As the economy and the housing market slowly begin to recover from the fallout of the ongoing COVID-19 crisis, the UK is witnessing a reviving demand for mortgages, loans, and other credit. However, despite this increased consumer demand, borrowers may find it challenging to obtain lines of credit over the coming month.
Lenders Are More Reluctant to Offer Credit
Lenders have said supply of secured credit, like mortgages, as well as unsecured credit like personal loans and credit cards will decrease over the summer due to the fallout from COVID-19. Among the reasons lenders are more reluctant to offer mortgages to borrowers are job uncertainty and reduced income due to the pandemic, both of which increase the likelihood of defaulting on repayments.
The Bank of England’s quarterly survey of the credit conditions of banks and building societies indicated that the demand for mortgages and home loans had in fact, fallen in the first half of the year. However, several experts anticipate that demand will increase over the next few months, on the back of several government initiatives aimed towards encouraging consumer spending.
Reduced Options for Borrowers
The number of available mortgages for borrowers with small deposits have seen the most significant reduction. Financial data firm MoneyFacts reports the number of products available for borrowers with a 10% deposit decreased from 779 in March, to just around 70 at present. Borrowers with 5% deposits have even fewer options, with the number of available products dropping from 391 to only 14 in the same period. Additionally, several of the available options are specialist products available only to those in certain professions or locations.
Further exacerbating the situation are the low-interest rates, which mean that savings are not earning at their usual capacity either. While government initiatives like the stamp duty holiday may bolster home buyers to some extent, it won't be enough to compensate for the lack of mortgage options.
Lenders to Become More Critical of Applications
Another factor that will change in the coming months is the acceptance rate of applications for mortgages, which will likely increase thanks to increased scrutiny by lenders. Borrowers seeking mortgages at high loan-to-value can expect to have to meet several new requirements before getting access to credit, like providing more documentation and proof of business solvency.
Some experts believe that only borrowers with the best credit scores will be able to access mortgages. Individuals who have chosen to take on a payment break may not be able to borrow as much as they would hope to. The Coventry Building Society, for example, is only willing to offer loans of up to 65% of the property's value to any individuals who have claimed benefits under the government furlough scheme.
The deposit might even be higher for those looking for mortgages for investment properties – these types of investments will often receive only up to 75% of the overall value of the property. However, the stamp duty holiday introduces specific benefits aimed towards supporting investment buyers, which could help them find a good deal.
The best way to get a mortgage under the circumstances might be for borrowers to increase their deposit. While this may be challenging, it would ultimately put them into a lower bracket for loan-to-value ratio, thereby possibly increasing their chances of a successful application.