Is it possible to get a mortgage whilst on maternity leave and still include my income?
As many couples think about moving to larger homes when their family starts to grow, they regularly ask if it is possible to get a mortgage when on maternity leave.
The simple answer is yes for almost all circumstances. However, there are lots of considerations and lenders do vary in the way they calculate affordability during this time.
Some lenders will use only the income during maternity leave in their affordability calculation, which usually results in low maximum loans.
However, other lenders will use the ‘usual’ salary or the ‘return to work’ salary in the calculation if a return to work is within the next few months.
If your return to work is much later, there may still be one or two lenders who will consider the application under these terms.
For evidence, lenders may request a letter from the client confirming the ‘usual’ salary and the current income.
They often request a letter from employers to confirm the return to work date, future terms such as changes to hours, and ‘return to work’ salary.
It will be important that mortgage payments are still affordable during the maternity leave, so evidence of savings to substitute the difference in income and mortgage payments will often be required for the remainder of the maternity leave.
When calculating affordability, future childcare costs and changes to other commitments must be considered, to ensure the mortgage will remain affordable.
For further advice and help arranging a mortgage whilst on maternity leave, call 0345 4594490 or fill in our enquiry form.
Whilst it remains unclear how close we are to a collapse of the Euro, one thing is clear; predicting how the fallout would affect financial markets is no easy task, even for seasoned financial experts.
In pure mortgage terms, one set of products appears to be particularly risky in the current market; is any which tracks a variable rate as opposed to the Bank of England base rate. These include discounted rates, variable rates and Libor-linked or Libor-rate deals.
All of these products could be subject to increases if the Euro collapsed, even if the monetary policy committee of the Bank of England decides to keep interest rates low.
When the BOE base rate was reduced heavily in 2008, many lenders did not pass these cuts into their variable rates for some time; as doing so would have seriously jeopardised their ability to remain afloat.
Similarly, in the scenario of the collapse of the Euro and or the default of a nation such as Greece, Spain or Italy, this would undoubtedly cause a similar crisis in the banks leading to a drying up of money markets and upward pressure on banks’ variable rates.
Most discount-rate mortgages are offered by smaller building societies, which typically have a much lower risk exposure and would be better insulated against having to raise their variable rates significantly in a similar scenario. However, they are not immune to this risk.
More concerning, though, are Libor-linked deals; these are linked to the going rate of lending between UK banks and could rise a lot if we saw more market turmoil.
Even so, tracker deals could still be a risk; who knows how the different repercussions of this kind of event could ultimately play out?
So when looking at current products, comparing the difference between fixed and variable rates, in general, is well worth doing. I would take a pragmatic approach where the difference is minimal, as it seems likely that the last string of bailouts may yet prove to be the tip of the iceberg.
Probably the biggest mortgage-related question on everyone’s lips is whether to fix their mortgage and at present, it is certainly difficult to predict future interest rates.
I can remember a conversation with a client almost 18 months ago where media coverage suggested interest rates were going to shoot up, and they were worried the tracker product I had recommended might become very expensive.
In my opinion, whether to fix your interest rate or not is a two-part question. Firstly consider your attitude to risk and the severity of that risk.
If you have ample income to afford higher rates, it comes down to your preference of whether to gamble on variable-type products. But, if you cannot afford for your mortgage payments to go above current figures, you should not only be considering a fixed rate but also trying to reduce your borrowing levels asap.
The second part of the answer comes down to the difference between fixed rates and variable products. If the difference between a suitable variable product and fixed deals is relatively low, even if you are a risk taker, it may be worth opting for a fixed rate. However, with bigger differences, it becomes harder to say.
Let us compare a 5-year deal currently on offer with one lender of 6.49% with a 25% deposit to their 2-year fixed and 18month tracker product; this is 3-4% higher, and that means the chances of it being good value for money long term are much lower as it would require average interest rates over the next five years to be over 5% or so.
That is a significant increase from current rates, so I would only recommend a fixed in this scenario to someone on the borderline of what they could afford and needing absolute long-term security.
