their credit record. On 20 March the FCA confirmed this,” she said.
“However, the FCA did not tell borrowers at this point that the mortgage payment holiday or deferrals could still influence banks’ willingness to lend to them, even if their credit scores or ratings were unchanged.
“Why was it not until the 22 May that the FCA added these warnings to the mortgage advice page and until 1 July for similar warnings to be put on the FCA’s loans, credit cards and overdraft webpage?” she asked.
Agencies or lenders
Randell said there were two different elements being considered in the situation – credit files maintained by credit reference agencies, and lenders making decisions about customers requiring the full detail of the borrower’s position.
However, he did not explain why there was a delay in being clear about the situation.
Rathi (pictured) said of the latest measures first announced Saturday: “We’ve been clear that the credit file masking is there for three months.”
He added that the FCA had been clear over the last week, that the credit score break did not mean lenders would ignore the additional indebtedness when making affordability decisions.
“It is important that when a lender makes a future lending decision they have an understanding of the overall indebtedness of a consumer,” he said.
‘We’re being straight now’
McDonagh responded sharply: “That’s not answering my question.
“To the lay person with a mortgage, they were told in March that if they took a payment holiday it would not affect them in the future.
“It took the FCA three months to put onto the website that indeed it would be taken into account.”
Rathi, who joined the FCA as chief executive in October concluded: “I wasn’t there in March, but we are being straight with borrowers now.”
Housing industry ‘crucial part’ of Covid response says Jenrick
In a letter to the housing industry Jenrick applauded the sector for reacting with enormous agility to the extraordinary circumstances presented by Covid-19.
He said the “determination to keep building, repairing, buying and selling the homes our country needs has been a crucial part of the economic response to Covid-19”.
Addressing the latest set of restrictions which begin today, the letter noted: “We can all play our part in ensuring that building and repairing homes can continue safely during this period and that people can buy, sell and move home.”
It continued: “Buying, selling and renting a home can continue, in a Covid-secure way, as it has in recent months.
“Estate and letting agents can operate, show homes and sales suites can remain open and property viewings, mortgage valuations and surveys can take place.
“Our guidance on moving home must be followed. Home repairs and maintenance can continue.”
Continue working safely
Home Builders Federation executive chairman Stewart Baseley and Federation of Master Builders chief executive Brian Berry co-authored the letter with Jenrick.
They reiterated that house building – and its supply chains – should continue working securely.
“The government is clear that work can continue if this is done in line with public health guidance. Construction and other site workers can go to work,” they said.
The letter concluded: “We are committed to supporting the sector through this emergency to continue working safely to build, buy and sell the homes we all need.”
Lack of comparables and lender caution leading to down valuations – analysis
According to advisers Mortgage Solutions spoke to, purchasers and remortgagors alike are finding themselves at the mercy of the risky environment and those living in higher priced properties are seeing their homes return with a lower price than expected.
This has been highlighted with growing evidence that it is demand for properties in this price range which has been a significant driver of housing market activity since reopening from lockdown.
A down valuation can leave buyers struggling to make up the deposit for an agreed sale price, as it means they will need to put more money in if a lender will only lend up to the new, lower value.
This was the case for a couple of first-time buyers who approached Adam Wells, co-founder of Lloyd Wells Mortgages, having agreed to buy a home for £500,000.
They found they needed to increase their £75,000 deposit to cover the shortfall after it was down valued to £475,000 with an 85 per cent loan to value (LTV) mortgage.
Unable to raise the full £96,250 required, the buyers ended up pulling out of the transaction.
Wells said this also happened during a remortgage with a buy-to-let customer. The application was submitted with a value of £275,000 and rent of £1,650 a month however, the survey came back with a value of £220,000 and monthly rent of £1,200.
Fortunately, he was able to find another lender and is waiting to hear back.
He said: “We’re definitely seeing a lot more down valuations. It feels like the lenders are using the surveys to manage their pipelines. I know they’d never admit to this, but they do seem to be turning away good business.”
Mitul Patel, mortgage adviser at Lemon Tree Financial, said he had also come across “a lot more reductions” in property prices when it came to remortgaging some of his clients.
