Making sense of the struggle lenders faced during Covid-19
At the time of my last post in July the mortgage industry was working through a unique challenge – too much demand for lenders to cope with.
In the middle of a global pandemic and with the UK officially in a recession, that felt like a strange situation to be dealing with. So how did it happen? People’s needs changed overnight and as each month passed by these needs became a more permanent reality.
Take for example the millions of people now fulfilling their work commitments from home – often from a significant distance to the office – a previous priority to be close to commuter links may now be irrelevant. People have used these nine months to reassess their housing needs.
Additionally, a fall in consumer spending coupled with a rise in disposable income, some of which has been used to pay down debts and increase saving, has only added to some people’s ability to consider a home move or purchase. And let’s not forget the announcement of the stamp duty holiday which proved a huge incentive to those wanting to move up the ladder. It created a perfect storm for demand when the housing market reopened, and we had to weather that in a way none of us had seen coming before 2020.
Rising to the changing challenges
Pre-Covid, with a full complement of operational teams, when demand peaks there is the option to use flexible working or recruit more people. That level of flexibility was reduced whilst lenders worked through the logistical challenges of moving vast numbers of their employees to work from home and redeployed others to support existing customers with payment holiday requests or other general queries. This has hit some lenders harder than others.
Another challenge – and one we haven’t been able to ignore - is the rising interest rate on mortgages, particularly for borrowers with smaller deposits wanting to buy a home. I’ve been asked many times what continued to drive these increases, and to be honest, it was the demand I’ve just touched on. However, in this unprecedented situation lenders didn’t want to be and often couldn’t be, the ‘first choice’ for borrowers.
Having the lowest rates in a booming market meant you would see higher than normal levels of applications. This caused a chain reaction which saw lenders consistently move their products further out of overly competitive positions to cope with demand. In a short space of time, average rates for some borrowers increased by over 1% in a short space of time, but we are now starting to see early indications that some of these rate rises are starting to reverse, which is good news for those buying or moving. It’s worth noting that the remortgage market has been less affected because the demand there has been lower and more stable.
What have we learnt?
There has never been a truer reminder that the mortgage market remains volatile and can really shift at pace but we as a lender also learnt that we can move at pace and adapt.
In a short space of time, many homeowners across the country started to experience financial setbacks as a result of being furloughed, made redundant or being out of work. We acted quickly to set up and equip teams to help those who needed us, starting with the most vulnerable customers first. For some we may have reacted to mortgage payment holiday requests, for others we may have been able to find more suitable solutions.
We also had some difficult decisions to make with our mortgage range, which ultimately saw us pull back from offering 90% LTV mortgages as a result of high levels of demand and a lack of supply. Quite simply, we were unable to service this market alone.
A number of other lenders have tried to re-enter this market, only to be swamped by business and withdraw quickly. This brought about the introduction of ‘pulsing’ strategies where lenders were entering the market for a few days before exiting again, allowing the time to work through the increased levels of business while maintaining service levels to other customers.
We’ve monitored this part of the market for a while now and by doing so have been able to return to 90% LTV lending recently, giving new hope to those with smaller deposits
Will this high demand continue?
There’s no denying a combination of factors have led to where we are today – I’m sure there are many people out there who weren’t even looking to move home this year but have been swept along with rising house prices, increased numbers of properties coming to market and the stamp duty holiday incentive.
That said, I don’t see this level of demand continuing. There simply won’t be the housing stock available for one, but also with stamp duty being reinstated from April and changes to the Help to Buy scheme coming into effect shortly, I expect we’ll see the market return to more normal levels of demand while the economy steadies itself after a turbulent year.
How does this affect homeowners?
If demand tapers off, logic suggests that should in turn aid lower house prices – though this is a much more complex area to predict. There has been such a rapid rise in UK house prices over the last few months as a result of the unique situation the market has found itself in, it’s hard to see how much longer it can continue. Instead, I expect we’ll start to see house prices steadily reduce to equalise to the natural supply and demand in the market.
In the short term though, rising house prices could see existing mortgage holders’ loan to value reduce which opens up ‘cheaper’ mortgage deals. This is particularly favourable as remortgage rates have been least affected by the recent rises and remain at historic lows.
What those looking to remortgage may find, however, is longer processing and conveyancing times as applications sit in the queue alongside thousands of other purchase and remortgage cases which have been impacted by strains further down the mortgage chain.
So yes, 2020 has definitely been an unexpected year for us all and one that’s been filled with many challenges. It’s taken us to the unknown and out of our comfort zone, but at the same time encouraged us to think and work differently to still achieve our goals.