Some small business owners and self-employed individuals looking for a residential mortgage are being penalised for taking government help during the pandemic, it has emerged.

This is contrary to what the government promised back in April when it offered support to businesses via a 12-month interest-free Bounce Back loan or to furlough staff. Some brokers – and lenders – admit it is included in mortgage credit scoring.

This is despite the fact many business owners and self-employed individuals may simply have taken the support because it was there. Thousands will have used the furloughing help for solely childcare reasons, for instance.

Will other lenders follow Virgin Money’s example?

Virgin Money – which owns the Clydesdale and Yorkshire Building Society – was the first to declare, weeks ago, that it wasn’t taking mortgage applications from business owners and/or self-employed staff who were receiving Covid-19 government support. At least, it wasn’t including furloughed income.

Nationwide, Lloyds and TSB said they weren’t ruling out individuals who had used government support, which includes the Coronavirus Business Interruption Loan Scheme. But they said it would be considered as part of their overall financial situation.

Mortgage broker Chris Sykes warned lenders were “setting the bar very high.” He added: “Some are scrutinising how people’s businesses are performing during the pandemic but not taking all circumstances into account, and we’ve seen some very harsh decisions.”

Mortgage holidays bad news for self-employed

Broker Nick Morrey of John Charcol, said those self-employed individuals who had taken a mortgage holiday might find their mortgage credit scores affected. This is also despite government assurances this wasn’t the case.

He said: “I understand they [lenders] don’t want to lend to people who won’t be able to pay it back, but they are treating the self-employed very differently to other clients.”

As well as their personal finances, many self-employed business people looking for a residential mortgage (or to re-mortgage) are being asked to show details of their company accounts too. In April many lenders were asking small business owners to provide personal guarantees when applying for an emergency loan. This practice has since been banned.

Regional winners and losers as property prices plummet

As expected, property prices have plunged over the last month – according to the Nationwide House Price Index, published this week.

The fall – of 1.7 per cent – fits in with the reduction in property sales 54 per cent compared to the same time last year. But it’s not putting property analysts into a spin. Most are confident of a price rebound effect, with the damage proving short-to-medium term. Others aren’t so optimistic. Samuel Tombs, chief UK economist at Pantheon Macroeconomics predicts a continuing decline for the rest of the year – to a five per cent drop by January 2021.

Pantheon does, however, admit that Google searches for property mid-May was only 13 per cent less than it was pre-lockdown.

Leicester is best UK city to invest says Raisin Index

Meanwhile, another two Indexes we’ve been looking at recently have been attempting to pin-point the best locations to invest. Private company Raisin lists the top three area for UK property investment based on business survival and property price increases. The other Index, by the urban policy research unit Centre for Cities, looks at where Universal Credit claims spiked last month.

So, is Leicester really where property investors should be focusing on at this moment in time? According to successful Berlin-based fintech company Raisin they should. The 2014 start-up – which refers to itself as a pan-European marketplace for savings and investment products – also encourages commercial investors to consider the city.

The company bases its findings on their recently commissioned report, the Raisin UK city investment index. The results showed 91 per cent of businesses in Leicester are still performing after two years. At the same time, property prices there have risen by more than a quarter, at 28.3 per cent (£69,000). It brings the price of an average price of a property to £246,000 – up from £176,382 in 2018.

Coventry and Bristol took second and third place in the Index respectively. Their scores for business survival were 90.6 per cent and 88.7 per cent. House prices in each city had increased by 28 per cent (Coventry) and 26 per cent (Bristol).

Avoid investing in Blackpool, Hull and Liverpool

Meanwhile, areas to avoid buy-to-let investments right now, according to a Centre for Cities Index, is the North of England. That’s because claims for Universal Credit there are the highest in the country. Blackpool saw the biggest jump in claims in April – an increase of 3.4 per cent from 11,650 individuals (or 8.9 per cent of the population). Other big increases came from those who are also now jobless as a result of coronavirus, in cities such as Hull, Liverpool and Manchester.

The increase in unemployment numbers in the North is no doubt already causing landlords anguish since, simultaneously, more landlords have mortgages on their property than in other regions of the UK. Research by estate agency Hamptons showed 67 per cent of landlords who invested within the past three years were mortgaged. The figure for neighbouring North West was only 2 per cent lower and in Yorkshire it was 60 per cent. The national average for landlords with mortgages on buy-to-let properties is 54 per cent.

On the 13th of May, many estate agents and property owners in England breathed a sigh of relief as the industry was, once again, open for business.  For over two months, government guidelines had forbidden the viewing of properties due to social distancing rules and, most estate agent personnel were advised to work from home.  With the same restrictions set to be lifted in Scotland on the 18th of June, the housing industry is about to start the long road to recovery across the UK.

