How is the coronavirus pandemic affecting mortgages?

illustration of How is the coronavirus pandemic affecting mortgages?

Coronavirus has had a huge impact on the mortgage and housing markets. We went into lockdown in late March 2020 and couldn’t view properties, then when national lockdown was lifted in May 2020, the property market boomed. As of January 2021, we’re back in a national lockdown. 

There’s been many changes to the mortgage and property industries caused by the pandemic, some good and some bad. This guide explains the impact on you.

How is the housing market being affected by coronavirus?

The World Health Organisation announced a global pandemic on 11th March 2020. Following that, the UK went into national lockdown on 23rd March 2020 and life as we knew it halted. Like many other industries, the property market halted – meaning no one could view houses or even move house until the lockdown restrictions were eased on 10th May. 

During that seven week period, everyone was spending a lot more time at home than usual. And a lot of people decided they wanted to move. 

After we came out of national lockdown in May 2020 there was a boom in the property market. And because of that, there was an increase in demand for mortgages. 2020 saw a record number of mortgage applications, which put a strain on lenders. 

For example, a lender is used to dealing with around 500 applications per day, whereas during the peak of the property boom in 2020, they were getting over 1,000 per day. Lenders aren’t set up to deal with this increased demand and can’t cater for everyone. So this means the mortgage application process is slower than before. 

Now we’re starting 2021 in another national lockdown, this means more financial uncertainty and more people have been placed on furlough again. We know this will impact the housing market because people’s behaviour will change and lenders will update their policies.

Mortgage holidays

What is a mortgage holiday?

A mortgage holiday is when you take a break from paying your mortgage. 

In March 2020, the UK Government said you can apply for a 3 month mortgage payment holiday if you can’t pay your mortgage because of coronavirus. You can do this if your financial circumstances change and you can’t afford to pay it for a while. In May, the financial regulator said you can ask your lender to extend your mortgage holiday by another three months. 

The scheme was due to end on 31st October 2020, but then the government announced a second national lockdown on that date. As a result, the government extended mortgage holidays. The deadline to apply for a mortgage payment holiday has been extended to 31 March 2021.

Your payment holiday can be up to a maximum of six months. So, if you have already taken the full six-month payment holiday, you cannot apply for another one. However, your lender might be able to help you in other ways, so get in touch with them if you’ve already taken a six-month mortgage payment holiday.

Here’s the detail about what Financial Conduct Authority (FCA) agreed about mortgage holidays:

  • If you haven’t taken a mortgage holiday yet: you can ask for one up until 31st March 2021.

  • If you’ve already had or are currently in a three-month mortgage payment holiday: you can extend it for a maximum of six months, so - for example - if you've already had four months, you'd be entitled to another two.

  • If you’ve already had a six-month payment holiday: you’ll need to talk to your lender about your options. Even though your six month mortgage holiday won’t be reported as missed payments on your credit file, lenders can still find out about it. for example, they can see your mortgage balance isn't going down - and can use that information to help their decision when you next apply for credit.

  • If you’re worried about repossession: your lender won't be able to repossess your home on the grounds of non-payment until 31 January 2021. Unless you agree to the repossession. 

When the extension ends, banks don’t have to agree to let you take a mortgage holiday. Every lender is different, so if you’re struggling to keep up with payments, you should get in touch with your lender to discuss your options. Some mortgage lenders will still let you take a mortgage holiday if you need to, or find another solution for you. 

After the scheme ends, taking a mortgage holiday could affect your credit score. In March 2020, the FCA agreed that lenders could let borrowers take mortgage holidays and it wouldn’t affect their credit scores. They first announced it to help people not fall into financial difficulty as a result of Covid-19, and take a break from paying their mortgage.

After 30th November 2020, it’ll be up to your lender if they’ll offer you a mortgage holiday and if it’ll affect your credit history and credit score. Get in touch with them to understand their policy and what your options are.

How do I take a mortgage holiday?

There are two ways you can take a mortgage holiday. One way is if you’ve been overpaying your mortgage, you use that overpayment money you’ve built up to pay your mortgage for a period of time. 

The other way is you can take a break from paying your mortgage monthly and pay it back at a later date. If you choose this option, interest rates still apply, so you'll end up paying more in the long run. Ask your lender if they’ll reduce your interest rates. They don’t have to agree, but because we’re in unprecedented times, they could be lenient. 

In March 2020, the Financial Conduct Authority announced you could take a mortgage holiday and it wouldn’t show up on your credit file if you applied during that time period. 

