An inevitable consequence of the ongoing pandemic has been lenders becoming more cautious about who they lend to and at what Loan to Value (LTV).
Until the recently introduced Government-backed 95% mortgage guarantee scheme, high LTV mortgages had virtually disappeared during the pandemic as lenders were put off riskier lending by the economic fallout from Covid-19.
With lockdown slowly easing and the vaccine rollout continuing to go well, the mortgage market should start to open up again. However, depending on your situation, you could still find it difficult to secure a mortgage at this time, especially if you’re on furlough or a business owner who took out a Government loan.
Here, we look to outline where people currently stand when it comes to getting finance for their homes.
What are the potential issues?
In a recent article in the Money section of the Guardian, as part of its ‘Consumer champions’ series, a reader sent in a letter outlining the issues they had experienced with remortgaging as a result of a company they part-owned receiving two months of furlough payments.
Despite the person having a booming business and earning more than they had ever done, Santander declined their remortgage application. The application was refused because the company the person part-owned had received Government support.
The letter went on to say: “Santander’s policy appears to be that it will not lend to self-employed people if the company has received Government help in the past three months. This seems utterly ridiculous. We have never missed a payment and can easily afford the modest increase to the mortgage, which will be used to build an extension that will add value to the home.”
As the Guardian said in response, mortgage lenders have become much stricter about who they will lend to since the onset of the pandemic, with so much uncertainty and so many areas of the economy still closed down. Self-employed applicants – including business owners, freelancers and others who work for themselves or independently from a company – are facing particular scrutiny.
It has long been the case that self-employed people can find it more difficult to secure lending, because a self-employed person’s income is seen as less secure than a person employed by a firm, but the pandemic has heightened this issue.
Lenders are demanding extra paperwork, and analysing what, if any, Government help businesses have needed to understand how strong and viable that business is.
It is inevitable, at times of economic crisis, for lenders to take a much more cautious approach – the same happened in the wake of the global financial crisis, when previously lax rules on lending where drastically strengthened. But the Guardian suggested that, in this case, Santander’s mortgage department had been somewhat over-the-top and failed to apply common sense to the situation.
“If [Santander] is going to reject mortgage applications from company owners who paid staff with furlough help, that is going to be a lot of people, given firms across the UK signed up to the scheme that was actively promoted by the Government,” the Guardian response added.
When the Guardian reached out to Santander, the high-street lender said it currently asks for details of how businesses have been trading to enable them to evaluate the financial impact of Covid-19 and make sure any borrowing remains affordable in the long-term.
Can you get a mortgage while on furlough?
The Coronavirus Job Retention Scheme (more popularly known as the furlough scheme) was introduced in the earliest days of the Covid-19 crisis to protect millions of jobs. Attempts to bring it to an end have been thwarted by further lockdowns and emergency measures, and it was most recently extended from June this year to until at least the end of September 2021.
Depending on the situation then, and how much of the economy has reopened, the furlough scheme could finally come to an end. In the last year and a bit, around nine million workers have been enrolled onto the scheme at one time or another, with claims of more than £8 billion.
In its current format, the scheme devised by Chancellor Rishi Sunak and the Treasury sees Government paying 80% of furloughed workers’ wages, up to £2,500 a month, to help employers facing financial difficulties avoid redundancies and keep staff on the payroll. It is hoped that this will help viable businesses that are currently unviable due to lockdown restrictions to recover quickly once allowed to reopen.
Many people – particularly those in still closed industries such as events, hospitality, tourism and live entertainment – will still be on furlough or flexi-furlough, and wondering if they can get a mortgage while relying on the Government to pay a big chunk of their wages.
Can someone on furlough get a mortgage in 2021? According to brokers, mortgage applicants that are still on furlough may be able to successfully secure approval for a mortgage, but it will also be the case that the majority of lenders will view the application with caution.
As you would expect, if there is a risk of you losing your employment or seeing your income reduced substantially, that presents a major risk to the lender as you may not be able to afford the level of loan you’ve applied for. Lenders will want to know that you can start paying back what you owe from month one, and this is less likely if your future employment is in doubt.
If you can show written confirmation that you’re due to return to work soon, or have recently gone back to work due to the easing of lockdown restrictions (even if only on a part-time basis), this could help your cause in gaining approval for a loan.
If your circumstances show that you can make your repayments in full and on time each month, you will have a greater chance of being accepted. The normal things like a bad credit score, big debts and high levels of monthly spending will further affect your chances. To have any chance of getting a mortgage while on furlough, you’ll need to ensure you have a financial clean bill of health, with a good credit rating and no credit card debt or other major loans.
Different lenders will have different terms and conditions, and it can in part be to do with luck and good timing. Some may still be willing to lend to you if you’re on furlough or part-time furlough, while others will understandably be more cautious.
Being on furlough might also affect the number of mortgage deals you are eligible for. Lenders will look at your age, the amount of money you would like to borrow, the size of your deposit, what kind of home you’re buying, your income-to-debt ratio, and the predictability of your income, before coming to a decision over whether or not to lend to you.
All these factors could be affected by being on furlough. If you’re unsure, it’s best to chat this over with a mortgage broker or adviser to see where you stand and know for sure if you will be eligible or not for a mortgage, given your current circumstances.
Your chances of getting a mortgage if your business has relied on Government support, or a loan, is also likely to depend on a case-by-case basis. The Santander example above suggests it will be more difficult, but other lenders could have different ideas, particularly if your business is doing well, generating good levels of income and would remain viable in the face of further restrictions.
A mortgage application is a very individual thing, and there are no hard and fast rules. But it certainly would appear to be the case that it will be more difficult for those currently on furlough, because of the extra uncertainty this provides.
Neil Weston, principal of Scout Financial Services, said the 95% mortgage guarantee scheme doesn’t really help those who are furloughed, either.
“More support for lenders to lend a higher percentage of the purchase price will no doubt be welcomed across the industry and by First Time Buyers,” he said.
“However, many First Time Buyers may find themselves in a tricky position where they will now have enough money saved for a deposit, but they are unable to secure a mortgage as a result of being furloughed. Recent Treasury figures indicate a total of 4.7 million Brits remain furloughed, many of whom are would-be First Time Buyers in sectors such as retail, travel and hospitality.”
He added: “Furloughed workers looking to buy a home face far fewer mortgage options, with many lenders refusing to consider furloughed income at all. This announcement from the Chancellor does little to alleviate that; if anything, the extension of the furlough scheme will only exacerbate the problem. If you’re furloughed and unsure about mortgage availability, it might be worth speaking with a whole-of-market mortgage broker, who will be able to explain your options.”