He said this was not too uncommon as owners always assumed their homes were worth more but added with a lack of product availability, there could be a danger for clients who did not have much equity in their homes.
To prepare for a down valuation with remortgaging low equity owners who have fewer options, Darryl Dhoffer, mortgage and protection adviser at The Mortgage Expert, said he readied two instructions for those on the cusp of 80 or 85 per cent LTV in their homes to avoid any “awkward conversations”.
“We all know that appealing a surveyor’s down valuation is pointless, and in today’s Covid-affected market, they hold all the cards, even though indicators have shown housing market valuations have remained resilient,” he added.
Inactive high value market
Brokers pointed out that a slowdown in downsizing and home moves may have had a knock on effect on those in larger homes as although the stamp duty holiday has stimulated movement at this level, surveyors sometimes have no recent data in the local area to base their decisions on.
Rob Gill, managing director at Altura Finance, said consequently he was primarily seeing down valuations on homes £1m or over.
In one instance, a remortgage with an estimated value of £1.2m returned with a valuation of £1m.
“I suspect the issue – and this has been bubbling for a while – is a lack of comparables. These properties are family homes that people might live in for 30 years, so for the same reason they only go up for sale every 30 odd years,” Gill said.
“Stamp duty hasn’t helped, to move at that level brings it well into six figures. So, people move less, hold on to their properties and there are fewer sales and valuers struggle to find comparables, especially where it’s a remortgage and they err on the side of caution.”
Gill said he had seen three seven-figure homes receive down valuations in the last two months. However, due to the equity the clients had built up in their homes over the years, it was not much of an issue and none had been left in a position where they had to revert to the standard variable rate.
He added: “One client said, ‘that’s fine I’ll take a slightly smaller amount’ and I managed to get this one solved by lunch time.
“With another client, it was a case of restructuring the loan so less of it was interest-only, but I got a higher valuation from my lender than the client got from his current lender, so he was happy. The other client wasn’t able to proceed but went with a product transfer.”
James McGregor, director at Mesa Financial also noticed a trend of down valuations among the higher priced residences he had been dealing with.
Similar to Dhoffer, McGregor has been making sure he has a plan B and C to buffer against this but he said he understood why banks would be wary.
“I think the main issue is the surveyors are scared of being taken to court so are cautious. There has been a pent-up demand and a false sense of security in the housing market.
“We are all forgetting we are currently in the middle of a recession. Banks and surveyors have a right to be cautious,” he added.
Self-employed grant to double as Job Support Scheme revamped
As part of the government’s ‘Plan for Jobs’, the chancellor announced an “increase in the generosity and reach of its winter support scheme” to support livelihoods in the “difficult months to come”.
For the self-employed, eligible applicants will receive a maximum of £3,750 in the next round of support offered by the government.
Under the initial extension to the Self-employment Income Support Scheme (SEISS), chancellor Rishi Sunak said the lump sum will cover three months’ worth of profits from November to January up to a total of £1,875.
But today’s announcement essentially doubles the amount of profits which will be covered under the scheme, from 20 per cent to 40 per cent.
Sunak said this is a potential further £3.1bn of support to the self-employed through November to January alone, with a further grant to follow covering February to April.
The subsequent grants will only be available to those who have previously made use of the scheme. Therefore this also means that the three million or so excluded workers will still not receive financial support from the government.
Statistics published today by HMRC revealed that by 30 September, 2.3 million or two-thirds of the potentially eligible population had claimed a second SEISS grant with the value of these claims totalling £5.7bn. The average value per claim was £2,500.
Job Support Scheme
The Job Support Scheme comes into effect on 1 November as the furlough scheme is wound down and means that for every hour not worked in areas under restrictions due to coronavirus, an employee would be paid up to two-thirds of their usual salary. Previously it was confirmed that employers would pay a third of their employees’ wages for hours not worked.
But today, Sunak announced that the employer contribution will be reduced to five per cent of unworked hours, and reduces the minimum hours requirement to 20 per cent.
This means for those working one day a week, they will be eligible. If someone was being paid £587 for their unworked hours, the government will contribute £543 and an employer just £44.
