Is it possible to get a mortgage whilst on maternity leave?
As many couples think about moving to larger homes when their family starts to grow, it is not surprising that we are often asked 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 will often leave the maximum loan available too low.
However, other lenders will use the ‘usual’ salary or the ‘return to work’ salary in the calculation if return to work is within the next few months. If return to work is not anticipated for a longer period of time there are still one or two lenders who will consider the application under these terms.
In order to evidence this, lenders are likely to request a letter from the client confirming the ‘usual’ salary and the current income. They will also request a letter from employers to confirm the return to work date, the terms of the contract – hours and ‘return to work’ salary.
It will be important that mortgage payments can still be afforded 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.
Consideration as to future child care costs when calculating affordability should be made as well to ensure that the mortgage will be affordable long term.
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We have recently launched the first of several new mortgage calculators which aim to bring much more sophisticated systems for borrowers to assess their lending ability online.
The most important of these new calculators is the maximum loan calculator which actually models some of the more complex systems for affordability lenders are using to assess customers borrowing potential.
Lenders are increasingly stepping away from using pure income multiples and the large high street banks and building societies now take into account many factors including credit scoring, number of financial dependents and overall debt to income ratio to decide on an appropriate borrowing figure.
The calculator is as far as we are aware the only one currently available which actually illustrates how different types of lenders calculations vary and takes into account dependents, existing credit commitments and credit scoring.
There are several more new tools in development which will soon be added so keep an eye out for more to come.
I wrote an article some time ago about the FSA’s proposed changes to end self certification and fast track mortgage lending in which I made a big point about how this could leave a lot of people struggling to refinance and cause trouble for the recovery of the housing market.
The FSA last week confirmed that action would be taken, and the press have been making similar observations to my own today about the impact that this could have on our recovery and those borrowers with an existing loan of this type.
But over the weekend I had a realisation and did a u turn on the subject. In reality there are few if any legitimate borrowers who cannot “prove” their income. The point being that “proof” and it’s interpretation is the key point here, because almost all people can show evidence that the income they declare is broadly accurate however they may not be able to prove income in the manner that a normal full status mortgage would require.
For example if you have a business from which you could take far more income than you currently do without running the business into decline that is your prerogative, and if you can show that you can still afford a large mortgage then fine, but you can also evidence that your business has the potential for you to take further income. It may not be satisfactory at your local building society now, but lenders with good product development teams will soon see how to create a new type of product to cater for this market once their appetite comes back.
So if the FSA get this legislation right and don’t dictate or define what proof consists of then there will still be the opportunity for lenders to market products for those with non standard income, priced above full status products as before but simply requiring some evidence to back up that the income declared isn’t total fabrication. This is what’s needed in the market and the FSA just need to be careful not to try and make this legislation so watertight that it chokes the housing market to death.
In Mortgage Adviser Q & A we look at some the common questions answered by mortgage brokers on a day to day basis.
Question; Will lenders consider my benefits as income when assessing affordability?
Most lenders will consider some types of benefits as income and this varies from lender to lender. For example it is quite common for child tax credits to be considered as income but child benefit not to be, it is also quite common for other income such as regularly received child maintenance payments to be considered. Again though how much is applied will be specific to each individual lender.
Most lenders will however require you to have some form of income apart from benefits as well, this is because year by year benefits will be changed in the budget and your entitlement to a benefit cannot be guaranteed in the long term.
For information about which benefits are considered as income with different lenders seek independent mortgage advice.
Woolwich have announced changes to their 4.19% fixed rate until 31/10/2011 Mortgage product at 70% Loan to value.
The product was previously restricted to a maximum borrowing of £200,000 and a minimum borrowing of £100,000. The amendments now allow maximum borrowing of £1 million and minimum borrowing of £50,000 opening the product up to a much wider audience to the delight of Mortgage Brokers and borrowers alike.
The product remains the same otherwise with a £499 arrangement fee. The APR is 2.5% and reversion rate currently 1.99%. Based on a loan of £100,000 other applicable fee’s are a valuation fee of £295, land registry fee of £200, lender Conveyancing fee of £126 and a £35 completion fee. Early repayment charges are 3% of the outstanding loan if the mortgage is repaid before 31/10/2011.
As usual consult a mortgage advisor or mortgage broker and request a Key Facts Illustration about the mortgage prior to making a decision.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. We do not usually charge a fee for mortgage advice although you do have the option to pay up to 1.5% of the loan amount. Some buy to let and commercial loans are not regulated by the Financial Services Authority.
The next part of my why you should use a mortgage broker theme of the week is the humble affordability calculator.
We do a little pay per click advertising on the various search engines, this is no secret. But it surprised me to see so many hits coming through the somewhat spurious term “mortgage calculator” and it occurred to me that rather than this being people searching to find out what their monthly payment would be (as pretty much everyone has one of these calculators) it is probably people looking to see how much they can borrow.
If this is the case and you are reading this article because you were looking to find that out let me explain something, calculators that purport to tell you what the maximum you can borrow is are a waste of your time. Plain and simple.
The reason is this, every lender will take a multiple of your income and your partners if applicable or a percentage of your gross or net income and the sum will be different with ever lender. They may then deduct your loans and other credit commitments (but the way they do this will also be different with every lender). They may deduct a figure for each dependent child you have, and they may use their standard variable as a basis for affordability or the product rate you will be borrowing if they use a rate to calculate it at all.
Clearly a calculator cannot be set up to work out the maximum based on all the different methods of assessment used, so they use a “best case” method to give you a rough idea. This might seem useful but if the best case happens to be a bit optimistic it could cause you some big headaches and if it is woefully underestimated then you might miss your dream home based on poor information. The only calculators that are reliable are those on lenders websites, but they only work for that lender and will often be based around your credit score anyway which you cannot predict.
Affordability assessment is very complex and is an ever changing landscape, so if you want to know what the maximum you can borrow is speak to a mortgage advisor as that’s what we’re here for.
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The Halifax have just announced a small drop in their house price index for June of 0.5% which on the face of it would suggest that the worst may not yet be over for property values despite promising rises in similar index’s over the past few months.
However there is a general feeling among the industry now that the bottom is out, and while prices are likely to remain fairly stable for at least the next year due to lack of mortgage products there is some good news out there for people looking to borrow.
Recent research from Unbiased.co.uk suggests that many people now believe that they can only get between 0.5 and 2.5 times their income when looking to mortgage and that only 24% of the UK believes they could arrange a mortgage for more than 4 times their main income.
The truth is that most lenders will accept four times main income as a guide or perhaps 3.5 times joint income however the difficulty is really for those with dependent children which has started to play a more significant role in lenders assessment of affordability and those people who have existing credit commitments which will continue to run after the mortgage completes.
If you are holding significant savings and have existing loans which have a short term to run it may be worth considering paying off loans before applying for a mortgage in order to assist your maximum loan and affordability calculation particularly if you also have children.
If you are unsure how much a mortgage lender will consider lending you many now have useful calculators which will give you an indicator of their maximum loan available on their websites.