Caution among mortgage lenders is pushing back against government efforts to boost activity in the housing market – and rightly so.
The UK government has made recent efforts to reignite activity in the property market to boost the economy’s post-pandemic recovery. This makes sense, given that the residential real estate market is a significant driver of investment, productivity and economic growth in Britain. To increase the number of transactions, the government has sought to release pent-up demand by introducing a stamp duty land tax holiday. So far, the temporary relief has been well received. Halifax’s house price index for July recorded a month-on-month and year-on-year increase of above 1%, and commentators attributed this sudden growth after months of stagnation to the stamp duty holiday having come into force early that month. For now, the big question is understanding whether such momentum can be maintained.
The government wants international and domestic buyers to return to the property market. Recent anecdotal evidence, however, reveals that certain categories of home-buyers are being turned away by banks and mortgage providers. There are reports that home-owners who took advantage of the mortgage payment holiday scheme during the peak of lockdown are either encountering significant delays with their applications or having them rejected altogether. In a survey commissioned by Butterfield Mortgages Limited (BML) in late May, 16% of homeowners said they had taken advantage of the scheme. An additional 14% said they had wanted to use the scheme but experienced difficulty applying for it through their mortgage provider.
There is no hard data to suggest that banks are outright refusing applications from those who used the mortgage payment holiday. After all, the Financial Conduct Authority has publicly stated that the scheme, which is in place until 31 October 2020, will have no direct effect on an individual’s credit rating.
The recovery of the property market will not happen overnight. It is a long-term process that cannot be rushed, even with state-backed stimuli
That said, it does make sense for banks to question whether someone using the scheme is in a position to take on a new mortgage. Lending to an individual who has requested a break in paying for an existing loan increases that borrower’s risk of falling into a debt spiral, which can have dire financial circumstances. Every lender wants to ensure home-owners and home-buyers are not accruing debt that they will struggle to pay back, particularly when we do not know the long-term consequences of Covid-19 on the economy.
We cannot overlook the need for responsible lending. Make no mistake: lenders want to lend. Not only does it facilitate their business growth; it also ensures an influx of capital into the property market to stimulate residential real estate investment. But that does not mean that any lender can discount risk. They cannot issue loans without undertaking the necessary due diligence, even if the property market itself becomes a hive of activity.
The reality of the situation is simple: the recovery of the property market will not happen overnight. It is a long-term process that cannot be rushed, even with state-backed stimuli. The latest figures have demonstrated a positive surge in transactional activity and market demand, but lenders and borrowers should not become complacent. This does not symbolise the end of the post-pandemic recovery; rather, it is just the beginning.
