Lending market 6 weeks into Covid-19 pandemic

It is safe to say there is genuine concern for the worldwide real estate market in light of the ongoing Covid-19 pandemic. Economies have ground to a halt, government expenditure has gone through the roof and we have seen some retail banks removing themselves from the mortgage market. The mass media has played a significant role in building a doom and gloom scenario but is it a balanced view?

In this article, we will look at various areas of the lending markets, investor trends, liquidity issues and what the future holds for both the property market and the lending market. Taking a balanced approach you will very quickly see that all is not as the media is portraying.

Real estate markets

You will no doubt have seen the doom and gloom predictions of a 35% fall in UK property prices in the short term. Suggestions that the market will grind to a halt, negative equity will go through the roof and UK/worldwide economies will collapse. Counter this media view with that of established real estate agent Knight Frank which recently produced a report on London house prices. Focusing on the luxury end of the London property market, Knight Frank is forecasting prices will fall by around 2% in 2020 with expectations of a rebound of 6% in 2021. Very different from the headline grabbing forecast 35% fall in UK property prices?

The reality is that regional and national property markets will perform very differently based upon their economies and how quickly they can recover. In the short term, we are already starting to see many ultra-high net worth and high net worth individuals increasing their liquidity ahead of potential property investment bargains. There is no doubt there will be challenges in the short term, taxes will need to rise to fill accounting black holes but there are signs of light at the end of the Covid-19 tunnel. As an investor, it pretty much comes down to how far into the future you are prepared to look.

Worldwide base rates

Rewind just a few months ago, the Bank of England was under pressure to increase UK base rates and Donald Trump was placing pressure on the Federal Reserve to follow suit. However, in the last few weeks we have seen a reduction in worldwide base rates. Indeed the European Central Bank base rate is currently flirting with negative territory as the EU seeks to bail out member states. We’ve also seen huge bailout programs as a means of injecting a degree of confidence back into investment markets and economies. Historically low base rates across the globe have also seen mortgage rates slashed and funding liquidity increased.

Lending markets

As a global entity, the lending market is split into three specific sectors which are retail banks, private banks and niche lenders. While much of the media focus has fallen upon retail banks the difference between retail banks and private banks/niche lenders today is like night and day.

Retail banks

We know that a number of retail banks have withdrawn from the mortgage lending market in the short term. While the last few days has seen Nationwide introduce an 85% LTV mortgage this seems to be an exception to the rule at this point in time. Even though many of our fund raisings tend to be bespoke and revolve around private banks/niche lenders we regularly transact with traditional retail banks where they are competitive. As a consequence, we still have our finger on the pulse with regards to retail bank lending where there has been a shift in staff focus towards Covid-19 led mortgage holidays. In reality it is a mixture of the huge demand for mortgage holidays and the uncertain outlook in the short term which has prompted many retail banks to withdraw from the traditional mortgage lending market. However, a glimpse at the figures shows they are in the midst of processing thousands upon thousands of mortgage holiday applications.

The general expectation is that retail banks will take some time to return to more traditional mortgage lending markets. Once the vast majority of mortgage holiday applications have been processed they will likely move their focus on to remortgaging and product switching. When this growing backlog of applications has been considered, and the appropriate action taken, the economy should be moving again and the property market more liquid. So, yes, retail banks have been impacted to a greater extent than private banks/niche lenders but they also have a huge backlog of mortgage holiday, remortgage and product switching applications to process.

Private banks

We have an extremely close relationship with many leading private banks across the world. This fits perfectly with one of our core services, that of creating bespoke funding solutions for often complex financial scenarios. The contrast between private banks and retail banks could not be greater; the majority of retail banks have reduced or withdrawn their mortgage products while 80% of private banks are still open – business as usual. When you also consider the level of worldwide base rates, with Europe currently flirting with negative base rates, there is huge liquidity away from the retail banking sector.

