Furloughed Staff Mortgage Applications And The Post-Lockdown Mortgage Environment
Boris Johnson is poised to release UK businesses and reopen a frozen economy from next week which bodes well for a pent up property market with more than 372,000 sales at various stages of the home buying and selling pipeline.
For the quarter of the population placed on the Government’s furlough Staff Retention Scheme in recent months, lockdown restrictions will be a welcome relief. However, for those who have been actively searching for property or applied and were approved for a mortgage in the time before they were furloughed, the post-lockdown landscape could appear very different to the time before Covid-19 came into our lives.
The Bank of England’s ‘Monetary Policy Report‘ for May 2020 indicates that the UK’s GDP could fall by 14 per cent this year with unemployment doubling to around 9 per cent. However, the immediate affects could be alot worse with GDP in the third quarter of 2020 falling by a quarter.
With so much uncertainty in the economy, what does the situation look like for the quarter of mortgage applicants who have found themselves in furlough and may not have a job waiting for them once the scheme starts winding down at the end of June?
Maria Harris, Director at Digital Cat Consultancy Ltd who provide digital and fintech expertise to the mortgage industry, said:
“From what I’ve seen, most lenders are trying to take a pragmatic approach to support lending and adjusting their affordability to accommodate any reduction in income and the temporary suspension of discretionary income such as overtime, bonuses, etc. Lenders are keeping their sourcing and criteria system partners up to date and doing the best they can to support customers and their intermediary partners however, the need to protect capital and adjusted risk appetite in response to a crisis is always going to curtail new lending. I would expect that affordability, loan to values and risk appetite will be restricted for the foreseeable future while the financial impact of Covid19 is worked through.
“There will be a number of other challenges over the coming months too. Firstly, we don’t know how long and at what level the furlough support scheme will continue so we could see further income and affordability reductions as we move out of lockdown. Secondly, it’s incredibly difficult to predict the impact on unemployment as firms start their recovery. We’re already seeing some scary numbers of redundancies being announced in big organisations and some of those jobs may not come back so we could find lenders need to prioritise their existing customers over new business. Thirdly, we don’t know what the new normal is going to be once we’re through this downturn for property prices, valuations, salaries, working patterns, etc. These make it increasingly difficult for lenders to plan their liquidity, capital and risk exposure limits with any degree of certainty.”
For those who already had a mortgage in principal before being placed on furlough, the offer is subject to the lender’s discretion. Many have issued messages of reassurance to borrowers, stating that their mortgage is still valid despite possible changes in circumstance whilst others are asking to review the loan in light of income changes.
The furlough scheme allows businesses to claim 80 per cent of their employees wage up to £2,500. To some, this 20 per cent loss in earnings, plus a capped wage for higher incomes, will disrupt the mortgage process.
For those looking to start their mortgage process whilst they are still furloughed will be at a disadvantage as lenders are only considering the income borrowers are actually receiving. This means their 80 per cent furlough payment will be classed as their income as opposed to their actual salary they may return to. This could reduce the amount they can apply for and alter the homes they are able to afford.
With some lenders also enquiring about the business’ intentions to retain staff in the future, a mortgage offer is likely to rely on the testimony of the applicants employer. Businesses have been planning for the ‘new normal’ for when restrictions are lifted and given the Bank of England’s warning about unemployment, many furloughed staff could face redundancy and lenders may become a lot more cautious about accepting applications involving furloughed employees.
Even for those still in employment, mortgage borrowing is a changed environment post-lockdown. Many mortgage products were recalled from the proverbial shelf and the number of mortgage options, especially high Loan to Value products were recalled. Although lenders are starting to offer a wider range of products, the number is substantially smaller for those acquiring a mortgage in May than those starting the process at the start of the year.