There is little doubt that mortgage lending recommendations made in the Mortgage Market Review (MMR), which came into force last year, have had a significant impact on borrowing, leaving some struggling to secure a new mortgage.
However, now experts are suggesting that the tougher criteria – which aim to ensure affordability and cut down on irresponsible lending – are leading to a sharp increase in ‘mortgage misfits’ who are struggling to secure a new mortgage once their current deal comes to an end.
You may be a mortgage misfit if…
1. …you are less than 30 years away from retirement
Now that most lenders will only lend up to your planned retirement age, some borrowers over the age of 40 are struggling to find affordable mortgage deals.
Borrowers are being forced to borrow over a shorter period of time, therefore increasing their monthly repayments, then are failing the affordability tests as a result.
If you are aged 40+ and looking for a new mortgage deal, it’s worth looking for a lender who uses manual underwriting and will consider your individual circumstances. Those with evidence of a decent pension income should be able to borrow over a longer period, into their retirement, with the right lender.
2. …a significant chunk of your salary comes in the form of bonuses or commission
If you work in sales, or any other industry where bonuses and commission are commonplace, securing a new mortgage may not be as straightforward as you might have hoped.
Most mortgage lenders will now take a maximum of 50% of your bonuses or commission into account when considering how much they are prepared to lend you. If you’ve previously borrowed on 100% of your bonuses or commission you may suddenly find a shortfall in the amount a mortgage provider is prepared to lend you.
3. …you want to buy above the fifth floor, or are moving to a new build property
If you want to buy a flat that is higher than the fifth floor or are interested in a new build property, lending has become significantly more challenging. It is widely accepted that new build properties are more susceptible to falling house prices than older properties, which has resulted in many mortgage lenders demanding larger deposits on new build properties.
If you’re keen to buy a new build but do not have a 20% deposit, the government’s ‘Help to Buy’ scheme could provide a solution; enabling you to put down just a 5% deposit, take out a 75% mortgage and secure the remaining 20% with a government loan.
4. …you have children
If you have young children, beware – you may be able to borrow significantly less that you were expecting! In the past childcare costs were widely ignored when considering affordability, but stricter guidelines introduced as a result of the MMR and more stringent affordability checks now mean childcare costs are a significant consideration.
Most lenders will apply an average childcare cost in the affordability calculations, so you may be at the mercy of a computer deciding how much you can afford. Again, the best solution is a lender that uses manual underwriting and will consider your individual circumstances and financial commitments.
5. …you’ve been self-employed for less than 3 years, or your self-employed income is variable
Mortgage lending for the self-employed has been relatively tricky since the demise of self-certification mortgages. Most mortgage lenders will want to see 3 years’ worth of accounts, and will want those accounts to show stable or growing income – any dips in income or fluctuations will make lenders nervous.
Most lenders will calculate lending either by using the average of the three year’s income, or on the lowest year.
6. …you’re currently on an interest-only mortgage
If you’re currently on an interest-only deal, you may soon be contacted by your lender trying to persuade you to transfer to a repayment mortgage.
Fears over an interest-only ‘time bomb’ mean that interest-only mortgages have been widely withdrawn from the market, but if you want to transfer to a repayment mortgage, borrowers who were attracted to the low monthly repayments of an interest-only mortgage may find they struggle with passing the affordability assessment as repayments will be significantly higher once you start paying off the capital.