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Written on 19 March 2020 by
Although the UK and many other countries are on a wartime footing and Trump is even invoking the Defense Production Act, allowing the Government to FORCE U.S. companies to ramp up production of medical supplies, at least we can all take precautions against catching COVID-19. Providing a large majority of the at risk group take the sensible precautions recommended by the Government and as more information becomes available over the next few weeks, including more testing kits becoming available, we will get a better idea of when the restrictions can be made less onerous. However, we need to plan for restrictions lasting several months.
With the Bank Rate being cut from 0.25% to 0.1%, it has little more than phycological benefit but increasing QE (quantitative easing) by £200bn is far more significant. The gilt market has been exceptionally volatile over the last few days with wild swings and the QE announcement appears to be having the desired effect but clearly markets are in for a bumpy ride. This new QE programme combined with the 4 year Term Funding Scheme with Special Incentives for SMEs announced by The Bank of England on 11th March 2020 and the relaxation of banks' capital requirements should provide enough liquidity to the banks and other building societies to maintain mortgage lending at current levels. However, as demand for purchase mortgages will fall sharply, we will see more enquiries regarding remortgages and product transfers.
It is clear activity in the property market will be severely curtailed, not only because of the economic uncertainty dissuading people from moving but also as a result of practical problems of surveyors visiting homes to prepare a mortgage valuation. Over the next 3 months, I expect the number of property transactions to be even lower than the 2009 trough and house prices to fall this year by around 10% from the peak, which is likely to be March for the Nationwide House Price Index and April for the UK House Price Index.
Many people who had planned to move home this year will delay their move until conditions stabilise, not least because it will become very difficult to put property chains together. This will put first-time buyers in pole position and so when they decide that the time is right to buy, they will be in a very strong negotiating position to secure their first home at a good price, an advantage which will dissipate when the market starts to recover.
Homeowners who delay moving and as a result need to change their existing mortgage should consider a mortgage with no early repayment charges to retain maximum flexibility on the timing of their move. Most mortgages with no ERCs (early repayment charges) are trackers or discounts but a few lenders offer fixed rates with no ERCs. Although most mortgages with no ERCs are “portable” borrowers must meet their lender’s criteria at the time of moving, even if they are reducing their mortgage, and so it is much safer to have a mortgage with no ERCs. However, with Bank Rate now down to 0.1%, and likely to stay very low for some time, borrowers with a portable tracker mortgage should consider porting it.
For those who want to move, or need to for personal reasons, the Help to Buy Equity Share scheme offers an interesting option in the current situation. This is only available for those purchasing a new build property, but developers will have homes to sell which are due to be completed over the next few months and will not want to mothball part-built properties. Therefore in a few weeks’ time there could be some good deals available and if developers continue to offer part exchange this would avoid the “chain” problem for movers. Up to now the Help to Buy scheme has mainly been attractive for those with only a 5% deposit but in the current situation others may find it worth considering.
The English scheme (rules are different in Scotland and Wales) offers a 20% equity share second charge mortgage (40% in London) and requires buyers to have a minimum deposit of 5% and a normal first charge mortgage of at least 25%. Thus, homeowners keen to move over the next few months could do so with the Government effectively covering 20% (40% in London) of the risk of any fall in the value of the property. This of course works both ways when prices rise but homeowners can buy the Government out at any time at the current price. An added advantage for those whose income might suffer as a result of the current crisis is that mortgage payments will be lower as the equity share second charge mortgage is interest free for the first 5 years.
An example would be someone who would otherwise have needed a 75% LTV (loan-to-value) mortgage could instead have a 55% LTV normal repayment mortgage (which also means they would qualify for a lower rate than if borrowing 75%) and a 20% second charge equity share mortgage (in London it could be 35% first charge and 40% second charge equity share). Anyone choosing this approach should consider carefully when to buy out the Government (probably with a further advance or by remortgaging) as the equity share option is unlikely to be ideal over the medium to long term.
If you would like more information on impact of Covid-19 on mortgage rates, please visit our mortgage and property blog.
Categories: Ray Boulger
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and neither Charcol Limited nor Ray Boulger will accept liability for them.