He added that the government will provide up to 61.67 per cent of wages for hours not worked, up to £1,541.75 per month – more than doubling the maximum payment of £697.92 under previous rules.
The cap is set above median earnings for employees in August at a reference salary of £3,125 per month.
Figures released today from HMRC revealed the number of people furloughed has fallen from 5.1 million on 31 July to 3.3 million on 31 August.
The chancellor has also announced additional funding of up to £2,100 per month primarily for businesses in the hospitality, accommodation and leisure sectors impacted by the restrictions in Tier 3 areas.
These grants will be available retrospectively for areas that have already been subject to restrictions.
The government said the grants could benefit around 150,000 businesses in England, including hotels, restaurants, B&Bs and many more which aren’t legally required to close but have been adversely affected by local restrictions nonetheless.
Sunak said: “I’ve always said that we must be ready to adapt our financial support as the situation evolves, and that is what we are doing today. These changes mean that our support will reach many more people and protect many more jobs.
“I know that the introduction of further restrictions has left many people worried for themselves, their families and communities. I hope the government’s stepped-up support can be part of the country pulling together in the coming months.”
Spending Review to focus on Covid-19 support
Chancellor Rishi Sunak said the decision was taken to focus on supporting jobs, setting departmental resources and capital budgets for 2021-22, and the devolved administrations’ block grants for the same period.
The government statement said multi-year NHS and schools’ resource settlements will be fully funded, as will priority infrastructure projects.
The government previously stated that it would keep plans for the Spending Review under review given the uncertainty of Covid-19.
The Spending Review will focus on three areas:
- Providing departments with the certainty they need to tackle Covid-19 and deliver the government’s Plan for Jobs to support employment.
- Giving vital public services enhanced support to continue to fight against the virus.
- Investing in infrastructure.
Sunak said: “In the current environment it’s essential that we provide certainty. So we’ll be doing that for departments and all of the nations of the United Kingdom by setting budgets for next year, with a total focus on tackling Covid and delivering our Plan for Jobs.
“Long term investment in our country’s future is the right thing to do, especially in areas which are the cornerstone of our society like the NHS, schools and infrastructure.”
The date for the review will be confirmed shortly but it will be in the last weeks of November.
However, the Local Government Association (LGA) is not happy with the one-year Spending Review, or its timing.
LGA chairman James Jamieson said: “It is hugely disappointing that councils will only get a one-year funding settlement for the third year in a row.
“This makes it incredibly difficult for them to plan how to provide local services our communities rely on and which have proved so vital during the pandemic, including public health, adult social care, children’s services, homelessness support, and help for those in financial hardship.
“We urge the government to publish this Spending Review as soon as possible as the end of November is incredibly late for councils to find out how much money they will have to provide services next year.
“Councils will face a £4bn funding gap next year just to keep services running at today’s levels and need urgent certainty about how to set budgets and to plan any measures they may be forced to take to cut spending.
“Before the Spending Review is announced, the government must confirm that the resources councils have this year will not reduce and there will be no business rates reset next year,” he added.
Taxpayers may lose £26bn on unpaid Bounce Back Loans
The Bounce Back Loan Scheme was announced on 27 April 2020 to quickly provide loans of up to £50,000, or a maximum of 25 per cent of annual turnover, to registered and unregistered small businesses to support their financial health during coronavirus.
The Department for Business, Energy & Industrial Strategy (BEIS) and the British Business Bank expect the scheme to lend £38bn to £48bn by 4 November, substantially exceeding the predicted £18bn to £26bn at launch.
But the NAO is warning that the speed with which the scheme was rolled out heightened the fraud risk, with self-certification, multiple applications, lack of legitimate business, impersonation and organised crime the key factors in fraud cases.
The scheme places the responsibility for managing fraud risk on the lenders as part of the loan approval process.
To support lenders, the British Business Bank established fraud prevention forums to share best practice and aid implementation of additional fraud measures, including a method to prevent duplicate applications.
However, the British Business Bank is currently unable to estimate the overall level of fraud.
As of 6 September, government data showed that the scheme delivered more than 1.2 million loans to businesses, totalling £36.9bn. About 90 per cent of the loans have gone to micro-businesses with turnover below £632,000.