Many lenders are touting products with an option to switch to a fixed deal at a later date; without early repayment charges. But for those who would be at serious risk of being unable to afford their mortgage if rates went up, this is likely to be a poor option, as the fixed deals available at the time are likely to be higher then as well.
It remains likely that while interest rates must increase at some point, overall market competition will do too, and to some extent, increases in bank base rates are likely to be met with at least some reduction in lenders’ margins.
Current two-year fixed deals come with an average margin of about 3% over the bank base rate, which would have been unthinkable three years ago, so at some point, slowly but surely, these differences must be eroded by competition as the market improves.
There are thousands of concrete construction types in the UK; some of these are difficult, if not impossible, to mortgage.
In general, its properties from the post-war era and a pre-fabricated construction type that could be challenging to mortgage; however, even establishing the type of construction used can be troublesome.
Most properties built after 1984 are likely mortgageable; after this point, Building Regulations are widely considered to have delivered suitable construction methods and control of material standards.
Some concrete construction types, particularly those containing structural iron or steel, built between the early 1900s and 1970s, suffer from concrete corrosion and either require significant work to prevent failure or are unsuitable for a mortgage; whatsoever.
Classed as defective construction types, contaminants in the concrete react with the iron in the steel rotting the concrete and steel beams from the inside out.
Other construction types are classed as defective simply due to being built in large quantities with sub-standard materials; or experimental wall leaves that have performed poorly over time or failed systemically; the Large Panel System or ‘LPS’ being an example that catastrophically failed in the Ronan Point tragedy.
There are, though, common concrete construction types, such as Taylor Wimpey No-Fines, which are not usually a problem to mortgage.
If you are looking at buying a vintage property of a concrete construction type, you should inform your mortgage advisor at the outset.
They should be able to check with local surveyors and try to ascertain whether there are likely to be problems with a mortgage.
If an estate agent is advertising a property as a non-standard construction, requiring cash purchase; it is likely that the property is not typically mortgageable.
But you should not assume that any agent or vendor is aware of a non-standard construction type; this is one reason why having an independent survey, not just a basic-mortgage valuation, is generally prudent when buying a home.
There is a big difference between mortgage lenders assessment of income for self-employed applicants and those who are employed and paid on a PAYE basis.
This short guide explains how lenders typically calculate income and some of the pitfalls to be aware of when becoming self-employed.
Lenders usually class you as self-employed if you are a sole trader, in a partnership, or when you own more than a set percentage of a limited company (typically 25%).
Employees paid a PAYE salary who own a significant share of another company would have two incomes, one from employment and one from self-employment.
If classified as self-employed, most lenders require a minimum of two years of full accounts before lending; only a limited number may lend based on a single year.
There are certain exceptions, for example, where an applicant buys a share of a limited company that is a ‘going concern’.
If you are considering starting these types of employment, securing a new mortgage deal before switching to self-employment could be a good idea.
When classed as self-employed, the lender will base their affordability assessment on your pre-tax net profit, not your turnover.
That is essentially your money received minus all allowable deductions, typically the profits stated in your tax returns.
If you own or are a major shareholder of a limited company, you typically pay yourself a minimum PAYE income and dividends; the two added together would be considered your profit.
It is important to remember that leaving profit within the business as capital rather than drawing these funds as dividend income will limit the maximum borrowing potential available to you with most lenders. But we can help you arrange loans with lenders that consider this additional profit.
It may be worth taking a ‘tax hit’ in the accounting year before arranging a mortgage if the previous year’s drawings were low, as many lenders will refuse to look deeper into your accounts, basing their assessment on just your PAYE and dividend and ignoring excess profits.
If your profits or drawings have decreased, most lenders will work on the most recent year’s accounts; if increasing an average of two or three years is typical.
Proof of income for the self-employed usually comprises either your SA302 or self-assessment tax computations, or a copy of your company accounts for the last two to three years. Some lenders will request accountants’ certificates if these are not available.
For the sole traders or those submitting their tax returns it usually pays to keep your SA302s handy for coming mortgage applications, although you can request reprints from HMRC, or easily download these from HMRC online if you have access.
For help with your self-employed mortgage, get in touch on 0345 4594490.