After you’ve taken a six-month mortgage payment holiday, if you apply for more time off from paying, it could show up on your credit history, and it could affect your credit score which will impact your ability to take out credit agreements in the future.

All mortgage lenders are different however, so if you need to take a mortgage holiday and want to understand your options and if it’ll affect your credit score, get in touch with your lender directly. They’ll be able to let you know what their policy is.

Mortgage payments

What if I can’t pay my mortgage because of Covid?

If you’re struggling to pay your mortgage, or any bills because of coronavirus, it’s important to ask for help from the organisations you owe money to. 

If you’re struggling to pay your mortgage, get in touch with your mortgage lender to see what options are open to you. You might be able to take a mortgage holiday, or you could reduce your payments to something you can afford. 

If you’re struggling to pay other bills like your energy bills or council tax, you might be able to claim benefits, or claim more money on top of your current benefits. If you can’t work because of coronavirus, or you’ve lost your job, there are benefit options open to help you. 

To check if you qualify for benefits go to this Citizen’s Advice page

To reduce monthly living costs, you can check if you can reduce the amount you’re paying in council tax. You could qualify for a reduction in your council tax bill if your income has been negatively affected by the pandemic. Get in touch with your local council to check. 

Even if you don’t think you’ll qualify, it’s still a good idea to get in touch with your local council and ask if you can get a council tax reduction. It’s also a good idea to tell them if you’re struggling to pay. They might be able to help by reducing your council tax, and letting you pay back the difference later. Find your local council on GOV.UK.

Stamp duty

How have stamp duty rates been affected by coronavirus?

Stamp duty is a tax that you usually pay when you buy a property. To help the property market get moving again after national lockdown, the UK government temporarily cut stamp duty until 31st March 2021. So for now, you don’t have to pay it if the property you’re buying is under £500,000. 

The government introduced this tax break to encourage people to buy property after the national lockdown halted the housing market. The cuts to stamp duty don’t apply if you’re buying a second home, or on certain buy-to-let properties. 

Usually, when you buy a property in England and Northern Ireland, you have to pay stamp duty on properties worth over £125,000. If you’re a first-time buyer, you have to pay stamp duty if the property you’re buying is over £300,000. The exact amount you usually pay depends on the price of the property. It’s calculated on a tiered system. 

Normally, stamp duty is calculated like this:

  • You pay 2% tax on the portion of the property worth between £125,001 and £250,000

  • And you pay 5% on the portion between £250,001 and £925,000

Suspending stamp duty means people can save a considerable amount of money. Under the new stamp duty cut, you won’t pay the usual stamp duty fees on a property costing up to £500,000, as long as it’s your main property where you intend to live. If the property costs more than £500,000 you’ll pay a new revised rate on the extra amount. 

Between now and 31st March 2021, stamp duty is calculated like this:

  • You pay 0% on the first £500,000 

  • And you pay 5% on any amount over £500,000

For example, if you buy a house for £550,000, the stamp duty you’ll pay on the extra £50,000 is £2,500. 

Usually, stamp duty on a property worth £550,000 would have been £15,000.

How has stamp duty on second homes been affected by coronavirus?

The new stamp duty rates apply to buying a second home, but you still need to pay 3% of the property value in stamp duty. 

If you’re thinking of buying a second home, an investment property or a buy-to-let property, you’ll still have to pay the 3% stamp duty but because the new, temporary rates apply, you can still save money. 

For example, before the new rates, if you bought a second home, investment property or a buy-to-let property:

  • You’d pay 3% on the first £125,000

  • And then 5% on the second £125,000

So that’d be a stamp duty bill of £125,000. 

From now until 31st March 2021, you only pay 3% of the purchase price.

Property prices

How has coronavirus affected property prices?

After we came out of national lockdown in May, the property market started to move again. Things like interest rates being cut and the government taking away stamp duty meant a lot of people wanted to move home. 

So far, we’ve seen a slight increase in property prices. The Land Registry Index is one of the most accurate indicators we have for knowing if house prices in the UK are generally going up or down. The figures they show are always two months behind, so the latest figures we have access to are currently August’s. Their figures are based on sold properties, so it’s the most accurate source of information for the housing market. 

According to them, “As of August 2020 the average house price in the UK is £239,196, and the index stands at 125.45. Property prices have risen by 0.7% compared to the previous month, and risen by 2.5% compared to the previous year.”

