Updated 03 December 2020
A couple with a new baby lost their life savings of £33,000 when the buyer of their home lost their mortgage offer after exchange of contracts, collapsing their chain. And a study suggests that thousands more may have faced a similar nightmare. Article by Nick Green.
A hidden impact of the Covid pandemic is coming to light, as would-be homebuyers reveal the impact of lenders abruptly withdrawing their mortgage offers earlier this year - with at least two sets of buyers in Reading losing over £30,000 each.
The property market shutdown earlier this year proved especially painful for buyers nearing completion. In a survey by Butterfield Mortgages of over 1,300 homeowners and would-be homebuyers, three in 10 buyers said they had lost their exchange deposit as a consequence, due to the shutdown taking place after contracts had been exchanged.
The exchange deposit – typically 10% of the property purchase price – is the sum of money that the buyer’s solicitor transfers to the seller’s solicitor at the time contracts are exchanged. It should not be confused with the mortgage deposit (though it forms part of that), which is the amount of cash or equity put up in addition to the loan. The exchange deposit provides security that the buyer will not pull out of the sale.
Disastrously for them, many homebuyers earlier this year were forced to pull out of sales through no fault of their own, after their contracts were exchanged. In the majority of cases, this is because their mortgage lenders were no longer willing to lend to those buyers, even if they had a mortgage-in-principle (MIP). As a result, these frustrated buyers will have lost an average of £23,000 each (based on the average UK property price). In some cases this may account for their entire mortgage deposit too – a huge blow that will crush many dreams of home ownership and wipe out life savings in the process.
At present, there is no indication that any of these buyers are entitled to compensation from the government to make up for losing their exchange deposits. However, given the number of transactions where this has apparently happened, it would be surprising if there were not calls for some form of deposit compensation scheme to be put in place.
A couple in Reading found themselves in exactly this nightmare, after their buyer’s lender Santander withdrew a mortgage offer after contracts had been exchanged. Abdus explains, ‘Our seller was still insisting on us paying our 10% deposit, so we had to insist on our buyer also paying their 10% deposit to us. Unfortunately, our purchase price was double our sale price. So our buyer must pay us £33,000 and we must pay £66,000 to our seller – so we both lose £33,000 for nothing. This money is all our savings from the past seven years. Our account’s empty. We are devastated by this – we have an eight-month old baby, but now we are just too sad.’
What the couple found most frustrating was that there was no fault on their part, as their lender was still ready to honour their mortgage deal. It was their buyer whose offer was abruptly withdrawn after exchange, apparently as the result of their lender Santander imposing new lending restrictions as a result of the pandemic. These buyers too stand to lose all their savings.
Abdus believes that the government should look at compensating people in this predicament, just as they have paid for people to take furlough. He says, ‘The government needs to intervene. Lenders are withdrawing applications after exchange. That’s not the mistake of the people in the middle of the chain, who have everything in place. Just like the furlough scheme and the stamp duty holiday, the government should compensate those who lose their savings like this, or intervene to stop the person at the top of the chain from demanding their deposit. If lenders pull out after exchange people should not be punished. These are special times.’
Less tragic, but still frustrating, were the many cases of chains collapsing pre-exchange. The Butterfield research found that more than half (52%) of homebuyers found themselves stuck mid-chain due to the shutdown, while four in 10 buyers had to pull out of their purchases after having an offer accepted. Many of these were among the 50% of prospective buyers who were denied a mortgage at the eleventh hour, despite have a mortgage-in-principle (also known as an agreement in principle). And more than half of these buyers were in the unfortunate group who had already exchanged. Not all of these will have lost their deposits (if all buyers in the chain agreed to waive them) but some may have been put into this position, just like Abdus and his family.
Alpa Bhakta, CEO of Butterfield mortgages, said, ‘The fact that many mortgage lenders withdrew products … during the lockdown has clearly had a damaging effect on property transactions. Indeed, today’s research shows that some buyers have lost their deposits, while others missed out on properties having been denied mortgages, despite having an agreement in principle.’ She added, ‘Positively, there are mortgage lenders who are continuing to issue loans and support homebuyers.’
Bhakta believes that pent-up demand for property will see sales pick up in the second half of the year, a prediction that has been made by many industry figures (though challenged by others). However, around one in eight homeowners who had been planning to sell have now changed their minds. Mortgage lending has also tightened up, with most high LTV mortgages (90% or above) withdrawn from the market. Thwarted buyers who now hope to jump back on the property ladder may therefore find the task is now even tougher than it was before.
The property market freeze due to the COVID-19 lockdown was an unprecedented set of circumstances, so it is likely that one or more homebuyers who lost their deposits may try to challenge this in court. However, based on previous cases this is still likely to be an uphill struggle, unless the government intervenes with compensation, as courts generally favour the seller.
A 2016 case in the High Court of England and Wales (Rock v Reddy) involved a buyer facing a delay in raising their mortgage (i.e. a similar sort of predicament to those buyers hit by the property freeze). The buyer was offered a 10-day extension to complete the purchase, but still failed to raise the money, and so lost their deposit of £430,000. The case was brought by the buyer seeking to challenge this decision, but the court ruled that the buyer was in breach of contract and that the seller was entitled to keep the deposit.
The coronavirus lockdown may offer more mitigating circumstances than the Rock v Reddy case, however. If one homebuyer can bring a successful case to recover their deposit, others may follow. Cases like Abdus's are on the face of it very different, since the buyer in the middle of the chain is not at fault if their buyer has to pull out post-contract. However, as things stand the law still insists that they must pay.
The property market freeze was another reminder of how vital it is to have the strongest possible mortgage application in place. Most of the buyers whose purchases fell at the last hurdle will have been those with high LTV offers, i.e. products that lenders withdrew as the crisis hit. The 50% of buyers who managed to secure their mortgages despite the freeze will have been seen by lenders as more secure prospects, with stronger mortgage applications.
You can get an idea of the strength of your mortgage application using the Unbiased Mortgage Checklist. This asks similar questions to those that you’ll be asked by a lender, but with complete anonymity and with no credit checks (which can show up on your credit file and harm future applications). This way, you can ensure your application is as robust as possible before approach a lender.
An even better way to boost your chances is to speak to an independent mortgage broker. A mortgage broker can identify the lender and the product who is best for you, and advise you on the maximum you can borrow without putting your application at risk. This will also increase your chances of receiving an offer at the first attempt – always helpful, as delays can disrupt your property chain or even put your deposit at risk.
It’s also helpful to read up on our best mortgage tips.
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