In this series of weekly articles, Greg Cunnington, our Director of Lender Relationships and New Homes, looks to clarify how the mortgage market has been impacted by the COVID-19 pandemic, and what this means for you. In this latest part to the new series, Greg looks at the effects of furlough on your mortgage options.
One of the most common questions we are now receiving from clients is in relation to mortgage options for furloughed employees.
If you have been furloughed and are currently on the government’s Job Retention Scheme, you may understandably be worried about how this may affect your ability to get a mortgage, especially if you are in the process of purchasing a home or looking to remortgage.
The good news is being furloughed need not mean the end of your mortgage application. In fact, most of the major lenders will continue to accept mortgage applications for clients who have been furloughed.
How furlough income is assessed
Typically mortgage lenders will assess affordability based on 80% of the normal income, to be in line with the income you will receive from the job retention scheme.
As such, if your normal salary is £20,000 and you are currently receiving £16,000 from the scheme, mortgage lenders will use £16,000 as your income when assessing the borrowing for the new mortgage.
In a further positive move, some lenders, notably HSBC and Barclays, have now confirmed that where the employer is topping up your income to 100% of your normal salary then this can all be taken into account for your mortgage application. Evidence of this additional income will be required.
So if you are currently furloughed but your employer is still paying you your full £20,000 salary (i.e. they are topping up the funding from the furlough scheme), then we have access to lenders that will use the £20,000 as your income figure when assessing the borrowing.
However, only a few lenders accept the full income, so it’s really important you speak to a good adviser with access to as many lenders as possible to ensure this will be an option for you, taking into account the rest of your own individual circumstances.
This also applies to those who are on furlough but earn above the furlough limit of £2,500 per month, and are being topped up by their employer.
So if you earn £50,000 per annum, and are currently furloughed but still receiving your normal salary as your employer is topping this up, we have lenders that can use this income for your mortgage application.
Since the start of the Covid19 pandemic and lockdown, many lenders who previously used automated decisions to approve or decline applications are now reintroducing a more human element to the decision process.
This involves an underwriter – the ‘decision makers’ – reviewing the full detail of an application where the lender feels the client’s employment may have been impacted by the Covid-19 situation.
Some lenders have introduced new declarations or forms for clients to complete and sign to confirm if there has been any impact to income and whether the client is furloughed.
There are even examples where the lender requires written confirmation that your employer will be bringing you back from furlough if applicable.
We appreciate this can be tricky, as some employers will not be able to confirm this yet. This is where an intermediary is vital as we can speak to the underwriters at the lenders before the application is submitted, to sense check what documentation will be requested and to check your scenario would be acceptable in advance of the mortgage application.
It should also be noted some lenders have taken a more defensive position.
We have seen some lenders capping loan-to-values – the proportion of the property’s value for which you are obtaining a loan – for clients working on a furlough basis.
This means you would need a larger deposit – potentially as much as a 40% deposit with some lenders. So, there is a mixed bag of lender positions on this.
I have returned to work from furlough
With more of the economy back up and running, and the furlough scheme ending on 31 October, more furloughed people will hopefully be returning to work.
We have had a lot of questions around whether mortgage lenders will accept applications from clients who have just returned to work.
We anticipate most lenders being flexible in accepting your updated normal income fairly quickly, and if you have a return to work date set that your employer can evidence then we have seen lenders agree to use the normal income figure on this basis also.
We have already seen this, and have helped several clients recently using their normal income having returned to work on a full time basis.
It’s really positive both to see more people returning to active duty at work, as well as seeing a sensible view being taken by many lenders. Nonetheless, this is not universal and a good adviser will be able to find the right lender and product for you.
Additional income and furlough
Additional income, such as commission, bonus and overtime, is a tricky issue for mortgage lenders currently.
Where the income was paid pre-lockdown it is hard for a lender to verify if that income level will be paid in the coming months once more, hence some lenders took a decision to temporarily no longer accept additional income when looking at mortgage borrowing calculations.
The more positive news is there are lenders who will still take this income into account. They will undertake a manual assessment based on your job role, employer and the frequency of the additional income to ascertain it appears realistic.
Where you have returned from furlough a lender will usually want you to show your additional income is sustainable once more, looking for a track record.
You will typically need to show three months continuous additional income on your payslips. Once you have this showing, there are lenders who will be able to factor this in to boost your mortgage borrowing.
We can speak to the underwriters at the lenders before an application is submitted to. An intermediary can help you to get a more accurate assessment on your budget and also know what lenders would be happy to use your additional income in their borrowing calculations.
As part of these series of articles we are hoping to answer as many of your questions as possible, as we know this is a worrying time and many of you are worried on the impact to your personal finances and mortgage.
Please ask any questions you can think of at the bottom of this article and I hope to answer as many as possible in future articles.
We received lots of questions this week so apologies we could not answer them all, but we will have more in next week’s article.
A client has asked:
Are there any 95% LTV mortgages?
“We have our 5% deposit saved and we are hearing a lot of mixed messages about when the lenders will be returning 95% LTV mortgages. Could you shed some light on this please?"
We are receiving a lot of enquires about higher loan-to-value mortgages. We covered this in quite a bit of detail in last week’s article, which you can access in the news section on our website.
In short we have seen lenders return with 10% deposit options, and once lenders are comfortable later this year that they are back on top of their valuation pipelines and service levels we anticipate 5% deposit mortgage options to return also.
It is vital if you are thinking of purchasing this year with a 5% or 10% deposit you get in touch with an intermediary with access to as many lenders as possible to ensure you receive sound expert advice and are set up with the best option for your individual circumstances.
Another client has asked:
Can I get a ‘right to buy’ mortgage?
“I have a council flat and have got the right to buy valuation from council. My broker has said that most mortgage lenders are not doing right to buy flats at the moment. Is that true?"
Right to buy lending typically includes the requirement for a surveyor to visit the property to conduct a physical valuation.
This was generally not possible during the earlier stages after lockdown. However, physical valuations have been carried out since May, when government guidance changed to allow these as long as social distancing and other safety measures are carried out.
As such, there are plenty of lenders offering mortgages for right to buy applications currently. If we can assist here, do not hesitate to get in touch!
You can email us at AskAlexanderHall@alexanderhall.co.uk or use the contact us page on our website – click here.
This article was originally posted in What Mortgage online. You can see the original article here. Please note this will launch a new web page.