I’m in the middle of a mortgage application but I’ve just found out that my employer is putting me on furlough.
I’ll still get 80 per cent of my salary from the government but I’m not sure what this means for my application.
Will this affect the lender’s decision? Will they still accept 100 per cent of my salary?
And will they still count my commission as income or is that now off the table?
Some mortgage lenders are basing applicants’ affordability on their furloughed earnings
Will Kirkman of This is Money replies: Many people will have been in the middle of a mortgage application when the news came that their employer was putting them on furlough.
Unfortunately lenders have pulled up the drawbridge in recent weeks by cutting a huge swathe of mortgage deals while the country remains in lockdown.
A mixture of staffing issues and concern over the future health of the housing market is causing lenders to be much more cautious in their approach.
And this week banks and building societies began to reassess the way they lend to employees who have been put on furlough.
A staggering third of all companies are planning to furlough some or all of their workforce in the coming week, according to the British Chambers of Commerce.
This will see the government help firms to continue paying part of their employees’ salaries if they would otherwise have been laid off because of the crisis.
The government will cover 80 per cent of salaries up to a ceiling of £2,500 a month – equivalent to the UK average wage of £30,000 a year.
The scheme, open to all firms with employees, will be up and running by the end of April and backdated to 1 March.
>> You can read our full guide to what being put on furlough means for you here
MPs call on watchdog to cap standard variable rates
MPs have called on the City watchdog to cap expensive mortgage reversion rates while the coronavirus outbreak continues.
In a letter to the Financial Conduct Authority, members of both the All Party Parliamentary Group on Mortgage Prisoners and the All Party Parliamentary Group on Fair Business Banking called on the regulator to limit how much lenders can charge on a standard variable rate.
The group said: ‘We are very concerned that recent withdrawal of products reduces the FCA’s estimate that 14,000 mortgage prisoners will be able to switch to improved deals.
‘We are concerned that if we do not act swiftly in the next three to 18 months we will see a repeat of many of the problems that we experienced post the 2008 bailout.
‘We must ensure we do not allow this to happen again.’
What are lenders doing?
The scheme is open to most of the self-employed and all employees, but the government has had to introduce a cap on how much it can help each worker.
This means that anyone earning under £30,000 per year will see their earnings cut by 20 per cent, but those who earn more than this could see their earnings cut far more drastically.
For example, a furloughed worker earning £22,000 per year will receive the equivalent of £17,600 per year, while an applicant earning £60,000 per year will receive the equivalent of £30,000 per year.
It may seem strange to think of it in annual terms, as workers may not actually be on furlough for this long.
But if you’re applying for a mortgage, some lenders will now judge whether you can afford your mortgage repayments based on your predicted annual earnings from furloughed pay, not your previous salary.
A borrower’s ‘affordability’ is their ability to pay back a loan. It’s traditionally based on your salary but can also include additional incomes such as overtime and commission.
This means that if you’re now being judged on your furloughed pay, you may now only qualify for a smaller loan.
For example, an applicant earning £60,000 per year may have previously been eligible for a mortgage of £240,000 if the lender thought they could afford four times their annual earnings.
Under the same conditions, if they had been put on furlough they would now only qualify for a mortgage of £120,000.
Not all banks and building societies are taking the same approach to this however.
In an email to mortgage brokers from Nationwide seen by This is Money, the lender says it is now accepting only 80 per cent of income up to £30,000 per year for furloughed workers.
It also says it won’t accept any bonus, overtime or commission in cases like this.
It’s likely your lender will reassess your application based on your current furlough income
NatWest has taken similar steps, and it’s likely more lenders will follow suit in the near future.
This also counts for people who started their application before being furloughed – if you’re in this situation, it’s likely your lender will reassess your application based on your current furlough income.
It’s also unclear how this will affect your mortgage chances further down the line.
These days, lenders use a variety of tools to assess affordability, including income and expenditure assessments, verification of income, an assessment of future income, and ‘stress tests’ to see if the borrower could keep up with repayment if interest rates were to rise.
Lenders can ask for between three and six months’ worth of bank statements to verify this. It’s too soon to say whether having been on furlough for some of this time will affect an application.
Nick Morrey, of mortgage broker John Charcol, said: ‘As this week unfolds I expect to see more lenders asking more questions and they will likely be trying to add questions regarding furloughing to their online systems.
‘Ramifications like these could be felt in the mortgage world for over a year for those on annual bonuses.’
Zero hour contract applicants may soon struggle to find a mortgage
If you are on a zero-hour contract, which means you don’t necessarily earn the same amount each month, your employer should give you the 80 per cent of your average monthly salary since you started working if you are put on furlough.
Quite a few lenders offer mortgages to zero hours contract workers, but this may also change soon.
Nationwide for example has now stopped offering mortgages to all zero hours workers except for nurses, care home workers, and supermarket staff including delivery drivers.
If other mainstream lenders follow suit this could mean those who do not have a fixed contract it may find it much more difficult to secure a mortgage.
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