December to February 2021 saw a sharp increase in searches for furlough-friendly mortgages, reflecting the nation’s need for lenders with flexible affordability criteria that includes income from the government’s job retention scheme.
More than 1,000 searches were logged by mortgage brokers on Legal & General’s SmartrCriteria.
Furlough changing from July onwards
Under the furlough scheme, employers can claim for up to 80% of workers’ salaries, up to £2,500 a month.
However, employers must meet the cost of National Insurance payments and pension contributions and will have to cover a percentage of employees’ pay from July 2021 onwards.
This change signifies the shift in support for workers and many fear that thousands of furloughed workers will become unemployed creating a cliff-edge effect and further restrictions on mortgage lending.
Furloughed employees want to remortgage
As of February 15, 2021, approximately 11.2 million jobs, from 1.3 million different employers were furloughed in the United Kingdom.
Unsurprisingly, many homeowners are desperate to remortgage to a cheaper deal in a bid to minimise their outgoings.
Many people have faced a reduction of their income through no fault of their own and despite knowing that they will return to work soon and see their hours and salaries return to what they previously were, they’re finding it difficult to find lenders who will consider them.
Some lenders are accepting income from the job retention scheme, a handful will accept a percentage of income from furlough while there are others who won’t accept applications from people who have been furloughed in the last 12 months.
People that have missed mortgage repayments are looking to switch too
Legal& General’s data also showed a 27% increase in searches for lenders that would consider borrowers who had missed a mortgage repayment, which may not be shocking given that so many have had their finances negatively impacted by the Covid crisis.
The risk of lending a large amount of money to someone who has experienced a loss of income due to being furloughed will be considered fairly high by most lenders.
The additional risk that comes with lending to a borrower that has previously missed a mortgage repayment and therefore broken a financial agreement, can be too much for some banks and lenders.
Unfortunately, a mortgage applicant who has previously missed repayments for mortgages, credit cards, car finance or other financial agreements may find their choice of lenders is narrowed down - but that doesn’t mean switching to another deal is impossible.
Remortgaging either with a current lender or a new one could be possible for furloughed workers
That’s according to The Mortgage Hut’s Managing Director Nicola Schutrups:
“Lots of people have had their incomes affected over the last year and there are a handful of lenders who are more willing to accept borrowers who have seen a dip in their income because they’ve been placed on the job retention scheme.
Remortgaging to an agreement with a longer repayment term could help to reduce your monthly mortgage payments but there are also lenders who may, in some circumstances, consider increasing your mortgage.
You might want to remortgage because you’re coming to the end of a fixed rate and that’s something that could be possible too, despite you being furloughed or having previously been furloughed.
This will be dependant on your ability to prove that you can afford the remortgage you’ve applied for though, so speak to a mortgage broker who can help you organise the paperwork you’ll need and check your eligibility for the various options that could be available to you.”
Furloughed first-time buyers want to buy too
Borrowing options that were once so limited now seem to be ever-increasing as we creep into April, edging nearer to the beginning of the government’s new scheme to ‘end generation rent’.
It’s not just the Conservative party that are backing 5% mortgages though; lenders like Accord and the Bank of Ireland have adjusted their lending criteria and launched new mortgages to help people get onto the property ladder too.
But what does that mean for furloughed first-time buyers or for people who have recently come off the furlough scheme?
Furloughed workers finding it hard to get a 95% mortgages
Being a furloughed first-time buyer doesn’t automatically rule you out as a borrower it just limits your options either until your affordability improves (through becoming employed and paid 100% of your usual annual income from your employer) or in the event that more lenders introduce products for furloughed workers.
Some lenders will charge higher rates of interest or have higher deposit requirements for the mortgages they provide to borrowers with what they deem as affordability issues.
This could range from being on furlough, having a high debt-to-income ratio or having a low credit score.
Do furloughed workers need a bigger deposit?
A 5% mortgage deposit could certainly make the dream of homeownership real for many but furloughed workers might want to consider a larger deposit if they want to improve their chances of being accepted.
Lenders usually provide larger loans of up to 95% of a properties’ value in circumstances where the borrower has proven they have good affordability, a steady income and good credit history.
Having a larger amount to deposit can help you meet criteria for mortgages with better interest rates too but understandably, that’s not always possible, especially for first-time buyers that are saving while renting.
Smaller deposit options for first-time buyers
Shared-ownership could provide a solution for many in that very situation and because the borrower is only buying a percentage of the property, they need a smaller mortgage and subsequently a smaller deposit.
If you’re a furloughed first-time buyer, shared ownership might be an option to consider, especially if you don’t have a larger deposit. It’s a government scheme with a wide range of housing developers who participate and purposely build homes for part-buy, part-rent agreements. Most developers allow the tenants to buy more shares in the future until they own the property outright, so in the future, if your income increases, you could consider buying more shares either via savings or a remortgage.
Brokers are finding mortgages for furloughed workers
Despite the doom and gloom of 2020, homeownership could still be possible in 2021, with the right advice.
Mortgage advisers are playing a critical role for borrowers and are using their knowledge of the market as well as their relationships with lenders, to broker the best deals for furloughed and previously furloughed workers.
We want to help and will never judge.
Call 023 8098 0304 or send us a message with a little bit about you and what you’re looking for from a furlough-friendly mortgage.