The government’s scheme went live today with Halifax, Barclays, HSBC and NatWest launching their 95 per cent loan to value (LTV) offerings – although NatWest’s range is only available direct from the lender.

Santander’s products go live tomorrow while Virgin Money will add a set of deals next month.

However, several lenders including Accord, Bank of Ireland, Skipton Building Society and Atom Bank have already unveiled offerings independent of the government scheme.

IMLA executive director Kate Davies (pictured) noted the guarantee scheme had clearly given lenders more confidence to return to this part of the market, but prices may not be comparable.

“We will need to wait to see how borrowers respond this time around,” she said.

“Price will clearly be a factor – and many of the non-government-backed 95 per cent products which have recently been launched may well represent better value for borrowers.

“There is a big role here for intermediaries to demonstrate their expert knowledge of the market and steer borrowers towards suitable and affordable products.”

At present it appears lenders are coalescing around interest rates of four per cent for their two-year fixes, with five-year versions slightly higher.

However, this may change as lenders start to compete for business.

Scheme drawbacks

Davies also noted there were some significant drawbacks to the scheme and so it was not a surprise some lenders had chosen not to use it.

“Many may be surprised to see that just a few lenders have said they will offer these mortgages and that some of those who have signed up have made it clear that their products will not be available for new-build properties,” she said.

“The scheme excludes applicants who have any form of credit impairment, and also lenders who securitise loans.

“When these factors are added to the additional costs associated with the scheme, many lenders are preferring to offer their own 95 per cent loan to value mortgages.”

Speaking to Mortgage Solutions, the association’s executive director said this was according to figures seen by members of UK Finance.  

It was also suggested that since it had been five years since the introduction of buy-to-let surcharge in 2016, there would be a significant number of landlords looking to refinance. 

She said: “There are a lot of fixed term loans due to mature in the second half of the year. There will be business going on and it will be up to lenders and brokers to attract more of that.” 

With this taking place during a busy period, delays in the market could push people towards product transfers as an easier means of refinancing, Davies said. 

She added: “If you remortgage you’ve got to get a conveyancer, but a transfer is quicker to arrange. We might see more of a balance between product transfers and remortgages.” 

Busy market 

Davies said as the sector was very active, she did not suspect there would be a huge slowdown in business once the Stamp Duty holiday ended. 

Referring to the association’s report The New ‘Normal’, published by its principal researcher Rob Thomas in January, Davies said the outlook remained “almost surprisingly upbeat”. 

The report predicted gross mortgage lending would rise to £283bn this year, 17.3 per cent above last year’s levels with purchases driving the majority of activity. It also said gross buy-to-let lending would reach £40bn in 2021 and £41bn next year as landlords use the stamp duty holiday to expand their portfolios. 

Additionally, Davies said pent-up demand, people saving money in lockdown and a lack of housing supply would not affect property prices or purchase activity. 

“There’s no real sign of a dip let alone a crash in terms of prices. It’s just not going to happen, I don’t think,” she added. 

Lenders looking for business

Davies said the ring-fencing policy from the Financial Conduct Authority which required banks to separate retail banking services from the rest of their business meant there was extra cash to be lent. 

It was expected that much of this would be given out last year, but the market’s reaction to Covid-19 restrictions stopped that from happening. 

She added: “They [lenders] want to lend it out through mortgages and we were expecting a whole load of that to flood the market with all sorts of offers. I suspect there’s still quite a lot of it there.” 

Responding to chancellor Rishi Sunak’s Budget delivered yesterday, the trade body noted the stamp duty holiday extension had not taken a more nuanced approach and as a result the industry would need to continue managing buyers’ expectations.

“IMLA asked specifically for added flexibility to the scheme’s deadline to prevent harm to those who stood to miss out, while also avoiding a simple extension of the scheme that would only have postponed the inevitable cliff-edge impact,” said Kate Davies, executive director of IMLA.

“That has not been included – so it will remain important for estate agents, intermediaries, lenders and conveyancers to continue to manage consumers’ expectations in the light of what may continue to be a very busy period between now and the end of June.

“As the weeks go by, those who have not already started the process of buying a home will become increasingly unlikely to complete their purchase by that first deadline. We may also see prices rise as activity remains buoyant,” she added.

