Getting comfortable with high LTVs
Simon Jackson is managing director at SDL Surveying
Understandably there is a lot of focus on the high LTV mortgage sector at present, with the industry wanting to ensure that quality borrowers get the finance they need, whilst at the same time lenders match up their risk appetite with their operational capabilities.
That latter point may have been overlooked by some, because this isn’t a Credit Crunch-type environment, lenders do want to lend, and therefore many will ask, why have we seen such a sharp drop in high LTV activity/product choice?
Each lender will have a different set of reasons for their own involvement in the high LTV space currently, but we shouldn’t dismiss the fact that, for all, operational capacity will have been hampered by the lockdown. Offices are still closed or operating at limited capacity due to social distancing, they may feel they don’t have the set-up/resources/structure to meet their service commitments in this area.
There’s no doubt that you can still operate effectively with the vast majority of staff working remotely – we are living proof of that – but for some lending organisations, who may also have a lot of their capacity in offshore centres, the ability to work at the standards required may not be there.
Even if their offices are not offshore, the process may not be working at 100% until they get those employees back into those work spaces.
In that regard, lenders who would normally be offering a large high LTV range may feel that something has needed to give in order to keep working effectively. In the mortgage market, that ‘give’ looks like it has tended to be in the high LTV arena.
Which is clearly unfortunate, especially when demand post-lockdown has been incredibly strong, and when you have large numbers of potential borrowers who would ordinarily be moving/remortgaging at higher LTV levels, as well as the stamp duty holiday to make the most of.
That latter opportunity is significant and, while I have some reservations about its timing – perhaps the government could have waited to ‘unleash’ this at a time when the market was less buoyant – all property professionals will want to ensure clients can benefit.
Indeed, the stamp duty holiday might allow some borrowers to use the money they would have spent on the tax and put it towards their deposit. It might allow them to get to a point where they can secure an 85% LTV product, rather than a 90% one, which would clearly be good news for them.
However, in terms of what might be done to encourage more LTV lending, we currently have limited options. Many have talked about potential government guarantees, however if it’s not a credit quality concern but an operational one feeding lenders’ reluctance, then there’s not much the government can do to stimulate the market in reality.
It’s likely to be a wait and see approach, and we must be hopeful that lenders get more comfortable in the weeks and months ahead, and inch their way back into these higher LTV spaces.
One final point I do think is hugely relevant here, especially in terms of high LTV lending and borrowers potentially stretching themselves, is around the importance that these individuals get a survey on the property they are going to buy, not just a mortgage valuation.
The last thing higher LTV borrowers would need is to buy a house with significant problems that requires lots of capital to put right, at a time when they may have pushed themselves to the limit to get on the ladder.
It can be a difficult conversation for advisers to have, but convincing borrowers that this is the right option is imperative; spending that money now and being fully informed on the property via a survey, could well ensure they don’t make a mistake and/or end up having to spend a lot more than they anticipated in the future.