In an uncertain market with high street mortgage providers becoming more stringent in their underwriting (removal of 95% LTV mortgages being one example) – homeowners, movers, buy-to-let landlords and first time buyers are starting to seek alternative finance solutions to traditional mortgages.

With underwriting criteria being tightened (and stress testing forever being increased), getting a mortgage is seemingly a lot more difficult than it was 12 months ago. Of course this was to be expected given the rapid rise in interest rates seen over the past nine months, but it doesn’t help potential buyers, sellers, or professional landlords who no longer have a clear idea of what product best suits them.

Ultimately high street mortgage providers drive the housing market prices with their lending criteria. In good times, it wasn’t unheard of that people were borrowing 7 x their salaries up to 95% LTV and driving prices of more ‘ordinary’ houses up. 

Contrast that with them now typically offering 5 x income multiples at a max of 90% LTV and you can quickly see how swiftly that can impact the market. And this is before we’ve even taken into account the interest rate on a typical fixed rate product going from somewhere close to 3% to closer to 6% and meaning that even if the LTV is within policy, the affordability is a long way from where it would have been 12 months ago.

This has meant that people looking to sell are facing the reality of getting much less than they would have previously, and people looking to buy being severely restricted in terms of what money they have to buy with. With sellers being reluctant to take too much of a hit on value, buyers have access to less property stock than they would have done previously.

I’ll give you two examples of impact the current market conditions can have:

The Property Owner Looking To Move

If one year ago, you had a property worth £1m and an existing mortgage of £500k – you had a 50% LTV mortgage and £500k of equity. Most buy-to-let mortgages would offer you up to 75% LTV and so you have around £250k of equity you would have been able to access by retaining your existing house, moving it to a buy-to-let mortgage and you would have also had £250k of ‘cash’ back to use as a deposit for a new house.

If the new house you were looking at was £2m – you had £250k available as a ‘deposit’ you would then need a mortgage of £1.75m which is 87.5% LTV and within all bank policies.

I must make the point that the above is of course subject to affordability checks etc and is just being used to illustrate the point.

In that same scenario now and assume the house value remains at £1m.

With buy-to-let mortgages now being stress tested at >9% (with rental yields closer to 4.5%) which usually produces a Buy-to-let mortgage average LTV at around 55% – means that repeating the exact same transaction as above would now give you access to around only £50k of equity (at a much increased cost) and in the scheme of things contributes almost nothing towards the new purchase.

So whilst a year ago you may have been able to retain one property, buy a new one (all whilst collecting a rental income and building a property portfolio) you could now only have one, you’d be looking at the realistic chance of taking less for what you’re selling than you had anticipated and your new mortgage would have significantly increased from a monthly cost perspective.

The First Time Buyer With Deposit Paid Off-Plan

There are a lot of people who have paid off-plan deposits for new build apartments across the Island.

This typically looks something like 5% deposit paid over the build period (say 3 years) and the remaining 95% to be paid at completion, presumably by a high-street mortgage.

If the property was valued at £300k – your deposit would need to be £15,000 (£5k a year or less than £500 pm throughout the build contract).

Your mortgage would have then been £285k – which if we used 6 x income multiples (prudent given that has been widespread market norm for > 5 years) would mean you would need a salary of £47.5k as a single person looking to buy that property. You could go into that transaction with your eyes open and making some fairly conservative assumptions in that you would be able to complete on that deal when the time comes.

If we put that into the ‘current’ environment, the 95% LTV is no longer accessible with any local mortgage providers – with 90% being the maximum. You’re also only able to borrow 5 x income multiples. So unless you had a salary increase to £54k and you had saved an additional £15k to use as a larger deposit, you would be unable to complete the transaction. More than ever it is the LTV that drives the mortgage options available and the £15k needs to be a cash deposit as mortgage providers take the purchase price as the value.

In reality, the true value isn’t the purchase price, it’s the value compared to other properties of its type sold and market comparables (size, amount of rooms, amenities etc) – but the purchase price is the lower of the two and so a bank would take a conservative approach to base their LTV calculations on.

So there is a real possibility that in this scenario, people will be unable to fulfil their contractual obligations upon completion and will need to sell the option for the property back to the developer, often losing their deposit along the way.

The above are two examples of scenarios where change in market appetite and increasing rates have had an impact. Both on a first time buyer and on a home mover – and different scales of the normal mortgage market.

The specialist lending market is different…..

At Reto Finance we are seeing an increase from consumers and professional property investors who are seeking real estate secured products for a number of reasons:

• Developers who have completed schemes and are tied into traditional development funding facilities. In this scenario we have supported development exit loans in order for developers to hold onto their completed assets, allow a longer sales process than they had initially envisaged and allow the market to settle back to some form of normality and prices to bounce back again. This scenario may also allow you to release some profit/cash from the scheme as our value will be based on the finished product.

• Home movers who have equity tied up in their houses which are for sale, but the sale isn’t happening at the speed they require in order to compete a new purchase (potentially linked to a pre-agreed mortgage rate which they have approved). A Bridge to sell in this scenario, even if on a single dwelling, is a way of releasing equity (as per the example one above) and completing the new purchase. It gives you breathing space in terms of the sales process and allows you to analyse offers without the need to panic. Our LTV in this scenario can be up to 80% of the value of the property utilised as security.

• People who have committed to acquiring sites off plan – we can support up to 80% LTV on most transactions, and given off-plan acquisitions typically have a price set from 2/3 years previous, the true market value of those assets is likely to be more than the purchase price (owing to the increase in house prices year on year), and so in this scenario you may be able to borrow up to 100% of the purchase price. You would then feasibly go to a bank and re-mortgage using the actual value as opposed to purchase price (now you own it, the purchase price is irrelevant). You may also be able to complete on the transaction, and then sell the property and realise the profits if you had decided that the current mortgage rates are too expensive.

The above are three examples, all very different, of the type of flexible solutions specialist lenders such as Reto Finance can provide as an alternative to more traditional mortgage providers. Our policies are bespoke in nature and we believe that they add value in both the good and bad times; we remain consistent in our approach, we understand the dynamics of moving markets, and our key fundamentals don’t change. This creates consistency in an ever changing Jersey real estate and mortgage market.

Whilst some rates are starting to reduce on the High street, they are still ‘high’ compared to what we’ve known in recent times. This means that specialist lenders are no longer as far away in terms of pricing as you may think. Add to this the flexibility of specialist providers; higher LTV than traditional buy-to-let products and ability to roll interest being two examples – mean that as an alternative, we can be a viable option for a lot of scenarios.

The high street mortgage market will bounce back – it always does – the rates will stabilise and the lenders will undoubtedly relax their approach which will result in the return to the previous types of product which have helped the Islands housing market remain buoyant and allowed people the ability to own a home of their own. In the meantime, thinking outside of the box is crucial whilst volatility exists and consistency is rare.