Property prices have risen slightly during this period probably directly due to coronavirus. But with more localised lockdowns happening, it’s hard to say if this increase will last for the whole country. There are some predictions that say prices will drop, and some predictions that say they’ll fall. Keep checking the Land Registry Index for an up-to-date figure.

Interest rates

How do the emergency mortgage interest rate cuts affect my mortgage?

On 11th March, The Bank of England made an emergency interest rate cut to try and control the economic fallout of the coronavirus outbreak. They cut the bank rate from 0.75% to 0.25%, this was the lowest rate in history, even more than when we were in a financial crisis in 2007. 

Then, on 19th March 2020, the Bank of England cut the rate to 0.1%. Another record low. 

The Bank of England is the central bank for the UK. It sets the base rates for the interest rates all UK banks can set, oversees all the financial policies and is also the bank to the government. 

Cuts to interest rates is a good thing for many mortgage borrowers. A lot of people who have mortgages are directly affected anytime the Bank of England changes the base rate. 

For example, if you’re on a tracker mortgage (one that tracks the bank rate) your monthly interest payments will go down. If you’re thinking about getting a mortgage while the rates are low, you could get a good deal. If you’re on a fixed rate mortgage, your payments stay the same.

If you’re on a variable rate mortgage the amount you pay each month can be changed by your mortgage lender. They can change the rate based on the Bank of England’s cuts, but they don’t have to. The rates set by the Bank of England are a guide for lenders and banks; they use them to know what to charge borrowers or give people with savings.

When will mortgage interest rates change again?

At the moment, interest rates are at an all-time low. The Bank of England is the only financial organisation who can set the base rate. The base rate is the standard rate that the banks, building societies and lenders use to set their interest rates. 

As we all know, it’s very hard to predict what will happen at the moment. At some point, the rates will have to go back up because of how low they currently are. But at the moment, they’re likely to stay low while the economy recovers. 

Generally, when we see demand for something, the price goes up. This is the same for mortgages. After the national lockdown, we were able to view property and the housing market boomed a little. Now that we’re seeing more and more local lockdowns, those areas of the country can’t view property so those local property markets come to a halt. 

If we see a national increased demand for mortgages, we could normally expect the interest rates to increase, but because we’re in a period of economic instability, the Bank is unlikely to put the interest base rate up because this would be a bad thing for the economy in general. The government and the Bank want people to have disposable income so they can go out and spend money which makes a healthy economy. So if they were to make the situation worse by increasing mortgage interest rates, they’d be creating financial hardship. 

At some point the rates will go up, but only when the economy gets stronger. 

Mortgage rates will always be affected by what the Bank sets, but it’s not the only consideration. 

At the same time, the Bank of England who sets the base rate isn’t just thinking of mortgages when it sets the rate. The Bank is trying to protect the economy as a whole and keep it stable.

First-time buyers

How has coronavirus affected things for first-time buyers?

There’s a few different ways coronavirus has and is affecting things for first-time buyers. Here’s a list:

No stamp duty: The government has stopped stamp duty until 31st March 2021. This is a good thing because it can save you thousands of pounds. 

Larger deposits: Because it’s an uncertain time, lenders are being more cautious with how much they’re lending. In some cases, this means they’re asking for higher deposits from first-time buyers. Very recently (December 2020) lenders have come back onto the market with 90% LTV (loan-to-value). That’s a big positive for any first-time buyer. Lenders like Halifax, Platform, Accord, TSB and Metro Bank have just announced this.

Saving is harder: Because of the pandemic, interest rates were cut by the Bank of England.  For some people, that was a good thing because their mortgage repayments went down in interest. But the negative is that interest rates on savings accounts have gone down too, making it even harder than before to earn interest on savings to buy a home. 

Lenders are changing the rules: Lenders change their lending criteria often at the moment, so it can be harder than usual to get a mortgage. For example, if a lender suddenly changes their minimum loan-to-value figure, it would mean you’d suddenly need a higher deposit.

Is now a good time to buy a home for the first time?

With no stamp duty to pay and super low interest rates, it could be a great time to your first home. But it’ll depend on your unique situation. 

If you’ve got a straightforward mortgage application, i.e. you don’t have any credit issues and you’re not self-employed, the benefits of buying while interest rates are low and there’s no stamp duty could make it a really good time to buy. 

If you do have credit issues or are self-employed, it could still be a great time to buy for these reasons. But these issues will complicate your application. The best thing to do if you do have these issues is to work with a specialist mortgage broker, rather than attempt a mortgage application on your own. A specialist mortgage broker will know which lenders are the most likely to accept your mortgage application, so you don’t waste time, effort or money applying to the wrong lender.

