The mortgage world is increasingly being split into winners and losers, with borrowers who are perceived as low-risk being offered some of the lowest rates on record, and the self-employed and those who are furloughed facing tougher rules.
Figures published this week revealed that the number of new mortgage deals on the market is the highest since the start of the first coronavirus lockdown in March 2020.
The data provider Moneyfacts, which issued the figures, says the big increase in availability of 90% loan-to-value (LTV) deals – 248 this month compared with 70 last July – could be an indication that banks and other lenders are feeling more confident.
However, the rates and terms on offer to different categories of borrower can vary hugely.
There are almost 5 million self-employed people in the UK, and this group is facing some of the biggest challenges when it comes to getting a mortgage.
During the past few weeks, a number of lenders have introduced tougher lending rules for those who run their own business.
For example, Santander is limiting its mortgages to 60% LTV for new self-employed applicants, thereby requiring them to stump up a 40% deposit, which will be beyond the means of many. This new restriction took effect on 9 January and was described as temporary, although it is likely to be in place for at least a few more weeks.
View image in fullscreenThere are almost 5 million self-employed people in the UK. Photograph: Ian Nicholson/PA
Meanwhile, some lenders are saying that if a self-employed applicant’s business isn’t currently trading because of the Covid-19 restrictions, it won’t take their income into account when assessing affordability.
Traditionally, when self-employed borrowers applied for a mortgage, banks and other lenders wanted to look at the last two to three years of accounts to see how much they earned. However, many applicants are now having to undergo much greater levels of scrutiny.
“Lenders have been applying more forensic underwriting to the self-employed by asking for sight of their past six months’ business bank account statements along with commentaries regarding their future trading and whether it is sustainable,” says Jonathan Harris of the mortgage broker Forensic Property Finance.
Self-employed people are strongly recommended to speak to an independent mortgage broker
If an applicant has taken financial support from the government, or their business has been closed during lockdowns, lenders seem to be judging their applications particularly harshly, says Will Rhind of the online mortgage company Habito. “It’s a tough situation … There are more hoops for the self-employed to jump through with lenders than ever before.”
Self-employed people are strongly recommended to speak to an independent mortgage broker, who will have an idea of what different lenders are asking for.
“Get all your documentation together, including the past six months of bank statements, both personal and business, well in advance,” Harris says. “Check your credit rating is correct. If you have debts, think about reducing them if possible, as the lender will take these into consideration when deciding how much you can borrow.”
Those who are furloughed
The Treasury’s furlough scheme has topped up the wages of almost 10m jobs since its launch in March last year, and there are still millions of people receiving help. The government will continue to contribute 80% towards wages until the end of April, at which point the scheme is due to end – although it may well be extended.
Various approaches are adopted by mortgage lenders towards those who are furloughed, says Mark Harris of the mortgage broker SPF Private Clients.
“Some lenders, such as the Coventry, Nottingham building society, Platform and Virgin, will not accept income from those on furlough when working out the affordability assessment,” he says. “Others require that the applicant has either returned to work or has a fixed date to return. Furloughed applicants will need to provide a letter from their employer confirming their basic salary, return to work date and any other terms of return.”
Lenders may apply different rules depending on how much you want to borrow – for example, Metro Bank says that for mortgages more than 80% LTV, those who are currently furloughed, or were recently, won’t be accepted.
Those hoping to remortgage
For some of those who already have a home loan, there are threats and opportunities ahead. The current lockdown is raising questions for the future, with some people starting to worry about how they will afford their existing mortgage, says Sarah Coles of the investment firm Hargreaves Lansdown.
However, if you are in a position to switch, you could save a fair bit of money by moving to a more competitive deal, particularly if you are sitting on your lender’s (often pricey) standard variable rate.
Moneyfacts this week reported that the average new five-year fixed rate for someone with a 40% deposit has fallen to 1.91%. The cheapest such deals available this week started at about 1.3% from lenders such as Barclays, NatWest and Platform (part of the Co-operative Bank).
View image in fullscreenMoneyfacts says the availability of 90% loan-to-value deals has increased – 248 this month compared with 70 last July. Photograph: Joe Giddens/PA
There are a lot more 90% LTV mortgage deals available than there were a few months ago, and they have become slightly cheaper over the past month. But the not so good news is that an average two-year fixed rate for someone who can only manage a 10% deposit is priced at about 3.56%, while for a five-year deal it is 3.72%. Both of these are way up on a year ago.
Just because high-LTV mortgages are more readily available it doesn’t mean it is necessarily easier to obtain oneSPF Private Clients’ Mark Harris
Habito says you could make lower monthly repayments if you are able to drop to the next LTV band, 85%, which means putting up a 15% deposit. This week you could get a two-year fix at 85% LTV for 2.54% from Platform.
Mark Harris says: “Just because high-LTV mortgages are more readily available it doesn’t mean it is necessarily easier to obtain one. Credit scoring is tougher – only the best borrowers who achieve an ‘A’ score can access the better high street products.”
One bit of positive news is that some lenders who brought in restrictions on high-LTV deals are now easing them, he says.
For example, Nationwide returned to 90% lending last summer but was limiting mortgage terms to 25 years. Last month, however, it increased the maximum back to 40 years, and it also no longer requires that those taking out a 90% LTV mortgage prove that at least three-quarters of their deposit came from their own savings and was not a gift to them. That said, for all mortgages above 85%, Nationwide will only lend on houses and bungalows – not flats or new-builds.
Professionals and higher earners
View image in fullscreenAn architect drafts some blueprints. Photograph: Getty Images/Hero Images
Some mortgage lenders will be more generous if you are a higher earner or in a profession regarded as a safe bet.
Earlier this month, Platform launched a “professional mortgage” allowing people in certain jobs such as accountants, architects, dentists, solicitors and vets to borrow up to 5.5 times their income. Meanwhile, Barclays has just pushed up its maximum income multiple to 5.5 where one applicant earns £75,000-plus or where there is a joint income of £100,000-plus.
Mark Harris says a number of lenders offer enhanced borrowing potential to those working in certain professions, adding: “Lenders recognise that professional incomes tend to rise quickly and significantly in the early years.”