Furloughed what happens with getting a Mortgage
I am a professional Mortgage Broker and in this article I cover the topic of furloughed workers in relation to obtaining a mortgage.
I don’t know about you but until a few weeks ago I was unware of the phrase “furloughed” but it has established itself firmly in our daily conversations in the same way “Brexit” did. This brain child of the UK Government is designed to prevent employees being made redundant in these tough economic conditions in favour of retaining their services so they can go back to the same job when the health crisis is stemed.
Furloughed workers are not allowed to work during this period but are paid at least 80% of their normal wage by their employers and this is subsequently reimbursed to the employer by HMRC.
It is fair to say the Mortgage Lenders have been struggling to incorporate the new furlough employment status into their lending policies to meet with demand. The stakeholders of banks are notoriously slow by nature to adapt and embed new processes but in these times of staff working remotely its been even more challenging to get a consistent message across, as a result things continue to change on a daily basis.
Therefore to pull the subject together in a way that is easy to digest I need to generalise on the mortgage lending response to being made furloughed. All lenders will have slightly different approaches so I would strongly recommend you speak to a professional Mortgage Broker such as Niche Advice.
It is very important to stress at this point that mortgages are a long term commitment and if you are in doubt that your job will be reinstated you should not proceed. In addition these new rules are being applied to mortgage applicants who were orginally fully employed but became furloughed during the mortgage process it is currently uncertain whether Mortgage Lenders will permit new mortgage applicants that are furloghed before they apply and I certainly would advise that you hold off if this were the case.
NEW MORTGAGE AFFORDABILITY OF FURLOUGHED WORKERS
Most Mortgage Lenders will cap earners at the level of compensation the Government is paying to the employer which currently stands at 80% of employed income up to a maximum of £2,500 per month.
Additional pay above basic income; such as overtime, bonuses and commissions are normally discounted from their lending assessment as even an established track record is unlikely to be a indication of future pay in this regard, at least in the short term, and of course a mortgage needs to be serviced from day one.
Top up pay above the 80% by employers is ignored from the affordability assessment. And, this is really the crux of the matter. The Government will stand by their compensation for as long as the furloughed job retention scheme operates but the employers are only oblidged to make a 80% contribution.
These changes have had a particularly hard impact on large residential mortgages as the compensation cap may put them out of reach but it may affect any case. For example, John earns £20,000 a year and the lender he was going to applies a five times income muliple which allows him to borrow £100,000 as a mortgage. The 80% compensation cap results in his usable income to £16,000 so his borrowing potential drops to £80,000.
Buy to let mortgages are largely unaffected as the Mortgage Lenders predominantly work on the basis of rental expectations. Some do however apply a minimum earned income level to go alongside the rent which is typically £25,000.
As with any mortgage you have a duty to disclose a change in status to the Mortgage Lender right up until the point funds are released as this may affect their willingness to lend.
In respect of a furloughed worker the Mortgage Lender will almost certainly request the letter given to you by your employer which laids out their job retention terms. Mortgage documents have historically needed to be “originals” posted to the Mortgage Lender or certified by your Mortgage Broker but there is a relaxation in this requirement given the stay at home directive.
MORTGAGE IS IN PLACE AND YOU HAVE BECOME FURLOUGHED
If you struggling to make your mortgage payments in full you will need to speak to your Mortgage Lender at the earliest opportunity. The Government has asked the Mortgage Lenders to be receptive to a short payment holiday request. You will need to be clear as to the impact this will make to your debt and credit record before you commit yourself to this approach.