Although the lifting of this restriction will certainly be good news for many, it’s likely to be nothing to write home about for many of the UK’s first time buyers.

Locking down higher deposits

Finance comparison site, Moneyfacts, has reported that there has been a steep drop in the number of 10% deposit mortgages offered by lenders due to fears over an impending house price crash.  In March – the month that lockdown restrictions began in the UK – the number of 10% deposit mortgages dropped from 780 to 87; a drop of almost 89%. Similarly, 5% deposit mortgage deals offered fell to 30 in the same month.  Another problem facing lenders is the backlog created by the restrictions due to valuations being halted for two months.

Despite differing forecasts on the actual percentage, most housing and financial institutions in the UK agree that a drop in house prices of between 2 and 10% is likely during 2020.  Although holding back on low deposit mortgage deals may seem prudent in such an uncertain market, property investor, Jonathan Rowland, warns that this may cause significant problems further down the line.  Jonathan said, ‘’Holding back on lending causes problems for the market,’ he said. ‘We’ve just seen a great example of that recently with businesses struggling to get loans. If that’s replicated in the mortgage market banks could be personally responsible for the collapse of the property market and we could even have another 2008 situation’.

Starting from scratch

For a huge number of first time buyers, being unable to secure a low deposit mortgage will mean that buying a property is simply impossible.  A minimum deposit of 15% means that many first time buyers will need to raise £12,000 up front – a tall order at the best of times, let alone at a time when the country is recovering from a pandemic.  A survey by Legal and General revealed that almost a third of people in the UK have less than £1,500 in savings and, 15% have none at all and, so, the majority of first time buyers will need to secure a loan from their parents or, give up on their dream of owning a property.

The new normal

Despite the doom and gloom, independent mortgage broker, Richard Latterman, thinks that there may just be a chink of light at the end of a very long tunnel.  Richard says,  ‘I’ve had a few emails from lenders that are now doing 90 per cent deals and doing 75 per cent buy to let. There are signs of recovery. There are a couple of lenders doing 95 per cent deals’.

As we wait to get a glimpse of the whole picture of the effects of Covid-19 on the housing market in the UK, we’re unlikely to see a return to anything close to 2018’s figures until at least 2022 – which means a long wait for many of the UK’s buyers.

There is no doubt UK house prices have fallen during the Covid-19 outbreak. But by how much and to what extent depends on who you happen to be listening to at the time.

Doom-mongers, or realists depending on your point of view, such as the Centre for Economics and Business Research (CEBR), see property prices slashed by as much as 13 per cent, while upmarket Savills expects a more modest five per cent by the end of the year. Knight Frank are coming in with a seven per cent drop on house prices, while Lloyds hedges its bets at five per cent. The latter does go on to predict a two per cent recovery rate for 2021, though.

Don’t expect any official government statistics for some time though, the Office of National Statistics (ONS) temporarily halted its Index last month, until further notice.

Meanwhile, prior to the lockdown around 450,000 property transactions were believed to put on hold or worse, fallen through. One thing is for sure though, UK property is definitely a buyers’ market right now. Some estate agents are reporting buyers asking for discounts of up to 20 per cent.

Winners and losers

Prior to the effects of coronavirus, properties near good commuter rail links were good news for buyers. Now, not so much. Expect houses with gardens and spare rooms (for home working) to go for a higher premium. Many singletons have also been appreciating the companionships pets provide during lockdown – as a result, luxury apartment blocks will likely introduce a ban, which may not prove quite as attractive in today’s climate.

Meanwhile, areas with a resilient jobs market and technology hubs such as Manchester, will always do well. And as for home-working? An expected boom in this is resulting in areas providing a rural retreat to become far more prized than frenetic city-centre living.

What shape is the drop?

But could the curve be ‘V’ rather than ‘U’ shaped? Frank Knight reckon that the next couple of months could certainly see falls in value but that prices should start to climb again towards the end of summer as the market settles more. Certainly, some of those stalled transactions pre-lockdown will now go through, giving a boost to current conditions.

The construction sector was one of the first to go back to work so sales of New Builds aren’t expected to suffer much. Having said that, first time buyers are now faced with tougher mortgage conditions; many lenders have increased deposit demands from 10 per cent to 15 per cent post-coronavirus.

Meanwhile, Virgin Money are refusing to consider furloughed wages for mortgage applications. Fortunately, for thousands of other buyers or those looking to re-mortgage their current property, many lenders haven’t followed suit.

Mortgage rates still remain at almost unprecedented lows with financial analysts Moneyfacts recording them as the lowest levels ever since their own records began in 2007.

How quickly will the market reignite?

The speed at which the market picks up depends on how confident buyers are with social distancing measures and venturing into the open again. Also, how desperate they are to move and to sell. Economic conditions today prompted the government to extend its mortgage holiday scheme for a further three months, as well as its ban on house re-possessions.