There are numerous factors to consider with regards to private banks and why they are currently able to operate while retail bank counterparts continue to struggle:-

1. Flexible lending criteria
2. Extremely competitive mortgage rates
3. Tools to address short-term liquidity issues
4. Access to cheap capital
5. Remote valuation services
6. Long-term client relations

We will now delve a little deeper into these various factors which are currently placing the private banking sector head and shoulders above the retail lending sector.

• Flexible lending criteria

It is fair to say that private banks have always been more flexible when it comes to income and asset considerations. Where UK retail banks will focus on UK income and UK assets when considering lending criteria, private banks take consideration of global income streams and global assets. They are also much more flexible when it comes to core lending criteria often able to provide competitive funding for clients who are perhaps asset rich but cash poor. It is their ability to introduce a significantly degree of insurance in the form of collateral (assets and AUM) which allows them to be so flexible and competitive.

• Competitive mortgage rates

Over the last few weeks we have undertaken a number of a large property refinancing programs using our private bank contacts. At the moment the broad spread of mortgage rates tends to be base rate plus 1.5% up to 3% depending upon individual circumstances. However, to give you an example these are rates which we recently agreed for clients:-

• 1.6% over Bank of England base rate for five years on a 50% LTV
• 1.81% fixed for five years, interest only up to £20 million
• 1.7% over Bank of England base rate for five years on a 70% LTV

As you will note, these are extremely competitive rates which are skewed towards the lower end of the broader private banking range.

• Improving short-term liquidity

While the UK government has introduced billions of pounds of support for businesses, employees and local authorities, we have seen issues with regards to short-term liquidity. Whether looking to roll over bridging loans coming to their expiry, remortgaging debt free property or introducing equity release, there are still numerous options in the private banking sector. This is a subject we will cover in more detail later in this article.

• Cheap access to capital

As we touched on above, worldwide base rates are currently at historic lows and this has given lenders access to relatively cheap capital. This is reflected in mortgage/refinancing terms as many lenders are now focusing on the higher end of the market. Competition is rife and our independent status allows us to introduce a huge element of competition amongst potential lenders, resulting in extremely attractive rates for our clients.

• Remote valuations

It is very easy to get the wrong impression of private banks/niche lenders when it comes to the risk/reward ratio. Yes, they do take in worldwide income streams and worldwide assets but only where there is an appropriate degree of certainty. One reason why the traditional retail mortgage market has frozen is an inability to carry out property valuations while abiding by lockdown/social distancing regulations.

Private banks have been a little more inventive and are now readily agreeing funding terms based on “desktop valuations”. The idea is simple, using data available and market trends it is possible to estimate a relatively accurate property valuation. However, any degree of risk is mitigated to an extent by the relatively low LTV ratios on some properties. Even pushing towards a 60% LTV this still gives lenders a 40% cushion should their clients experience financial difficulties.

• Long-term client relations

One core concept of the private banking movement is the offering of a range of different services to keep new and existing clients in-house. In many cases this involves extremely competitive introductory mortgage/refinancing terms which lay the groundwork for a longer term relationship. Private banks are not “giving money away” but they can afford to give a little more back at the start to create multiple long-term income streams and strong relationships with their clients.

Niche lenders

The situation for niche lenders is very similar to that for private banks although by definition they will focus on a specific type of finance. Evidence suggests that niche lenders, as well as private banks, are benefiting from growing demand for:-

• Remortgaging
• Equity release
• Short-term finance

It will be interesting to see the shift in business between retail lenders and niche lenders/private banks when the Covid-19 pandemic is finally under control. Will all of those who would previously have gone through the retail banking sector return? Might niche lenders and private banks be able to secure more long-term relationships to the detriment of the retail sector? In aftermath of the 2007/8 financial crisis we saw niche lenders/private banks come more to the fore and increase their market share.

Our evidence suggests that the use of mortgage brokers, opening access to niche lenders/private banks as well as retail banks, will be more popular going forward as this often mysterious area of finance is revealed to a wider market.