Predecessor had low take-up

Davies was also more circumspect about the 95 per cent loan to value (LTV) mortgage guarantee scheme, noting that it would help some lenders to return, but questioned its effectiveness.

The scheme is designed to only be available until December 2022 and has just £3.9bn worth of guarantees available.

It has already attracted commitments from at least six major lenders and has been welcomed by brokers.

“We shall need to digest the detail – and assess how this scheme differs from its predecessor, which attracted relatively low take-up, with buyers accessing just £2.3bn of the £12bn of guarantees offered,” she continued.

“Some lenders would prefer a simpler model of high LTV lending, which could be enabled via a revision of the current loan to income and stress testing requirements.”

The trade body emphasised that more was needed to be done to support the environmental impact of the housing sector.

“Interestingly, the chancellor’s announcement was silent on specific plans to improve the energy efficiency of Britain’s housing stock.

“Green Bonds can only go so far, and more incentives will be needed to help homeowners overcome the existing barriers to making home improvements, such as the high cost of effective remedial work and the fact that pay-back periods may be unrealistic,” Davies concluded.

Kate Davies, executive director of IMLA, said it was “completely unacceptable” to expect leaseholders to cover the costs through government-backed loans.  

IMLA also estimated the cost to remove dangerous materials from high rise homes was £15bn, three times more than the £5bn the government has committed so far. 

More support for borrowers financially affected by the pandemic was also suggested by IMLA, in the form of a rethinking of the Support for Mortgage Interest (SMI) rules. 

It said tying the loan up with Universal Credit payments meant borrowers who do not have this benefit would be prevented from accessing SMI which may still be necessary if they lose all or part of their income. 

IMLA said extending SMI to more borrowers would provide them with a lifeline and stop people from possibly losing their homes. 

Stamp duty and climate change 

The association proposed a flexible winding down of the stamp duty holiday rather than postponing the deadline to June, as it said that would avoid pushing the possibility of cliff edge to a later date. 

Davies added: “The current stamp duty holiday deadline of 31 March has created unprecedented levels of activity and put a huge strain on lenders and conveyancers as they race to complete transactions in time.  

“We have asked for some flexibility to avoid penalising those who miss the deadline, very possibly through no fault of their own.” 

IMLA also suggested a more joined up approach to addressing climate change within the housing market following a Business, Energy and Industrial Strategy (BEIS) report which suggested lenders declare the average EPC rating of their mortgage book. 

Davies said: “Climate change is a huge issue and lenders support the government’s ambition to build back better and focus on green initiatives.  

“The Green Homes Grant was well intentioned, as was a recent BEIS consultation on improving home energy efficiency, but we think this challenge requires a much wider and more ambitious cross-government strategy, rather than a piecemeal departmental approach.” 

“Protecting the UK’s housing market should be high up on the chancellor’s priority list for this Budget,” she added. 

The Department for Business, Energy and Industrial Strategy (BEIS) published its consultation ‘Improving home energy performance through lenders’ which suggested the annual disclosure of average Energy Performance Certificate (EPC) ratings with year-on-year comparisons as well as gross value lending for improvement works. 

This will include all Financial Conduct Authority (FCA) regulated lenders regardless of size and a target of having a portfolio average of EPC band C by 2030.

The government also proposed a league table to rank lenders and encourage the meeting of targets. 

IMLA said a league table could cause lenders to spend too much time and effort trying to improve their rating and cause lenders to lend based on a property’s energy efficiency, rather than a borrower’s needs.  

BEIS admitted avoiding poor performing properties would be an “unintended consequence” of setting targets but said it would try to mitigate this by setting incremental improvements so lenders could focus on making slow changes over time. 

It also said one potential outcome could be that energy inefficient properties become cheaper, making them more attractive to those at their borrowing limit by giving them more room to raise additional finance to make improvements.  

Homeowner responsibility

IMLA said it rejected the implication that lenders, rather than homeowners, were responsible for the energy efficiency of their properties and asked for a review of the EPC, to ensure it is accurate and fit for purpose. 

The association said property owners should be made to obtain an EPC with all inspections carried out by qualified assessors.  

IMLA also said it was unclear as to whether the FCA and Prudential Regulatory Authority (PRA) had been fully consulted about the proposals as some of the suggestions were already mentioned in the regulators’ Climate Risk Financial Forum.  

