Are you a mortgage misfit?
Young families and the self-employed can struggle to secure finance, but there may be a way out.
A stalling property market might sound like good news to homebuyers hoping to snap up a bargain. Yet certain groups of borrowers are struggling to secure mortgages for their dream home, which is contributing to the slowing of house prices.
With tighter regulations on borrowing, buying a new home or remortgaging an existing one can prove difficult for anyone who doesn’t fit the mould defined by lenders.
Andrew Montlake, of the mortgage broker Coreco, says: “Part of the problem with the affordability rules is that people who are very good credit risks are falling through the cracks and unable to get a home loan as they don’t quite meet the obligations.”
Anyone who has quit their job to be their own boss, had a baby or got a divorce later in life is among those labelled “mortgage misfits”. So what if you fall into this category?
It can be more difficult for selfemployed workers to get a mortgage in the early years. To qualify for a loan you need three years of accounts (or SA302 forms from HM Revenue & Customs that summarise your income for the tax year) in most cases. If you want to move or simply remortgage, you might struggle if you have less than this and get stuck on your lender’s standard variable rate, which is expensive compared with fixed rates.
The good news is that some lenders are becoming more flexible. The Bank of Ireland has joined a handful of other banks that require only two years of accounts. This helps those who are perhaps likely to have a low-earning first year and allows them to get a mortgage on more realistic earnings.
There are even some lenders who will consider those with one year of accounts, including Aldermore, Kent Reliance, Halifax and Kensington.
Contractors can also have a tricky time proving what can be a fluctuating income. NatWest recently started to offer loans to higher-earning selfemployed contractors. For those earning more than 75,000 who have had no more than a six-week break between contracts in the past 12 months, the bank will calculate their income by multiplying their weekly average by 46. Mr Montlake says: “A broker can help you approach the more flexible lenders.”
Most mortgage lenders will not approve loans that stretch beyond the age of 70 or 75, when income is expected to fall. Some will not go beyond 65.
These rules mean that those in their forties and fifties may struggle to remortgage and could get stuck with their existing lender, potentially paying over the odds for their mortgage. It is bad news if you are simply remortgaging or perhaps divorcing and buying a property alone.
Jonathan Harris, the director of the mortgage broker Anderson Harris, says: “There are some lenders willing to be flexible. The Family Building Society, which lends up to age 90, has a flexible interest-only policy allowing the sale of property and downsizing as capital. The issue does come, however, when borrowers try to use their earned income in the calculations as underwriters won’t accept that people working at, say, 70 will be doing the same thing at age 90.
“Santander will lend up until age 75 on earned income alone. However, the deal has to fit on affordability on a repayment basis over the term, so this can be good for borrowers in their fifties, but perhaps not beyond.”
Workers who earn in a foreign currency will not qualify for a mainstream home loan – they will need a special kind of loan that is not easy to find these days. The mortgage is paid off by making monthly payments, as usual, in sterling, which are converted into the chosen currency on the foreign exchange.
Mr Montlake says: “Since the European Credit Directive came into effect, we have seen many lenders pull out of offering mortgages to people who can afford the loan, but earn income in a foreign currency.
“Apart from lenders such as Santander and private banks catering for high-net-worth individuals, these borrowers have found that their choice of lenders has been severely restricted, especially on the high street.”
The rapid rise of “zero-hour contracts” has prompted lenders to become more flexible for such borrowers. Banks and building societies are, however, cautious about lending because workers’ hours are not guaranteed and their income often fluctuates.
David Hollingworth, of the mortgage broker London & Country, says: “Lenders are looking to accommodate these borrowers. But they will all have slightly different criteria to meet. Halifax asks for 12 months of payslips. A rule of thumb is that the longer the track record of earnings you can evidence the better.”
Rigorous affordability tests can cause trouble for parents with children in childcare or private schools because the costs will reduce the amount of borrowing that is possible. However, if your household consists of younger people or fewer members, you might be able to borrow a bigger amount for a better house. After all, there can be many advantages of buying a single family home in PEI or any other place, and you should be able to benefit substantially from it.
Mr Harris says that young families tend to be served well by the larger high street banks. “For example, if someone is on maternity leave – on reduced income – when calculating how much they can borrow, Barclays will take into account their usual income as long as they have a letter from their employer. Most other lenders will only use the income they are receiving at the time, so they will be able to borrow less.
“Barclays will also lend the most generous multiple, at 5.5 times income for a good-earning borrower.”