Getting your finances in order to buy a home can be tough enough at the best of times. But in the midst of a pandemic, there can be an added layer of difficulty.
For example, what’s the best way of securing a good mortgage rate from a nervous lender if your income has taken a hit? And can you even still get a mortgage if you’ve been furloughed?
The answers to these questions are not always simple and so we have spoken to some mortgage experts for their advice.
Their comments come amid a fast-moving backdrop that has seen a new lockdown applied across the country bumping into a stamp duty holiday that comes to an end in March, with no indication yet that it will be extended.
The housing market has remained open this time around, although there is speculation that tighter curbs could be introduced – including the shutting of estate agents – if people flout the rules.
We ask the experts: Can you get a mortgage if you’ve been furloughed amid the pandemic?
Mark Harris, of mortgage broker SPF Private Clients, said: ‘If you are one of the many people moving for more space, inside or out, or to be nearer family, and are keen to take advantage of cheap mortgage rates and the stamp duty holiday, it can be frustrating if your income has taken a hit thanks to the pandemic.
‘With some lenders tightening criteria for groups such as the self-employed or those requiring high loan-to-values, getting a mortgage is not necessarily as straightforward as in the past.’
Here, we provide some top tips for helping you to wade through the mortgage application minefield amid the pandemic…
1. Know your credit score
It is more important than ever amid the coronavirus pandemic to know what your credit score is and how you can improve it.
This is because lenders are increasingly turning to credit scores to determine whether they will approve your mortgage application.
So without a decent credit score, you may miss out on the best mortgage that you can get – or a mortgage altogether.
Lenders have become nervous about lending to people who may not be able to repay their home loan at a time when unemployment is rising and workers are falling ill.
Gerard Boon, of mortgage brokers Boon Brokers, explained: ‘Lenders’ appetite for risk is becoming less and less as the pandemic worsens.
‘We have seen many cases in recent weeks that would otherwise fit a lender’s criteria under normal circumstances. But the mortgage has been declined merely due to the risk factor of the pandemic.’
He said: ‘Arguably what has been affected the most is credit scores. Especially in the higher loan-to-value brackets, lenders are limiting borrowing based on credit score rather than general affordability.’
For example, even though an applicant may be able to easily borrow up to 90 per cent of the value of a property based on their income and financial commitments, a lender may force this to be reduced to 85 per cent due to a borrower’s credit score.
Mr Boon added: ‘This is a key factor that is preventing most first-time buyers from proceeding with property purchases – as they can often only afford to put down a maximum deposit of 10 per cent of the purchase price.
‘Mortgage applicants with a low credit score will find it harder to get a mortgage offer as lenders may perceive it as an indication that they could miss a mortgage repayment.’
You can check your credit score on sites such as Experian, Equifax and ClearScore. If your credit score is low, it may be worthwhile trying to improve it and waiting a few months, making sure all your payments are made on time and information is up to date as a way of boosting it.
By contrast, some borrowers can be caught out by having too little debt. This can also lead to a low credit score due to a lack of credit history.
Mr Boon suggested that one way of establishing a higher credit score and proving that you can manage credit with no risk is by taking out a credit card to pay for basic expenses, such as grocery shopping and ensuring that the balance is cleared every month.
You can also improve your credit score by making sure you are registered on the electoral roll.
2. Avoid too much debt
Some lenders may decline your mortgage application even if you make all your credit payments on time as you may have a large amount of outstanding debt.
Recent credit applications may also count against you as a red flag and experts recommend not applying for credit for at least six months leading up to your mortgage application to stand the best change of having it approved.
3. Minimise your outgoings
Lenders will review your income to help establish whether you can afford a mortgage.
Historically, lenders would have a calculation – such as four times your salary – to calculate whether you could afford the loan.
But more factors are now taken into account based on affordability of payments, including where you spend your money.
It means that paying careful attention to how you spend your money in the run-up to applying for a mortgage, and minimising your outgoings will work in your favour.
For example, if you have a personal loan, you may be better waiting until it is paid off.
Other financial commitments that are important to minimise in the run-up to your mortgage application include credit cards and hire purchase loans.
4. Maximise your deposit
Some mortgages that only require a small deposit have been removed from the market amid the pandemic as lenders become increasingly adverse to risk.
That said, it has always broadly been the case that the bigger the deposit you have, the better interest rate you will get on your mortgage.
As such, if you’re close to saving a 15 per cent deposit, you may want to wait until you have the full amount as it will give you access to better rates. These rates mean you will pay a lower mortgage payment every month.
5. Challenges for the self-employed
People who are self-employed will generally find it more difficult to get a mortgage.
Lenders tend to require the last two years of tax calculation and tax year overview documents for those who are self-employed.
Rather than take recent income into account, most lenders will average the self-employed income figures declared on these tax documents.
Amid the pandemic, some lenders are also applying further tighter lending criteria for those who are self-employed. These include requiring larger deposits of up to 40 per cent of the value of the property.
Ray Boulger, of mortgage brokers John Charcol, explained: ‘There is currently an even wider variation than normal between lenders’ criteria for new mortgage applicants, particularly the self employed.
‘For example, Santander announced that from January 9, its maximum loan-to-value for self-employed borrowers is reduced to 60 per cent.’
6. Getting a mortgage if you’ve been furloughed
Lenders are also looking closely at the incomes of those who have been furloughed.
They want to see evidence that these borrowers will return to work at a set date in the future at the same salary.
Mr Harris confirmed that those lenders who will consider applicants on furlough – and where the applicant is also in receipt of an employer top-up to their salary – will require evidence and confirmation of an end date or return, and income top-up, from their employer.
He added: ‘Some lenders will require those who have returned to work after furlough to provide a payslip showing one full month’s proof of income, rather than a letter from the employer as evidence of return to work.’
Mr Harris suggested that if you are coming up to remortgage, it may be better to stay with your existing lender rather than try to remortgage away.
He said: ‘If you have been furloughed but are keen to move, it may be worth considering putting that move on hold until you return to work at your normal salary, if you can, and can access a much wider range of lenders and products again.
‘While it will be annoying to miss out on the stamp duty holiday, there are market commentators who believe house prices will dip anyway later in the year so it may not be a disaster returning to the fray at a later opportunity. You may also feel better prepared to take on a bigger mortgage at that time when your job and income is more guaranteed.’
Meanwhile, Mr Boulger went on to explain that lenders are generally not rejecting employed applicants who work in badly affected sectors, but an increasing number are ignoring furlough income in their affordability calculation – which in many cases has the same effect.
Lenders are not required to apply the onerous affordability test imposed by the Bank of England if the mortgage selected is fixed for at least five years
Ray Boulger, John Charcol
He said: ‘Borrowers in this position coming to the end of their deal who find they can’t remortgage will in most cases be able to obtain a new deal from their existing lender, thus avoiding reverting to their lender’s more expensive standard variable rate.’
‘Some lenders are asking borrowers shortly before completion to confirm that there has been no material change to the information provided on the application form. If the borrower confirms a change, such as being placed on furlough, there is a serious risk of the mortgage offer being withdrawn.
‘For many joint applications an acceptable way to address this problem is available because lenders are not required to apply the onerous affordability test imposed by the Bank of England if the mortgage selected is fixed for at least five years.
‘Providing the borrower has selected a fixed rate for at least five years the lender could base its affordability test on the mortgage pay rate rather than the much higher stressed rate and it seems reasonable for the lender to assume that after five years we will no longer have coronavirus imposed restrictions on economic activity.’