In light of the 2008 US mortgage crisis, which led to a worldwide economic collapse, there was a tightening of regulations with regards to mortgage borrowings. Just prior to the coronavirus there were signs that these regulations were beginning to loosen a little but we shall see after the virus is eventually under control. However, there are still a number of broad guidelines which dictate current borrowing limits and how you can best secure a UK mortgage.
Affordability is the key
Whether you look at the Bank of England, UK government, European Union or the array of regulators covering the UK financial industry, affordability is the key. The concept behind affordability is simple; unless you’re able to cover monthly payments then it is highly unlikely you will be able to secure mortgage funding. The days of 100% mortgages, even 125% mortgages in some cases, are long gone as a means of reducing speculation in the UK property market. There are specialist lenders and private banks who are more “flexible” but traditional lenders are very much singing from the same hymn sheet at the moment.
Even though banking institutions are under pressure from the authorities, they also have one eye on their own balance sheets which were decimated in the aftermath of the 2008 economic collapse.
Buy to let mortgages
Despite the fact that the buy to let sector has seen a huge increase in taxes and regulations in recent years, it is still very popular. Traditional banks do offer limited buy to let mortgages but this is now more the realm of specialist buy to let lenders and private banks. In years gone by there were relatively simple formulas such as assuming 5% rent and requiring rental income equal to 125% of monthly mortgage payments. While these formulas are still used today, each lender will have their own specific adaptation with additional income and additional assets now often used as further collateral.
It may also be possible to “top up” on traditional buy to let mortgage funding by again using additional income and assets as collateral. While obviously very important not to overstretch your finances when looking at buy to let investments, there are additional means by which you can maximise borrowings.
In recent months we have seen many buy to let property investors looking to remortgage their assets on significantly lower interest rates. This is a trend which is likely to continue in the short to medium term in light of the impact the coronavirus is having on economies. The question whether to remortgage your buy to let property is a valid one but remember this, the only definitive mortgage rate is that you see before you today. What happens tomorrow, next month or next year is at this point in the lap of the gods.
The residential mortgage market is extremely competitive and with UK base rates now approaching zero there are some very attractive rates out there. As a rule of thumb those looking to take out a UK mortgage on joint incomes can probably work on around 4.5 times combined income. Therefore, if your joint income is £90,000 you could expect a mortgage in the region of £405,000. There is some leeway depending upon the level of securing income and profession but this tends to be a general rule of thumb.
Obviously, mortgage providers will also take into account various elements of your financial profile which include:-
• Additional bank/loan debt
• Credit card debt
• Additional buy to let properties
• Standard of living
• Cost of living
• Previous credit issues
• Mortgage application structure
The key to securing residential mortgage finance is maximising your free/discretionary income. The more funding you have left each month, after covering all of your regular bills/living expenses, the higher the degree of mortgage funding. It does also pay to shop around because there are often significant differences in criteria between different lenders.
While many people see these conditions as obstacles to their ultimate goal of mortgage funding, they actually protect not only the bank but also the customer in the longer term.
Those who have made a mortgage application under a self-employed basis will be well aware of the major challenges, one in particular. As a means of reducing annual taxes many self-employed individuals have been “creative” with regards to their income and their expenses while careful not to break any laws. So, on one hand there is an encouragement to minimise income to reduce taxes while on the other hand maximise income to maximise mortgage borrowings. There stands the quandary!
Very often self-employed individuals are paid through a company system which can to a certain degree make it easier when applying for mortgage finance. Official tax/company returns will show individual income as well as overall company profitability and dividends paid. There are numerous specialist mortgage providers in the UK who cater for the self-employed market. Their criteria tends to vary significantly with some including average earnings over a period of years, plus dividends, without dividends or simply based on personal income and company profitability. So, in this particular situation it does certainly pay to shop around for a lender more aligned to your particular requirements and situation.
The majority of lenders will also require you to have been self-employed for at least one year so they have official documentation to confirm your income. There may also be changing scenarios, new contracts, contracts lost and a significant change in the make-up of individual/company income. These are additional issues which will need to be considered before mortgage finance is offered.
While historically we have seen set formulas with regards to mortgage funding in the UK, the situation has changed dramatically with introduction of not only specialist mortgage providers but also private banks. As a consequence, many people now use mortgage brokers to find the best rates and terms for their specific financial scenarios. However, while it all comes down to affordability, the introduction of additional collateral can make a huge difference.
Since the 2008 US led mortgage crisis, leading to a worldwide economic downturn, many people have chosen to remortgages their assets on significantly lower rates. This is a trend likely to continue for some time to come with UK base rates hovering just above zero. However, there may be short to medium term liquidity issues in the UK mortgage market, depending on the extent of the coronavirus lockdown, which could see some of the more competitive rates disappearing. It is imperative that you shop around when looking for mortgage/remortgage opportunities and many investors are now looking towards mortgage brokers to unlock the best deals on offer.