It is generally perceived that as you build up your credit history, financial portfolio and investment experience, you’ll be better positioned to access and successfully receive new forms of debt. The reality, however, is far more complex. The wealthier someone is, the more complicated their finances become.
Looking at the current climate, the COVID-19 pandemic presents a new host of challenges for UK property investors. While the UK Government has been routinely announcing new measures to support businesses and consumers, it is still not known just how and when the virus will be contained. This uncertainty has resulted in investors and banks slowly becoming more risk averse.
On 19 March, the Bank of England took the decision to cut interest rates to an historic low of 0.1%. With the rate of interest repayments becoming lower, one would naturally anticipate a surge in applications for mortgages. Afterall, property is traditionally positioned as a safe-haven asset able to maintain its value and recover from volatile trading periods. However, this assumption overlooks some of the inherent challenges faced when attempting to arrange a mortgage.
The mortgage struggles of property investors
To understand the challenges faced by property investors, Butterfield Mortgages Limited (BML) surveyed over 750 UK individuals who own three or more properties. The research aimed to uncover the overall experiences of seasoned property investors when applying for a mortgage.
Of those surveyed by BML, 72% felt the process of applying for a mortgage had become significantly more difficult since 2015. The idea that high net worth (HNW) individuals or sophisticated property investors are being denied mortgages may seem strange, but it represents a predictable consequence of the tightening regulations imposed on the sector as a result of the 2008 global financial crisis.
The Mortgage Market Review’s list of rules for reviewing mortgage applications in 2014 advised banks and lenders to be weary of “execution only” mortgages and always err on the side of caution. Further regulation implemented in December 2017 now means that mortgage applicants must undergo a “rental stress test”, calculating whether their combined assets and rental income would cover mortgage repayments regardless of any future interest rate rises.
Such a laborious process may seem overcautious to some whose assets already ensure that they will have enough to cover such repayments. And for many, this has already led to directly missing out on property purchases. 59% of the property investors surveyed by BML said that they had lost out on a purchase in the last five years due to delays from their mortgage provider. Nearly two-thirds (65%) indicated that these time-consuming measures were the result of “red tape and regulation”, and 63% considered the application process to be too reliant on “tick box” measures.
Look beyond the high street
There is always an important role to play when it comes to regulation. Over time, governments have strived to achieve the right balance―fostering a marketplace that has the necessary protections in place but that does not undermine the ability of investors, businesses and consumers to act freely.
A consultation paper on mortgage advice and selling standards by the Financial Conduct Authoritynoted that firms were taking a particularly conservative approach when it came to compliance procedures. It also found that guidance was written before the widespread proliferation of online transactions in the financial services markets.
Taking into account the findings from BML’s research, one could argue that traditional high-street banks are simply not equipped to meet the demands of property investors and those with complicated finances. This has resulted in undue delays and put property transactions at risk. The question beckons–how can prospective property investors access mortgages in a timely manner, reducing their chances of being gazumped or gazundered?
There are plenty of answers to this question, though one should not overlook the following important point: avoid the high-street banks and find specialist mortgage providers who only deal with one type of client.
Indeed, 53% of property investors surveyed by BML considered the best mortgage providers to be the ones that specialised in a certain field―be that a particular client type, wealth, location or property size. The variety of these kinds of providers is vast. Some focus on first-time buyers, some on HNW individuals, and some purely on ultra-HNW individuals. As a result, brokers, financial advisers and property investors are well advised to acquaint themselves with these specialist mortgage lenders to ensure they are best positioned to acquire the finance needed to complete on a property purchase.
While it is difficult to predict the long-term impact of COVID-19 on the mortgage market, it makes sense for property investors to seek out lenders equipped with the knowledge and expertise to address their needs. Doing so reduces the stress, time and ultimate risk of a mortgage being delayed or declined.
Alpa Bhakta is the CEO of Butterfield Mortgages Limited. Part of the Butterfield Group and a subsidiary of The Bank of N.T. Butterfield Son Limited. Butterfield Mortgages Limited is a London-based prime property mortgage provider with a particular focus on the needs of UK and international HNW individuals.
