Mortgages may currently be cheap, but it will not be long before rates start climbing.
While this spells bad news for many homeowners, it represents a double whammy for those borrowers who do not meet standard lending criteria. Not only will they find it hard to get a mortgage, but they will probably pay more for it.
So why is life so tough for those who do not fit the mould? Put simply, banks and building societies are happy to lend to applicants with a regular income, a solid employment history, a squeaky clean credit record and a decent deposit.
Moving: William and Julie Cadwell struggled to get a mortgage after being viewed by lenders as ‘too close to retirement’
WE CAN PAY BUT NO ONE WOULD LEND US ENOUGH
William and Julie Cadwell struggled to get a mortgage after being viewed by lenders as ‘too close to retirement’.
The couple, aged 58 and 52, had previously lived in a rented property in Falmouth, Cornwall, for 17 years. But when their landlord told them they had to move out, as the lease on their property was not being renewed, they decided they wanted to buy.
William says: ‘As we were applying for a mortgage in our 50s, only a handful of lenders were willing to lend. It was frustrating as I am still working hard as a self-employed builder while Julie is a healthcare assistant.
‘In fact, we had been paying £1,000 a month in rent and were looking at monthly mortgage payments of no more than £800. Despite this, the few lenders who were willing to offer us a mortgage would only let us borrow a maximum of £80,000. This was nowhere near enough.’
The Cadwells eventually got around the problem by opting to buy a home in nearby Perranporth via shared ownership. William says: ‘We bought a brand new two-bed semi-detached house from developer Aster Group in September 2016, worth £200,000. Under the shared ownership agreement, we bought a 25 per cent share with a £14,000 deposit and a £35,000 mortgage.
‘We got the home loan with Santander, fixed for seven years at 3.6 per cent.
‘But after recently inheriting some money, we have been able to clear this mortgage altogether. We now feel settled in our home.’
But when it comes to the self-employed, zero-hour contractors, new jobbers, older borrowers and divorcees, the response from the bank is often: ‘The computer says no.’ Recent research by specialist lender Masthaven revealed that 65 per cent of borrowers now believe getting a mortgage is all about ‘box ticking’ – and not the financial reality of their situation.
Mark Harris, of mortgage broker SPF Private Clients, says: ‘Tougher affordability criteria now makes it particularly hard for certain groups of people to get home loans, turning them into mortgage misfits.’
The good news is that there are lenders prepared to take on borrowers who are not quite the norm. There are also steps you can take to improve your chance of getting accepted for a home loan.
The UK has almost five million self-employed workers. Yet getting a mortgage when working for yourself can be a struggle.
Matt Andrews, of lender Masthaven, says: ‘The main challenge for this type of worker is that lenders do not take time to understand their finances. The affordability models used by some lenders in determining who to lend to do not properly take into account self-employed income.’
Steve Seal, of rival specialist lender Bluestone Mortgages, agrees. He says: ‘Many successful business owners find it difficult to get suitable mortgage products as traditional big banks will turn away those with variable incomes – or new businesses without a certain number of trading years behind them.’
For the self-employed, the best way to improve your chances of getting a home loan is showing evidence of your earnings. Harris says: ‘So long as you can prove your income, you should be able to get a mortgage.’
Being new to self-employment makes things harder.
David Hollingworth, of broker London & Country Mortgages, says: ‘The newly self-employed should try mainstream high-street lenders initially. They will tend to offer the most competitive rates, but you may find a specialist lender is more open-minded.’
He adds: ‘Some lenders such as Precise, Kensington, Vida Home-loans, Kent Reliance and Aldermore may consider borrowers with as little as one year of accounts.’
It makes sense to seek help from a mortgage broker who can help identify lenders that understand self-employment.
The Government has just promised an overhaul of employment rights to support the country’s ‘gig economy’ workers.
Changes include new rules on holiday and sick pay and higher fines for firms which mistreat staff. This is in response to last year’s Taylor Review into working practices.
These changes may be a step in the right direction for the estimated 1.1 million people in Britain’s ‘gig economy’, such as Deliveroo drivers. But it still remains hard to get a mortgage if you have an irregular income stream as a result of a temporary or zero-hour contract.
Brian Murphy, of the Mortgage Advice Bureau, says: ‘You may consider yourself able to meet the financial commitment of a home loan, but demonstrating this to a lender can present a challenge.’
Automated processes used to assess an applicant’s affordability do not always take into account multiple sources of income or those on zero-hour contracts.
Moving in the right direction: The longer your track record –either with the same employer, or in the same line of work with different employers – the better your chances of getting a loan
Ishaan Malhi, from online mortgage broker Trussle, says: ‘Working and earning habits have changed significantly with more people taking flexible jobs with non-regular income. But while some lenders have made positive efforts to offer more flexible lending criteria, many have yet to catch up.’
Metro Bank does not accept borrowers on zero-hour contracts, nor does Yorkshire Building Society, or its intermediary arm Accord.
The longer your track record –either with the same employer, or in the same line of work with different employers – the better your chances of getting a loan.
But the key is proving your income. Harris says: ‘Lenders will base their decision on what you can show in terms of accounts and SA302 tax year calculations [the figures which support your earnings claim].’