Rightmove are confident it won’t take long for the property market to bounce back, having recorded 5.2 million viewers last Thursday – the day the market reopened in England. Interestingly for buy to let landlords, the majority of viewers were looking to rent.

Around 77% of brokers surveyed believe that lending, mortgages in particular, will stabilise and recover to pre-pandemic levels within 9 months. Half of those surveyed (51%) believe it will happen inside of 6 months, research by Smart Money People has shown.

Smart Money People’s managing director, Michael Fotis, commented “Tentative steps are being taken to get the economy moving, and many lenders are talking loudly about their appetite to lend.

“That said, with job security likely to be a concern for many consumers, and predictions that house prices may decline by up to 13%, it’s really hard to see customer appetite for new mortgage lending returning until 2021 at the earliest.”

Equity release brokers proved to be sceptical of a recovery with only 19% feeling that lending will return to normal levels within 6 months.

So what does this mean for investors and landlords? Perhaps the days of worrying whether you can refinance or get that pesky deal over the line, could soon be over. And as the government flood the market with liquidity following the Covid-19 financial aid measures, maybe we could even see a spike in housing market activity, from sophisticated and ‘newbie’ investors alike.

Housing and Communities Secretary, Robert Jenrick, during an online Q&A session with MPs on the Parliamentary Select Committee announced that the effective ban on evictions in the private rental sector may be extended by 3 months.

This comes as a blow to landlords with problem tenants, as well as neighbours next door to dysfunctional HMOs and properties with antisocial behaviour issues.

This won’t come as a shock to most landlords, as part of the government’s assault on the private rental sector. With the abolition of Section 21, changes to Section 8, growth of Article 4 dictations and the changes to tax legislation make this yet another ‘below the belt’ hit to landlords who currently operate. The government has already forced landlords to keep tenants that can’t pay in their properties.

We cannot discount the tenants who are genuinely struggling to pay due to the effects of the pandemic, for example those who have lost their job as a result. What the extension doesn’t account for are those who were due to be evicted pre-pandemic, already thousands of pounds in arrears who were granted evictions that were simply badly timed.

The semantics used also introduced a level of confusion. Many tenants automatically stop paying because they believe their landlord has a mortgage ‘holiday’, when in actual fact this is not a holiday, but a deferral of the payments – they still have to be paid. Many tenants see this as an opportunity not to pay, as well as wrongly thinking those rental payments have been ‘written off’ and not payable, largely thanks to the government.

Compounding the issue is the fact that landlords (many of whom are working professionals, not millionaires) are receiving no assistance from the government directly. This discounts aid such as Business Bounce Back and CBILs loans, which are reserved for sophisticated landlords, who need less help than the average landlord, who isn’t classified as self-employed by HMRC. Many aren’t eligible for any help via the Universal Credit system, either.

This is seen by many as a cynical move by an otherwise ‘finger-pointing’ government. Many landlords are already looking to pull out of the private rented sector and opt for shorter-term lets such as holiday-lets or serviced accommodation. As this trend increases, so will homelessness, as private landlords form the majority of the rental stock in the UK; which can only lead to further homelessness down the line.

The government can only punish landlords for so long.

Today, the Bank of England has warned that the current pandemic, brought on by Covid-19, will bring about the biggest recession on record. It speculated the economy as a whole will shrink by 14% in 2020 (if lockdown measures are relaxed sometime in June).

Research by the Bank of England shows the economic impact by Covid-19 had been “dramatically reducing jobs and incomes in the UK” during the period.

The policymakers voted to keep interest rates at their record low of 0.1%. There was some disparity between the Monetary Policy Committee (MPC) on whether to increase stimulus into the economy. A total of 22% of the committee voted to increase the latest round of quantitative easing to £300bn.

The Bank of England’s analysis was based on the lockdown measures being phased out gradually from June onwards. Its latest Monetary Policy Report illustrated that the UK economy would enter its first real recession in more than a decade. It shows the economy shrinking by more than 3% in the first 3 months of 2020, with a much sharper decrease in the months from June.

This would cause a recession in the UK due to two consecutive quarters of economic decline.

The Bank commented on the housing market, saying it had effectively come to a standstill. In addition, all consumer spending had dropped by 30% this month.

For the whole year of 2020, the economy is expected to shrink by over 14%. This would be the largest decline on record, according to the Office of National Statistics (ONS).

The economy isn’t expected to return to pre-pandemic conditions until at least the middle of 2021. Governor of the Bank of England, Andrew Bailey, expects any ‘permanent economic damage’ caused by the virus to be relatively minimal. He said the economy was “likely to recover much more rapidly than the pull back from the global financial crisis”.