As a result, the association called for a collaborative approach to avoid creating policies which could cause firms to breach requirements imposed on them by opposing authorities.  

Kate Davies, executive director of IMLA, said: “These latest proposals from BEIS are highly unlikely to bring about real change. Rather, they would oblige lenders to devote way too much time compiling and disclosing data in an exercise which – at the end of the day – won’t change a single low-energy lightbulb.  

“It makes more sense to ensure that property owners have really accurate information about the energy efficiency of their property – and the best place to start is by ensuring that EPCs are really fit for purpose.” 

Davies said it made no sense to create “artificial competition” through a league table as it could cause lenders to avoid lending on properties that were less attractive and did not meet targets.  

“In the worst case this could lead to some borrowers being unable to re-mortgage or sell. It is critical that this is avoided,”  she added. 

Davies said: “Rather than creating a distracting paperchase for lenders or imposing penalties if they fail to meet arbitrary targets, reducing our carbon emissions will require rather more fundamental cross-departmental thinking on where responsibility lies and how real change can be incentivised and encouraged.  

“It will also need major investment to drive energy efficiency in the UK’s existing housing stock. These latest proposals from BEIS fall far short of the ambition needed.” 

Incentivising borrowers 

The report suggested lenders consider including energy efficiency in affordability calculations as well as a review of affordability rules to encourage the development of green mortgages. 

It also said green mortgage extensions could be introduced to offer additional borrowing to existing customers for home improvements. 

BEIS said such measures, along with consumer awareness, could influence mortgagors to make changes. 

To balance the deliverance of energy performance improvements while making sure targets remain affordable to borrowers, BEIS proposed a £10,000 VAT-inclusive cap on additional borrowing for home improvements.  

It said a £10,000 cap would result in the improvement of 40 per cent of owner-occupied mortgaged properties in England and Wales by 2030. 

As the average length of a fixed-rate mortgage is five years and up to 1.4 million properties are refinanced each year in England and Wales, BEIS estimated that working towards goals could see up to 80 per cent of the mortgage market being within scope over the target period. 

For instances where energy performance improvements were made before the introduction of lender targets, BEIS suggested taking any spend from April 2021 onwards into account and incentivising borrowers for taking early action.  

Self-regulation 

The government said it wanted lenders to report on targets voluntarily at first and review how progress was made before considering the introduction of mandatory measures by 2023. 

It also acknowledged some lenders have not begun considering energy performance and may not have the capability to immediately disclose such information. 

Lenders will be expected to carry out their own internal audits but spot checks may take place to confirm firms were producing relevant data. 

As smaller lenders may find it harder to produce the data, the government will expect auditing to be proportional to a firm’s market share which could be based on the value or number of properties in its portfolio. 

It is likely there will be a penalty for under-performing lenders but this will be consulted on if and when it is implemented. The money raised from penalties will be used to fund energy performance improvements in the poorest performing properties or fuel poor households. 

Small value or volume lenders could also be exempt from paying penalties as BEIS said targets may be harder for them to achieve due to the makeup of their portfolio. 

Tenures and affordability 

BEIS said tenure type and costs associated with extra borrowing could limit borrowers living in certain properties from improving the energy rating of their homes. 

The consultation report said while mortgage arrears were currently at historical lows, mortgagors facing financial difficulties due to the pandemic would have increased as indicated by the rise in arrears in Q4 2020 as reported by UK Finance. 

It said such borrowers could be exempt from the target as well as fuel poor homeowners. 

For those unable to make changes to their homes due to tenure restrictions, mortgaged leaseholders should be exempt from overall targets and instead put on a database with a list of what can and cannot be changed according to leasehold terms. 

Despite the reduction in case volumes, brokers appeared to be positive about the future of their business and the wider mortgage market overall. 

The survey found 96 per cent were optimistic about their own business, 92 per cent were positive about the intermediary sector as a whole and 85 per cent felt confident about the wider mortgage market. 

The mix of cases handled by brokers remained fairly similar to the previous quarter with residential applications taking up the largest share. Two-thirds of cases were residential, 26 per cent were buy-to-let and eight per cent were specialist cases. 

The average number of 25 decisions in principle (DIPs) processed by advisers in Q4 remained flat with the previous quarter. 

Conversion rates were consistent during the period, with 81 per cent of DIPs converting into offers compared to 80 per cent in Q3, 82 per cent in Q2 and 85 per cent in Q1. 

