A snapshot of the UK lending landscape
On 17th March 2020, the Bank of England made the unprecedented decision to cut interest rates from 0.25% to an all-time low of 0.1%. Not since the Second World War have we seen rates plummet to such an extent.
At face value, this would have been welcome news for those looking to take out a loan or a mortgage. Given that interest rates were already low, a further dip would have been particularly enticing; especially for those toying with the idea of taking on a self-build project.
Although in reality, this move has resulted in lenders becoming more risk-averse. Indeed, since the Bank of England announced its interest rate cut, banks and building societies have withdrawn more than 900 mortgage products.
There are two main reasons for this; firstly, banks will be overwhelmed by homeowners attempting to take the three-month mortgage holiday offered by the Government. Consequently, it is likely that they will be redirecting their resources to deal with such enquiries from existing customers.
Secondly, and perhaps most importantly, lenders are starting to become unnerved by uncertainty surrounding house prices during the pandemic. House prices appear to be falling, but lenders are faced with the logistical issue of a UK lockdown, so they are unable to arrange house valuations. Consequently, more lenders are becoming reluctant to accept new mortgage applications.
So, what impact are these conditions having on the self-build mortgage market?
In short, those seeking self-build mortgages are facing similar changes. Unlike a residential mortgage, a self-build mortgage is a form of financing issued to borrowers building their own home. The mortgage is issued in stages during the construction phase in order to reduce lender risk and ensure the mortgage is being used for the purpose of constructing a new property.
Indeed, when compared to the traditional mortgage market, self-build mortgages come with the additional risk of financing the construction stage. This might seem like an obvious point; however, given the current uncertainty faced by the construction industry itself, many lenders will likely be less generous when it comes to accepting a self-build application.
The impact on the workforce
Given the current circumstances, it is perhaps unsurprising that lenders who offer self-build mortgages have become more risk-averse. Like many sectors across the UK, the construction industry has taken a hit from COVID-19.
Many development firms have taken decisive action and halted all their construction work for the immediate future. And whilst the Government has not offered any definitive guidance on the closure of construction sites, the announcement of a support package for the self-employed could encourage construction workers – many of whom are self-employed – to stay at home and help with the containment of the virus.
Additionally, a similar issue will occur when it comes to finding the correct building materials for the project. Suppliers and logistics companies across the UK, and indeed the world, will likely be practicing social distancing. Even if such companies are still able to provide a service, it is probable that it will not be at full capacity. So, deliveries will likely be delayed, or even cancelled.
Whilst an understandable measure, the fact that many construction workers, suppliers and logistics companies are operating at a reduced level means the construction sector at large is in a static position. As a result, the time it takes to successfully lodge and process a mortgage for self-build purposes is likely to increase. What’s more, traditional lenders could simply decide to remove this product from the market for the time being.
What are the next steps?
Of course, it is too early to say what COVID-19’s long-term impact on the self-build market will be. However, we should also not forget that the property market, in general, has been able to quickly recover from difficult trading periods. This is due to underlying domestic and international demand for UK real estate as an attractive asset class.
That being said, in the short-term, many self-build mortgage applicants might find the current climate unaccommodating to say the least. While options are still available, the process of finding a lender willing to deploy a mortgage will be challenging. This is why it is always advisable to consult with brokers who have an informed understanding of the different mortgage products available on the market.