HTB has cut its maximum loan-to-value to 60 per cent, setting out difficulties in obtaining accurate valuations during the covid crisis.

In a frank email to brokers, managing director Charles McDowell lays bare the problems lenders are facing in the current climate.

He points to recent Royal Institution of Chartered Surveyors’ guidance, which suggested the majority of valuation reports over the coming months are likely to indicate “material uncertainty” over house prices.

McDowell’s email says: “Until we have more clarity around the actual performance of property prices post covid-19, we are restricting our maximum LTV to 60 per cent for any loan which relies on a valuation report which contains material uncertainty. 

“We will continue to review our position as we are able to build up our base of up-to-date house price data.”

He says: “Valuation is as much an art as it is a science, but a key element of any valuation is suitable comparable transactions and the truth is that we won’t have comparable transactions for a number of months in some cases. 

“The [RICS] guidance goes on to tell lenders that reports ‘must not be relied upon until the full implications of the current crises have passed and been fully identified.’

“I have every sympathy of our surveyor colleagues but this does put us, as a lender, in an interesting predicament.

“The post lock down economy is anyone’s guess. 

“We’ve never been here before. 

“What is clear that the UK economy will take a hit this year (latest estimates vary from a 6 per cent drop to a 13 per cent drop in annual GDP) and there will be a bounce back. 

“What is unclear is how quick will that bounce be and how do we pay for it.”

McDowell says that despite what some people are saying, the problem is not the inability of surveyors to carry out inspections during lockdown – “this is merely an inconvenience”.

“The real problem is what number do we put on any valuation in the months following lock down and how confident will we be to lend against that number.”

McDowell says HTB was faced with three choices – to stop lending altogether, apply a haircut to estimated property values, or “stick our head in the sand, continue lending at our current maximum LTV of 75 per cent and wish on all our lucky stars that property prices hold up”.

He explains that the middle option was the only way forward, but knowing what valuation haircut to apply is tricky.

McDowell adds: “During the 2008 global financial crisis, property prices in the UK fell by 20 per cent and rental yields dropped by 5 per cent over an 18-month period. 

“Do I think it’s going to be this bad? No, I’m actually reasonably positive but I could easily see property prices coming off by 5 per cent to 10 per cent just because of the reduction in transactions but that’s just me without a crystal ball. 

“So, as a prudent lender, we are going to apply a haircut of 20 per cent. “This means that we will be limiting our lending to 60 per cent maximum net LTV for any valuation that includes a material uncertainty clause – this is equivalent to 75 per cent LTV with a 20 per cent reduction in property value. 

“If and when we begin to see valuation reports without these clauses we will lend up to 75 per cent.”