Nearly 10 million employees have been placed on furlough leave since the Coronavirus Job Retention Scheme (or Furlough Scheme) started in March 2020. Under the Scheme, furloughed employees have had their salaries reduced by up to 80% (up to a maximum of £2,500 per month).
For people who have been thinking about buying a house, being furloughed will undoubtedly cause great anxiety. Is this a time to be cautious and hold off from making such a large purchase? Can you get a mortgage while furloughed? What if you get an agreement in principle and are then furloughed?
These issues, combined with lockdown restrictions on house viewings and moves that have only recently been lifted, mean the housing market has been sluggish in recent months. However, since the recent introduction of a Stamp Duty holiday in England and Northern Ireland, a Land Transaction Tax holiday in Wales, and a Land and Buildings Transaction Tax holiday in Scotland, many people now have a valuable incentive to restart their house hunt.
So, if you are thinking of buying a home and taking advantage of the Stamp Duty holiday but you are worried about the impact of furlough on getting a mortgage, in this post we have answered some of the burning questions you may have.
How does the Furlough Scheme work?
The Furlough Scheme was introduced in March 2020 to help employers facing financial difficulty due to Covid-19 keep their employees on the payroll. While on furlough, employees are not allowed to do any work for the company but will be paid up to 80% of their wages up to £2,500 (which the employer claims from HMRC). The Scheme is due to end on 31 October 2020. The employer can top up their employees’ salaries to 100%, however, they do not have to.
Since 1 July 2020, the Furlough Scheme has entered its flexible stage where employees can be furloughed and brought back to work as and when they are needed. Only people who were furloughed for the first time by 10 June 2020 can be furloughed again under this flexible phase. This means that anyone who has been previously furloughed and brought back to work prior to 10 June 2020 could be placed on furlough leave again.
Can you apply for a mortgage while on furlough?
There is no rule that people cannot make a mortgage application while on furlough. However, your reduced salary is likely to affect the mortgage lender’s affordability assessment.
How do mortgage lenders assess affordability?
Affordability assessments are carried out according to each individual lenders’ lending criteria (in line with overarching regulations about treating customers fairly). Lenders will:
- Check whether your income covers the monthly mortgage payments
- Assess your expenses (for example, whether you have other lines of credit such as car loans and credit cards)
- Apply stress tests to see how you could cope in various circumstances (for example, if your mortgage repayments went up)
If you fail an affordability assessment, you may be unable to borrow the required amount with that lender. However, you may be able to borrow a lower amount or borrow from a different lender. A qualified mortgage broker will usually be able to advise you about which lenders are likely to lend to you.
How does furlough affect the affordability assessment?
If you are on furlough, the mortgage lender will likely take into account your reduced income (80% of your normal income). For example, if your normal salary is £30,000 per annum, the lender will conduct their affordability assessment based on an income of £24,000. If your employer tops up your salary to 100%, many lenders will take this into account. However, not all lenders will do this so it is important to speak to a qualified advisor who provide advice about which lenders will best suit your needs.
Additionally, some lenders may also take into account your wider circumstances. There have been some reports of lenders contacting employers to check whether the applicant is likely to return to their job after furlough or if there is a risk they will be made redundant.
Be aware that many lenders are also tightening the reigns on how much they will lend to any borrower. The impact of Covid-19 and the introduction of the Stamp Duty holiday which has pushed demand for mortgages up to unmanageable levels has caused many lenders to cap their loan-to-value ratios. This means that you may need a bigger deposit than before Covid-19 – at least 15%, potentially even as much as 40%. As stated above, consulting an independent mortgage advisor or broker is the best way to assess what you can afford.
Can you get a joint mortgage with your partner if one of you is furloughed?
Yes, but as above, the furloughed partner’s income will be assessed according to their reduced salary which could affect your overall affordability.
What happens if you are furloughed after getting a mortgage in principle?
Your lender may honour the agreement but some may want to undertake a further affordability assessment. They are then within their rights to reduce or withdraw the offer depending on the outcome.
Can you get a mortgage after returning from furlough?
Lenders should take your full income into account as soon as you have returned to work or received a return to work date. However, be aware that until the Furlough Scheme ends on 31 October 2020, your employer could put you on furlough leave again, impacting your mortgage application.
Need advice about buying property in the UK?
At Bird & Co, we have a team of specialist conveyancing solicitors who have decades of combined expertise helping individuals across the UK buy and sell their homes. We can handle all legal aspects of the transaction on your behalf, including liaising with your mortgage lender and ensuring all legal documentation is completed to the highest possible standards and registered correctly.
We understand the stress and frustration you may be going through as a result of buying a home at such an uncertain time. We will aim to make the process as smooth and straightforward as possible, responding quickly to your correspondence and navigating any issues efficiently and cost-effectively.