However, the offers that converted into completions fell further from the 84 per cent average seen in 2019. In the final quarter of 2020, offers to completions dropped from a peak of 79 per cent in Q1 to 65 per cent.   

Kate Davies (pictured), executive director of IMLA, said: “While there are signs that the unprecedented demand we saw in summer and autumn 2020 was already starting to cool towards the end of the year, intermediaries clearly remain positive about the outlook for the mortgage market.  

“Whilst the impending stamp duty deadline means that activity will remain high in the weeks ahead, there are clear signs that demand will continue beyond 31 March.” 

She added: “Advisers are also recognising that 2021 is set to be a major year for the remortgage market too, presenting plenty of opportunity.  

“However, as we approach the final months of the stamp duty holiday, there will be added pressure on lenders, conveyancers and all involved in the transaction process as consumers race to beat the deadline. IMLA and AMI have jointly warned that consumers need to be prepared to meet the additional costs if they cannot complete by 31 March.” 

The Intermediary Mortgage Lenders Association (IMLA) and Society of Mortgage Professionals (SMP) issued statements emphasising the stark reality of the situation.

They highlighted some borrowers were already likely to miss the 31 March stamp duty holiday and could lose their property purchase altogether if they did not have funds to cover the stamp duty.

And they added that this situation could grow in severity with the renewed lockdowns around the country.

‘Sales may fall through’

IMLA executive director Kate Davies noted the housing market was still open despite Britain moving into a third lockdown, “but the mortgage market remains under extreme pressure to process a large number of buyer applications before the stamp duty deadline on 31 March”.

“Lenders, intermediaries and conveyancers are battling to work through the volume of transactions as the stamp duty deadline approaches,” she said.

“Borrowers must remain realistic about what could happen if they are unable to complete before the 31 March because, if they cannot, they will be liable to pay the stamp duty due. If they can’t find the funds they need, their sale may fall through.

“IMLA has been clear about the need to manage consumers’ expectations – but the imposition of a third national lockdown will undoubtedly cause disruption for some buyers.”

Davies concluded by urging the government to offer a lifeline to those stuck in limbo.

“There have been many calls on the government to consider some form of extension or tapering of the stamp duty holiday, giving buyers the breathing space they need to complete their house purchase before the deadline.

“Surely the time has come for the government to respond and ease the pressure on the system.”

Pressure mounting on legal teams

The SMP added its voice, warning brokers to prepare borrowers for the likelihood they will miss out on the stamp duty saving that they were expecting.

SMP chairman David Thomas said the demand for property because of the government’s tax incentive had exceeded expectations and it was vital borrowers had a clear understanding of what to expect.

“We know that lenders have been desperately trying to temper demand through a variety of pricing and criteria changes, but that hasn’t stopped the recent wave,” he said.

“That pressure is now starting to move into our legal colleagues’ hands, and with just a few months still to go, the management of clients’ expectations will be critical.

“It is likely some will miss the deadline, and while some may still benefit from recent house prices, there will inevitably be a focus from clients in this area.”

The Association of Mortgage Intermediaries (AMI) and Intermediary Lenders Association (IMLA) issued a joint statement warning the UK home buying market is at a critical stage and that “it is now likely that many cases will not complete before 31 March”.

IMLA and AMI said they had raised their concerns with the Treasury, noting that a large number of borrowers may not be able to meet the March deadline through no fault of their own with unprecedented demand putting immense pressure on lenders, intermediaries and conveyancers.

Delays in obtaining searches are being combined with complex chains and firms’ capacity to operate in a Covid-safe way.

“The market has processed record levels of new applications from buyers while managing the varied and continuing impacts of Covid-19 on their businesses,” they said.

“Once mortgage offers are issued and borrowers move on to try to achieve exchange and eventually completion, the pressure moves on to conveyancers, who are also facing record volumes of business.”

Widespread collapse in property chains

They issued a stark warning about the potential risks to borrowers and the likely knock-on effects on the market.

Those buying properties for less than £500,000 will pay no stamp duty if they complete in time.

However, if they miss the date they will be liable to pay the tax on the value of the property above £125,000, or over £300,000 for first-time buyers.

