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How does furlough affect your mortgage options?
During the pandemic, 11.6million jobs were placed on furlough, the Government’s employment scheme to protect jobs in industries hit hard by the pandemic.
For many, the scheme gave much needed financial stability, at a time when the economy was being hit hard by consecutive lockdowns and GDP fell by 9.8% - the steepest drop since records began in 1948. However,with the stability provided by the Government came nervousness from lenders and banks.
While mortgage lending hit a record high in March 2021, buoyed by the stamp duty exemption holiday, certain groups of house buyers felt the effects of the banking industry’s nervousness.
For first-time buyers, 81% had their mortgage application rejected at least once during the pandemic, and for those on furlough, or who are self-employed, it was difficult to even get to application stage. Some mainstream lenders were refusing to take applications from people on furlough, or who had accepted the Government’s Self-Employed Income Support Scheme (SEISS) grants.
The end of furlough
The good news is that with furlough now at an end, your chances of getting a mortgage approved could be greater, but there will be a tricky few months of transition. Some banks have been asking for supplementary information from employers, to determine the job status of applicants (such as further plans to furlough or the likelihood of redundancy). Others require proof of at least one month of income since coming off furlough.
Adding to the difficulty is that every bank or lender’s approach is different – while some will accept an application if you’ve had a handful of furlough days within the past month, others won’t. So it pays to shop around lenders to see what their current requirements are.
Re-mortgaging
If you’re looking to re-mortgage and not borrow any additional extra money, a straight switch to a different product should not cause too many problems.
However, if you are looking to borrow more or switch to a different lender to get a better deal, then you will need to take a careful look at your financial status and make sure you have all the evidence you’ll be asked for. Some banks want proof that you received your full salary while on furlough, and not just the 80% or less the government paid for. Others are only offering mortgages with a lower Loan-To-Value (LTV) ratios, sometimes as low as 65%.
First-time buyer or self employed
Things are trickier if you are a first-time buyer or self-employed. Thanks to the pandemic and furlough, a lot of lenders are being pickier about who they will and won’t accept. Credit history is causing more issues now for first-time buyers, so if there are any blemishes on your credit record, then now is the time to clear them up. Look at any debt you have, any missed payments or credit cards – taking steps to consolidate debt and pay off outstanding balances may help your application in the future.
There is also an issue with many banks demanding higher deposits to mitigate their risk, which puts a lot of mortgages out of reach for first-time buyers. If you are a self-employed first-time buyer and have taken the SEISS grant, the challenges are similar. However, you may find it much harder to prove your income has returned to normal, because lenders typically look at previous accounts (around two to three years), which means the impact of the pandemic may affect your mortgage chances for longer.
But there might be other options available to you, such as asking a close family member to be a guarantor. Some mortgage companies are specialists in self-employed mortgages, such as Aldemore, which offers a more personalised approach.
It is always wise to get independent mortgage advice from a mortgage broker to get an unbiased view of the market and expert advice. We offer a service to connect you with brokers who can help – fill out our form to find the right person for you.
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