The real estate, professional services and support activities sectors received the largest amount of support – £8.5bn from 283,000 loans.
Bounce Back Loans are delivered through commercial lenders such as banks and building societies, with the government providing lenders with a 100 per cent guarantee against the loans.
The NAO found that lenders approved loans for existing business customers within 24 to 72 hours but approval times for new customers took substantially longer.
The government imposed less strict eligibility criteria for the Bounce Back Loan scheme than other coronavirus loan schemes, to improve quick access to finance for smaller businesses.
The NAO said this lower level of checks presented credit risks as it increases the likelihood that loans are made to businesses which will not be able to repay them, leading to losses of taxpayers’ money.
A third-party review commissioned by the British Business Bank found that, while some risks can be mitigated, there remains a “very high” level of fraud risk.
The BEIS and the British Business Bank have made a preliminary estimate that 35 per cent to 60 per cent of borrowers may default on the loans.
Assuming the scheme lends £43bn, this would imply a potential cost to government of £15bn to £26bn.
The NAO said over the coming months, the extent of losses due to fraud will become clearer, but the full extent of losses will not emerge until the loans are due to start being repaid from 4 May 2021.
Gareth Davies, head of the NAO, said: “With concerns that many small businesses might run out of money as a result of the Covid-19 pandemic, government acted decisively to get cash into their hands as quickly as possible.
“Unfortunately, the cost to the taxpayer has the potential to be very high, if the estimated losses turn out to be correct.”
He added: “Government will need to ensure that robust debt collection and fraud investigation arrangements are in place to minimise the impact of these potential losses to the public purse.
“It should also take this opportunity to consider now the controls it would put in place to protect against the abuse of any future such schemes.”
Think tank calls for more help for mortgage borrowers when payment holidays end
A new paper from the think tank points out that while a third of those in poverty are owner-occupiers, there is little support available for this group through the benefits system. It is calling for an improved version of the Support for Mortgage Interest scheme to be introduced.
The Centre for Policy Studies warns that millions of people could face losing their jobs when the furlough scheme ends next month. As mortgage payment holiday arrangements end at the same time, many will risk losing their homes as well.
Even with the Jobs Support Scheme, many could struggle to pay their mortgages without reform to the support available.
Housing benefit is only available to renters – homeowners must wait nine months to qualify for help with their mortgage interest payments.
The report, supported by the Joseph Rowntree Foundation, argues that the Support for Mortgage Interest (SMI) scheme needs urgent reform to support low income homeowners through the crisis, and to improve the benefits system so that it better supports struggling homeowners.
It argues that as well as being necessary and compassionate, such measures will be far more cost-effective for government than seeing people lose their homes and go on to housing benefit.
To ensure those with mortgages who lose their jobs don’t also lose their homes, the CPS is proposing that:
- the nine-month waiting period for SMI should be abolished
- the first three months of SMI should be paid as a grant, not a loan
- the government should allow people to claim SMI while working, as with other benefits
- lenders should make people who are at risk of losing their homes aware of the scheme automatically
- SMI should be time-limited for claimants who are able to work and are not receiving a disability-related benefit
James Heywood, CPS head of welfare and opportunities, says: “The Support for Mortgage Interest Scheme is going to be vital for ensuring people losing their jobs do not also lose their homes before they manage to get back to work. The government needs to act now to make the necessary changes so people can move straight onto SMI when their mortgage holiday runs out or when they become unemployed.
“If they don’t, not only will people be forced out of home ownership into the rented sector, it will also cost the state more to support them through housing benefit.”
Darren Baxter, policy and partnerships manager at the Joseph Rowntree Foundation, says: “Even before coronavirus hit, a third of homeowners were living in poverty. And as the economic fallout from the pandemic grows, that number is likely to rise. With the deadline for applying for a mortgage holiday rapidly approaching, now is the time for government to take swift action.
“Reforming the Support for Mortgage Interest scheme is a targeted and cost-effective way of preventing struggling homeowners from being pulled further into poverty. This crisis has shone a spotlight on just how important a safe, secure and stable home is. The government’s focus must be on ensuring people can stay in their homes, whether they be homeowners or renters.”