“The result could be that borrowers are forced to borrow more funds to cover the costs of stamp duty, at a time when they may be stretched on their mortgage loan and additional borrowing may not be available,” the bodies continued.

“We are concerned that the tax exemption cut-off with no taper could see a widespread collapse in property chains if buyers who planned to take advantage of the stamp duty holiday have not completed before 1 April 2021 and are forced to withdraw.”

‘No plan to extend relief’

IMLA and AMI join fellow trade bodies the Building Societies Association (BSA) and the Association of Short Term Lenders (ASTL) in calling for the taper to soften the cut off.

However, earlier this week HM Treasury confirmed it was not planning an extension to the stamp duty holiday deadline.

“As the relief was to provide an immediate stimulus to the property market, the government does not plan to extend this relief,” Treasury said.

“Stamp Duty Land Tax (SDLT) is an important source of government revenue, raising several billion pounds each year to help pay for the essential services the government provides.”

Borrowers must prepare to pay

IMLA executive director Kate Davies warned borrowers to be realistic about what will happen if they miss the 31 March cut-off date and to plan ahead.

“Those who do miss it will need to be aware of how much stamp duty they may be liable to pay – and have a plan for finding that cash,” she said.

“If they can’t – there is a risk that their sale may fall through – taking with it a number of other transactions if there is a chain.”

She added that lenders, intermediaries and conveyancers will be as upfront as possible with borrowers and manage their expectations.

“We are asking all our members to work to increase post offer operational support, and our broker and conveyancer partners to assess their new business pipelines,” Davies continued.

“This will ensure as many complete before any deadline.

“We want to avoid borrowers losing out – through no fault of their own – and have called for some flexibility to the deadline which would ease the immediate pressure on lenders and conveyancers, and treat borrowers whose cases are already in the pipeline more fairly.”

Brokers should assess pipelines

AMI chief executive Robert Sinclair added: “As the main contact point for the consumer at the sharp end of this, brokers will work hard to keep the consumer informed and warn them of the potential risks they face.

“We are calling on lenders to ensure their conveyancer partners have capacity to deal with the pipeline in front of them.

“I would like all lenders, brokers and conveyancers to assess their pipelines and operational capacity between now and the end of March and give a realistic assessment to their customers of the likely outcomes.

“By working together now we can minimise disappointment. However, I firmly believe with what is already in the legal process, government needs to stand ready to extend the deadline to avoid there being thousands of frustrated and disappointed taxpayers.”

We also expected a rush as borrowers sought to beat the 31 March deadline next year for completing on Help to Buy transactions and then the temporary stamp duty holiday put further strain on systems.

This has all added up to a record number of mortgage approvals for property purchases in September to 91,500 – up from 85,000 in August.

The challenge for lenders now is to make sure these convert into completions and do not leave disappointed customers unable to move into their new homes.

Borrowers hoping to beat the Help to Buy and stamp duty deadlines are being warned now that unless they have already agreed to buy, they stand little chance of completing in time.

So what are the main challenges? We undertook a survey of our members to find out a bit more about what the pressure points are and what might be done to alleviate them.

The results show there are various challenges – and there is unlikely to be a one-size-fits-all solution.

How has the virus impacted lenders?

The biggest single issue at present is sheer volume and the various impacts of Covid-19 mean it’s not possible simply to scale up operations in order to meet the increase in demand.

One in four lenders stated the crisis had forced them to seek further proof of income from borrowers, slowing down the timescales within which applications can be assessed and offers issued.

And 40 per cent said the need to underwrite more cases manually has significantly impacted their service levels.

As some individuals come off furlough and others face possible redundancy or reduced earnings, lenders need to do even more to be certain that borrowers can afford their mortgage.

Inevitably this means that many are having to undertake much more manual underwriting.

Building societies and specialist lenders have traditionally done this much more than larger banks and mainstream businesses, which have relied more heavily on automated credit scoring tools to deal with high volumes of applications.

But current circumstances are more complex and require a different, more in-depth approach.

It might be tempting to assume that the answer is for lenders to recruit more underwriters – but, as members point out, it takes time to find and recruit experienced underwriters – and even longer to train up new ones.

Home working and social distancing

Around 30 per cent of members acknowledged that social distancing and home working have also – inevitably – been an issue.

Given the circumstances, lenders have done an incredible job, quickly integrating new technology into their businesses and enabling employees to work effectively from home.

