Concerns about a potential cliff edge scenario for the UK’s mortgage market on October 31st could be exaggerated, according to new research from IMLA. The Association’s latest report, The Impact of Coronavirus on the UK Housing and Mortgage Market, suggests that the impact of the closure of the UK’s COVID-19 support schemes could be less severe than anticipated, with lenders expecting between 0.5% and 5% of borrowers coming off payment deferrals entering arrears. The findings come as the country approaches six months since the lockdown first took effect and as the mortgage market continues to face exceptional levels of demand from homebuyers.
According to the report, lenders expect a further 1.5% of borrowers on ‘payment holidays’ to be able to make interest only payments, meaning a large majority of borrowers are likely to successfully return to repaying their mortgage. Projections from the Bank of England also show that the number of furloughed workers is expected to fall to one million in October, far below the 9.4 million employees registered in June 2020. The fall is attributed to the reopening of many sectors of the economy and employers now having to meet some of the costs of furloughed workers.
However, the report acknowledges that the true impact of the COVID-19 crisis, the biggest shock to the UK economy since the Second World War, will only be known once emergency support measures including the Coronavirus Job Retention Scheme are wound down over the coming months. Fears about the state of the economy later this year and into 2021 have also led to restrictions on lending, particularly high loan-to-value mortgages. While these changes by lenders are understandable, they risk a ‘chicken and egg’ scenario, with the potential to exacerbate a downturn in the housing market by limiting options for first-time buyers to step onto the ladder.
IMLA’s report also suggests that if the property market is able to remain robust and resilient beyond the closure of the support schemes and into early 2021, it could begin to see lenders normalising their criteria. This includes a return of higher loan-to-value mortgages, including 90% and 95% products.
IMLA believes that the latest housing announcements from the Government, including the Stamp Duty holiday and planning changes, are likely to come with a substantial multiplier effect for the economy. However, it has also emphasised that the Government will need to avoid a sharp end to the Stamp Duty exemption in March 2021, with the potential for a further cliff edge for the housing market next year that could delay lender decisions to normalise criteria.
Kate Davies, Executive Director of the Intermediary Mortgage Lenders Association, comments
“There have been some major concerns that Britain’s economy and the mortgage market could face a cliff edge when the furlough and payment holiday schemes conclude at the end of October, but this latest report from IMLA suggests that the impact might be less severe than anticipated. The mortgage market has remained strong and resilient in the face of COVID-19, and figures suggest that most borrowers will return from payment deferrals with little or no difficulty. The Government’s latest measures to cut Stamp Duty is also likely to have sparked further demand in the housing market.
“That said, the UK’s economic recovery from Coronavirus is still far from assured. While the Stamp Duty exemption will provide a boost, the Government will need to be aware of the risk of another potential cliff edge for the housing market next March and they may even want to consider extending or phasing out the Stamp Duty holiday. Lenders are also well aware of the challenges facing consumers across the country, including first-time buyers, and they are eager to return to high loan-to-value mortgages as soon as it is prudent to do so.”
Notes to Editors
The Intermediary Mortgage Lenders Association (IMLA) is the trade association that represents mortgage lenders who lend to UK consumers and businesses via the broker channel. Its membership of 43 banks, building societies and specialist lenders include 18 of the 20 largest UK mortgage lenders (measured by gross lending) and account for about 90% of mortgage lending (91.6% of balances and 92.8% of gross lending).