An update on the mortgage market from Alex Ogario, Head of our Private Office

The Private Office team at Knight Frank Finance work with ultra-high net worth individuals to find debt solutions for global super prime real estate and luxury assets such as, private jets, yachts, art collections, fine wine and classic cars. This month Alex Ogario, who heads the team, provides us with an update on how the mortgage market has been impacted by Covid-19.

Key takeaways

• Liquidity and lending appetite have somewhat recovered
• UK long duration fixed mortgage pricing remains exceptionally low relative to historic averages
• Underwriters approaching transactions with greater scrutiny of a clients’ balance sheet strength and the likelihood of cash flows being supported in a post Covid world
• There still remains strong appetite within certain lenders for large and complex transactions. Mortgages are taking longer to execute
• EU residents currently have fewer lending options than they once did

Initial pressures on lenders have eased as corporates have reduced the hunt for capital to sure up balance sheets. In fact I hear some have started repaying credit lines that were initially drawn as the pandemic started.

Lenders that exited the market as the health crisis took hold have generally returned to lending, and high loan-to-value ratios have been made available again- albeit with more caveats and lower product supply.

Whilst central bank rate reductions have on one hand flattened interest rates, this has been offset in many cases by increases in bank margins, as lenders try to maintain their net interest margin. Fixed mortgage rates in the UK have benefited more from the environment, with some 10 year rates available below 2%, albeit for select clients borrowing large amounts, and on a bespoke basis.

Talk of a negative UK base rate is of great concern to the lenders I speak to on a daily basis, and investors are betting rates could go below zero by the end of the year.

The Bank of England seems cautious about implementing such a policy, and a swift recovery from what is- unlike the 2008 Global Financial Crisis- an exogenous event, should prevent the base rate from going negative.

Clients are weighing up whether they take long duration fixed rates, on the basis of their relative cheapness, or take the savings today with shorter duration and lower fixed or variable rates, speculating that in a world that’s now seemingly addicted to cheap money central banks will be hard pressed to raise rates any time soon.

Mortgage valuations were a concern as we exited lockdown, as the possibility of large down valuations on high value properties reared its head. This narrative hasn’t played out, in the UK market at least, and pricing is proving to be relatively resilient.

Bank underwriters are now questioning the impact of Covid-19 on clients’ balance sheets and cash flows. The knock on effect of that has been a large increase in clients instructing us to arrange mortgages on large prime central London properties over the last few months, as credit conditions tighten and a client’s existing lender becomes more conservative. For some lenders exposure to large debt amounts on super-prime assets is not as palatable a risk as it once was.

There is still appetite for very large and complex ticket sizes within certain private banks, if a client has a strong balance sheet, stable cash flows and can demonstrate a willingness to develop a relationship with a bank that transcends purely debt- there is certainly more emphasis on quid pro quo, which usually entails the development of an investment management relationship.

Debt is undoubtedly taking longer to arrange, as lenders carry out extended due diligence, so it’s certainly prudent for clients to leave themselves plenty of time and make sure they have the best team around them. In addition, with all of the disruption that has been caused by the pandemic, it seems that some have forgotten Brexit, which is impacting European’s looking to borrow money in the UK.

Many lenders are in fact re-evaluating their ability to provide debt to Europeans post-Brexit, as they lose passporting rights in the EU and need to separately assess the EU’s mortgage regulation in each member state. There are still many lending options available for EU residents, but again it’s important that they are taking the right advice and working with a team that understands all of the options.

If you'd like to find out more or discuss your own requirements, contact Alex.