But we have to remember that many of those working from home may have to juggle their family lives with work, looking after children or caring for the elderly.

Another major factor has been the spread of products available: the combination of higher demand, need for more detailed underwriting and operational challenges has forced lenders to withdraw products.

Their focus has been on dealing with as many applications as possible – at the expense of the more complex, higher risk ones – but it’s clear they wish to return to the higher LTV space as soon as possible.

Overwhelmed by demand

This creates problems too – as lenders do gradually return to this part of the market, they risk being overwhelmed and over-exposed unless there is a critical mass of others joining them.

The only mechanism they have to manage demand has been to put the brakes on products when activity starts to get out of control.

A third of our members cited this as an issue.

Again – it might be tempting to ask – why can’t lenders agree to return to these markets collectively?

Well competition law would currently prevent them from doing so – but might there be scope for regulators to consider a temporary waiver of the restrictive legislation, in order to help re-open the market fully?

Advisers have helped

What is absolutely critical to a well-functioning market is effective co-operation between lenders and the intermediaries who introduce such a high proportion of their business.

Efficient systems and clear processes can greatly help to ensure that cases are “all right first time” – and that time isn’t wasted chasing and checking missing information.

Lenders really appreciate the efforts intermediaries have been making – 67 per cent said intermediaries have helped to speed up mortgage applications by going the extra mile to package cases in line with their requirements.

As a result, 17 per cent agreed these actions had helped to reduce time to offer by as much as 10 working days – a significant reduction.

Lenders praised intermediaries who worked together with business development teams to understand criteria and clarify any issues before submitting applications.

They also appreciated intermediaries’ use of case tracking software and lender portals – thereby avoiding the need or temptation to ask lenders for frequent updates on case progress.

So while some of the current challenges are likely to stay with us for some months yet, and some of next year’s challenges remain unknown, it’s clear there is still huge demand for mortgage advice and mortgages.

There may not yet be a silver bullet for the capacity challenge, but by working together we can make the process as efficient as possible – and ultimately help more homebuyers to make their housing plans a reality.

Some 74 per cent of lenders said they expected green mortgages to become a larger part of the market in the future, while 13 per cent of advisers said more clients were asking about them since the start of the pandemic. 

In order to be successful, 71 per cent of advisers and three-quarters of lenders believe financial incentives similar to the Green Homes Grant would help drive interest and increase take up. 

More than half of both lenders and advisers also want initiatives for lenders to encourage the provision of green mortgages.  

Only a few want to see the government take drastic steps to achieve this however, as just 13 per cent of lenders and six per cent of advisers would welcome harsher intervention such as restrictions on the sale of inefficient homes. 

Despite a desire for further state inclusion, the industry is still responding to an increasing demand for green mortgages, as 29 per cent of lenders plan to or have already launched a suitable product while 35 per cent of advisers aim to advise on green mortgages in the future. 

Knowledge and financial barriers 

Knowledge around green mortgages and the options available remains low, as the survey revealed 43 per cent of borrowers had never heard of the product type. Furthermore, a third expect them to cost more than a standard mortgage. 

Some 77 per cent of lenders plan to respond to this misconception however, by launching green mortgages that are either cheaper or cost the same as a typical mortgage. 

For borrowers who are aware of mortgages available, the costs of renovations remain an obstacle. Some 27 per cent of UK homeowners said the expense of improving their home’s energy efficiency was stopping them from taking out such a product. 

Although costs were cited as an issue, the financial benefits of an energy efficient home were noted as more than half of respondents said they would be willing to take out a green mortgage to save money on energy bills. 

Reducing their carbon footprint was also a listed as a reason to go for a green mortgage as 43 per cent said they would consider it if they knew it meant helping the environment and a fifth said they would go further and pay an extra £100 a month if it lowered their impact on the planet. 

Kate Davies, executive director at IMLA, said: “Green mortgages might be in their infancy, but the indications are there that this is a part of the mortgage market that is set to grow in the years ahead. 

“Lenders and advisers are already recognising the opportunities presented by green mortgages as consumers ‘switch on’ to eco-friendly products and recognise the devasting potential of climate change.” 

She added: “Now, with a Covid-19 lockdown giving us all a temporary view of a world with reduced carbon emissions, the growth of the green mortgage market could accelerate yet further.”