Remortgaging during the coronavirus pandemic

Is it a good time to remortgage during the coronavirus pandemic?

Because interest rates are currently at historic lows of 0.1%, it could be a good time to remortgage. If you’re considering it, check when your existing mortgage is due to expire, and check to see if your lender charges any early exit fees if you’ve got a while left. 

Remortgaging is usually quicker than when you mortgage for the first time on a property. But at the moment, it could take longer than usual because lenders are changing their mortgage products often.

Should I stay with my current lender or switch mortgage providers?

It's possible the best rate you can get might not be with your current lender, so it’s always worth considering remortgaging with another lender.

There are two main ways remortgaging has been affected by coronavirus – lenders have changed their mortgage products and policies, and people’s incomes have been affected by the pandemic. These two things might affect whether you want to stay with your current lender or switch to someone new. 

If your income has been affected by coronavirus, for example, if you’ve been on furlough, or your income has decreased, you might find it difficult to remortgage with another lender. That’s because lenders have different lending criteria to assess your affordability. Some of them will look at your furloughed income which is up to 20% less than usual. It’s better for you to have your affordability assessed on your 100% salary because you’ll be able to afford a larger mortgage. 

If you haven’t had your income affected by coronavirus, you can take advantage of good rates, but if you have had your income affected negatively, it could be better to stay with your current lender for now.

Can I remortgage if I’ve taken a mortgage holiday?

Yes, you can. UK Finance is a trade body who regulates the financial industry. They confirmed that banks and lenders won’t do extra affordability checks on people who apply for a remortgage after taking a mortgage holiday due to coronavirus.  So that means you should be absolutely fine to remortgage with your current lender if you’ve taken a mortgage holiday.

Getting a mortgage on furlough

What is furlough and when does it end?

Furlough is a temporary leave of employment if your workplace closes or just doesn’t have enough customers because of the coronavirus pandemic. The current furlough scheme in the UK pays 80% of an employee's pay (up to £2,500 per month) and is due to finish on 30th April 2021.

To be eligible for furlough, you’ll need to have been on your company’s payroll since 30th October 2020. If you’ve been made redundant or left a job, but were on a payroll on 23rd September 2020, you can ask to be re-employed and placed on furlough.

You can place yourself on furlough if you're self-employed through the Self-Employment Income Support Scheme. 

Use our Self-Employed Mortgage Calculator to see how much you could borrow on your adjusted income.

Can I get a mortgage if I’ve been on furlough?

Yes, you can. But because you’ve had changes to your income, it could be more difficult than before. 

If you were furloughed during the pandemic, or are still on furlough, your income might have changed. Any change to your income usually affects your mortgage application because lenders want to know exactly what your income is and what it has been recently. 

When lenders calculate your affordability, a lot of them will only consider 80% of your income if you’ve been furloughed. Some lenders will consider 100% of your salary if your employer tops up your salary to the full 100% of what it was before the pandemic. 

If you normally get bonuses or overtime pay, a lot of lenders won’t accept those as income if you’re on furlough. But if you’re back on full-time hours and those bonuses apply again, you should make sure it’s part of your application so they can see what your income is now. 

Because it’s a new and complicated system, it’s a good idea to use a mortgage broker if you’ve been on furlough and want to get a mortgage. You’ll definitely benefit from someone who’s got inside insight and knows the market.

Can I apply for a mortgage if I’m still furloughed?

The good news is it's still possible to apply for a mortgage while on furlough. However, how much you can borrow and how much interest you pay is likely to be affected. Prepare to be assessed on your furlough pay – not your full pay – unless your employer is topping your salary up to 100%.

If you’ve been put into the furlough scheme, mortgage lenders might be hesitant to let you borrow, viewing your job as less stable. If your employer is topping up your income to 100%, this will be taken into account. Some companies might request a confirmation of employment, though this might be hard to obtain from your employer if your job is still uncertain. This also isn’t an option if you’re self-employed and on furlough.

If you’re applying for a joint mortgage, lenders may look at your partner’s income, but it’s not guaranteed to get you approved. If the higher earner is furloughed, this could stop your application in its tracks with a lot of high street lenders. Whereas if the applicant on lower income is furloughed then this might not matter as much. 

Work out how much you could borrow using our Mortgage Affordability Calculator.