You can also help your case by seeking out pragmatic lenders. Halifax, for example, only requires that a mortgage applicant has 12 months’ history of being on a zero-hour contract.
Murphy adds: ‘A number of the new lenders also take a more considered approach, but they will still need to see evidence of earnings over a sustained period to give them an assurance that an applicant’s income is consistent and regular.’
Another way to increase your chances is by saving for a little longer so you can put down a larger deposit – as this reduces the lender’s risk.
Equally, preparing accounts and paperwork can make a real difference as can speaking to a mortgage broker who knows where to turn for the best chance of success.
Newly qualified professionals
Workers who have only recently qualified can face difficulties securing a mortgage.
Teachers commonly get offered a job well in advance of their start date. But many struggle to get a home loan as lenders want to see some history in the job – and security of employment – before they will contemplate lending.
Ben Spenceley was one of the lucky ones as he was able to find an understanding lender.
Lucky: Teachers Ben and Laura, with son Charlie, found an understanding lender
The 31-year-old started his first teaching post at a primary school in September last year. Only weeks earlier, he completed the purchase of his first home in Bolton, Greater Manchester, with his fiancée, Laura Amatt, aged 30. The couple moved into their new home with son Charlie, aged three, in August.
Ben and Laura bought the three-bed semi-detached property, valued at £168,000, with a home loan from Accord Mortgages, the intermediary arm of Yorkshire Building Society.
Laura has been a teacher for several years whereas Ben qualified in July last year and was offered a job three months earlier.
Ben says: ‘When we first started looking for a property in the summer of 2016, we found a house we liked on the market at £125,000. Initially, we tried to get a mortgage with HSBC based on just Laura’s salary. It refused to lend to me until I had started work.’
When this property fell through due to issues with the vendor, the couple started house-hunting once again.
Ben says: ‘This time around, we approached Accord and it was happy to offer us a deal based both on Laura’s salary and my future salary.
‘All that was required was confirmation of my job. Being able to get a home loan based on two salaries meant we could look at bigger properties.’
The couple have taken out a two-year fixed-rate deal at 2.72 per cent.
Hollingworth says: ‘Newly qualified teachers could face a number of hurdles as they have no previous employment history.’
Barclays, for example, requires a minimum of three months in current employment – or an 18-month history of continuous employment – while NatWest requires six months of continuous employment, though this does not have to be with the same employer.
Some lenders will not offer a mortgage while a borrower is still in their probationary period.
A select number of lenders are happy to start the ball rolling before a borrower has actually started their job, provided employment is confirmed.
Yorkshire Building Society, for example, will lend to new graduates and those starting out in their career – it does not require a previous work history. It will make an offer on a mortgage three months ahead of the applicant’s employment start date, as long as the borrower can show they have been given a permanent contract.
Nationwide Building Society will consider those on probation as well as professionals with minimal history in their job – subject to the relevant documentation being provided. A lender specialising in an area of work – such as Teachers Building Society – is also worth approaching.
Andrew Montlake, from broker Coreco, says: ‘You can help your case by having bank statements showing you are conducting your finances well.
‘It also makes sense to improve your credit score by getting registered on the electoral roll, clearing unpaid debts and closing credit card accounts you no longer use.’ You can check your credit rating at Experian, Equifax and Callcredit.
The long-held expectation that people will pay off their mortgage by State retirement age is no longer realistic.
But a lot of lenders are still wary about lending into retirement – and many high street banks have relatively conservative upper age limits on whom they will lend to. NatWest imposes an age cap of 70 while Barclays will typically expect a mortgage to end by age 70.
One of the big issues is being able to give evidence of earnings.
Adrian Anderson, of broker Anderson Harris, says: ‘Proving income in retirement can be tricky, particularly if you are relying on a pension.’
The situation is improving. Hollingworth says: ‘Some lenders have become more flexible.
‘Halifax, for example, will lend up to age 80 at the end of the term, while Nationwide also considers lending to already retired borrowers up to age 85.’
It may be worth trying small regional building societies as some have upper age limits of up to 85 – or even beyond – subject to you being able to demonstrate affordability.
Older borrowers may also want to consider equity release, which has become more flexible and better priced. Here the mortgage interest rolls up rather than being paid every month.
Divorce is a big issue at this time following the New Year. One of the big resulting financial problems is being able to split the mortgage liability on a jointly-owned property.
Hollingworth says: ‘The home loan will usually need to be taken on by one of the borrowers, but lenders will not release one party until they are happy the other can afford the mortgage.
‘That may require the existing mortgage to be taken in one name, rather than two – and could prove a challenge where one income must support the home loan originally underwritten on two incomes. If it is deemed to be unaffordable, the lender will not discharge the other borrower and this could ultimately result in a need to sell the property.’
To help get a home loan in the future you will need to demonstrate that you can pay the mortgage on a new property on your own.
Harris says: ‘For divorcees, affordability is the big issue, with much depending on the divorce agreement. If maintenance is the only source of income for one party, this can prove a problem for some lenders.’ Independent advice from a mortgage broker can prove vital.