Lending market trends

As we touched on above, the vast majority of retail mortgage lenders have taken a step back from the main market to focus on mortgage holiday/remortgage applications and product switches. In our experience 80% of private banks/niche lenders are still operating and they have seen an increase in demand for:-

• Remortgages

While the experts suggest that base rates, and as a consequence mortgage rates, are unlikely to move significantly higher in the short term, nothing is ever certain. It is also debatable as to whether we will see any further downside on base rates/mortgage rates hence the reason why many ultrahigh net worth and high net worth individuals are busy securing remortgages. In these challenging economic times, the ability to reduce monthly mortgage payments can be very useful.

• Equity release

There has also been a huge increase in demand for equity release mortgages both as a consequence of historically low interest rates and the potential to cherry pick investments in the short term. The short to medium term forecast for UK (and worldwide) property prices varies significantly. We have Knight Frank suggesting London property prices may only fall around 2% in 2020 before rebounding by 6% in 2021. But other parties suggest a larger fall in property prices and a more gradual recovery. Either way, those with liquidity may well be able to negotiate some extremely attractive property acquisitions in the short term.

• Second charge mortgages

There has also seen a recent increase in second charge mortgages as an alternative to remortgaging an entire property. As the term suggests, the second charge will stand behind the primary mortgage charge. Due to the level of equity in the property, both parties have a degree of headroom. This funding might be used to increase short-term liquidity for personal/business use or else go towards a war chest for short to medium term investment.

• Bridging loan refinancing

There is growing concern for individuals/businesses that have bridging loans due for renewal/refinancing over the next 3 to 6 months. However, here at Enness we have been very proactive in this area and have a number of short-term financing partners we can call upon. So, if you have a bridging loan due to expire in the next 3 to 6 months we would welcome the opportunity to talk to you in more detail. We should either be able to negotiate a refinancing of the bridging loan or an exit into a more traditional longer term lending facility.

On a more general note the ongoing lockdown and economic paralysis has also prompted growing demand for:-

• Mortgage holidays
• Business loans
• Business overdrafts

In many cases individual applications are backed by the UK government to varying degrees as a means of protecting businesses/individuals from short-term economic hardship.

Similarities to the 2007/8 financial crisis

It is fair to say that the ongoing Covid-19 pandemic is a challenge the likes of which we have not had to face for over a hundred years. Impacting countries around the world, and likely to remain at least in the background for some months to come, we are seeing some similarities to the 2007/8 financial crisis – brought about by the collapse of the US sub-prime mortgage market. Base rates around the world have been slashed, mortgage rates have followed suit and there are concerns about the short to medium term outlook for not only economies but also real estate markets.

Governments have again responded with an array of support packages, including funding for individuals and businesses, on a level never seen before. So, we have ultralow base rates, high levels of mortgage funding available and extremely competitive terms. We appreciate that property valuations are challenging in this environment but many private banks/niche lenders are willing to accept desktop valuations where there is significant headroom above the LTV. The retail lending sector is suffering from a degree of paralysis which is again something we saw in the aftermath of the 2007/8 financial crisis.

Conclusion

Mass media headlines suggest the mortgage lending market has been paralysed as a consequence of the lockdown and inability to carry out property valuations. As a mortgage broker focusing on ultrahigh net worth and high net worth individuals we are aware of the wider picture which is very different. At this moment in time, in what many would describe as the most challenging period of the pandemic, more than 80% of private banks and niche lenders are still operating as normal. Indeed, there has even been an increase in demand for mortgage finance, refinancing and funds to assist short-term liquidity.

The recent reduction in worldwide base rates has increased the supply of cheap finance, dramatically improved liquidity amongst private banks/niche lenders and demand for various financial solutions. So, if you’re looking to secure mortgage funding, refinancing, remortgaging or equity release, we can certainly structure a number of solutions for you to consider.