If you want a mortgage while furloughed, you’ll probably need a mortgage broker to help you through this new territory. This way, you’ll get the best rates for your situation and be prepared for what could be a tricky application. Get started if you need a mortgage broker. 

What happens if I get furloughed during a mortgage application?

If you're placed on furlough after receiving a mortgage offer or a mortgage in principle, you'll need to let your lender know. By rights your mortgage in principle or agreement should be binding. But the lender will need to reassess if they're still willing to lend. 

Be prepared for your mortgage company to reduce the amount they're willing to lend you. In some cases, they may stop you getting the mortgage altogether. This can be super frustrating if you're keen to move into your new home.

Each lender is taking their own approach to mortgages on furlough, so it's worth getting the help of a mortgage broker who can help if you find yourself needing to reassess your options.

What can I do to help my furlough mortgage application?

Furlough mortgages are new for both borrowers and lenders. It may be easier to wait until your work situation has become more stable before starting a mortgage application. However, each mortgage company will be different, and there’s a few things you can do to help you with your application:

Get your bank statements

Usually you only need to provide three months’ bank statements, but it's a good idea to gather as many as you in case you're asked for evidence of your pre-furlough finances.

Find your payslips or accounts

Start pulling together your recent payslips, and your accounts if you’re self-employed. Getting them in order and ready to view will ensure you’re as prepared as possible for an application.

Consider a bigger deposit

If you can do it, putting down extra cash up front will make you less risky to lenders. Your loan-to-value will be lower, opening up more lenders and better rates. 

Check your credit rating

It’s possible to get a mortgage whatever your credit score, but the lower that score is, the more difficult it becomes. There are some surprisingly simple ways to improve your rating. 

Get tips on how to improve your credit score before a mortgage application in our Guide: How to improve your credit score before applying for a mortgage

Get a mortgage broker

Most big banks and lenders on the high street will view your application as 'high risk' if there's any uncertainty around your job. Using a specialist broker who knows the market will give you access to lenders more suited to your needs. The brokers we work with cover the whole of the market. That means they’re not loyal to a lender, they’re loyal to you. Get started.

The mortgage market

How has coronavirus affected mortgage lenders? 

When we went into national lockdown for the first time on 23rd March 2020, some mortgage lenders stopped offering certain mortgages because of the coronavirus pandemic. This was because due to lockdown and social distancing rules, viewings couldn’t happen on properties and surveys couldn’t be done either, so it changed demand and the market entirely. 

On 13th May 2020, in-person valuations were allowed to start again, and lenders start to return to normal. Because a lot of people had been locked down inside, there was a lot of DIY going on, and after lockdown – a lot people had decided they wanted to move home. 

During April-September lenders saw a huge increase in demand for mortgages and struggled to keep up. A lot of people were disappointed when their mortgages were rejected. 

By October 2020, the market stabilised to the kind of pre-Covid levels lenders were used to dealing with. It’s uncertain what a second national lockdown will mean for the housing market. 

As of the third national lockdown in January 2021, the housing market is still open for business.

How has coronavirus affected loan-to-value (LTV)? 

Loan-to-value rates have been affected by coronavirus because lenders are always more careful with the kind of loans they offer when the country is in a financially unstable place. That’s because they like to loan money to people they’re sure will stay financially stable for a long period of time so they can pay back the money they’ve borrowed. 

Because we’re in a global pandemic, lenders see that as an unstable environment so might be less willing to give you a mortgage if you only have a 5% deposit or a loan-to-value (LTV) of 95%. The amount of lenders who’ll be willing to offer you a large mortgage loan, for example, something like 90-95% is limited at the moment. 

Generally, there aren’t a lot of lenders at the moment who are accepting mortgage applications from people with less than 10%. If you have a deposit or equity in your home of 15% or more, more lenders will be willing to offer you a mortgage.

If you have credit issues, only have a deposit of 5%, or have any other kind of complex situation you’d need a specialist lender to consider you. It’s a good idea to talk to a specialist mortgage broker so you can have the best chance of getting a mortgage with a 5% deposit. Alternatively, you could try to improve your LTV by saving up more money or consider buying a cheaper property. 

People with credit issues or a complex income will find it harder than ever to meet lenders’ criteria. And if you’ve had your income affected by coronavirus, this could add more complexity to your mortgage application. If that’s the kind of situation you’re in, it’s a really good idea to talk to a specialist mortgage broker. A lot of mortgages suitable for you are only available through specialist brokers because specialist lenders don’t deal directly with borrowers. You’ll have much more chance of getting a mortgage than if you searched for one yourself.

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