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Mortgage advice for the self-employed

The growth of what’s been dubbed the ‘gig’ economy has led to more people joining the ranks of the self-employed and becoming small business owners. In the past, it could sometimes be more difficult for people who don’t have set employment and salary patterns to get a mortgage. However, times are changing and more lenders are adjusting their lending criteria to meet the needs of this growing group of workers.

LENDING CRITERIA

As a first step, you’ll need to make sure you have all your relevant financial documents to hand, and ensure that any information you provide in support of your application is clear and concise and suited to your lender’s requirements.

The good news is that, by and large, mortgage lenders are less likely to be concerned by what you do for a living, or how often you do it. What they will want to see is evidence that you are able to make your monthly repayments in full and on time each month. They will generally ask for accounts for the last two years, and you’ll need to be prepared to answer questions about any fluctuations or discrepancies in your level of income.

MAKING THE RIGHT MOVES

Having a good credit score will help. If you’ve had a financial hiccup in the past or don’t have a credit history, you might want to acquire a credit card and make sure you make repayments in full and on time, to demonstrate you can manage your money.

If you have set up your business as a limited company, you may well take a small salary and pay yourself a dividend. You’ll need to make sure that you provide details of both of these, so the combined total can be taken into consideration when assessing whether you can afford your monthly repayments.

The information contained in this article is purely for information purposes only and does not constitute advice.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.

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Later life mortgage borrowing has become standard practice for many

The mortgage landscape has changed in a number of fundamental ways over the last few years. Diverse factors such as the increase in house prices, students leaving university with larger debts, the trend towards couples buying their first homes and starting their families later in life, the ability to access pensions from age 55, are all having an impact on homeowners’ borrowing requirements and repayment patterns.

For the majority of us, our mortgage represents the biggest single financial commitment we are likely to make. Repaying it has a major impact on how we manage our finances. Over the last few years, more mortgages have been granted for terms in excess of the standard 25 years, not least because stretching the monthly repayments over a longer period can make them more affordable (although this does mean that the borrower will be paying interest for longer).

With house ownership proving a challenge for many young buyers, the average age at which they take on their first mortgage is more likely to be in their 30s. This means that many more borrowers will find themselves repaying mortgage debt well into their retirement years.

The amount of mortgage debt held by over-65s is set to double to about £40bn by 2030, according to a May 2017 study supported by the Building Societies Association.

KEEPING YOUR MORTGAGE UNDER REVIEW

If you are in the situation where your mortgage is likely to run on into your retirement, keep it under review. There may come a point where you may want to consider shortening the mortgage term if your finances mean that you can afford higher repayments. Alternatively, you might want to consider making overpayments to reduce the amount of mortgage outstanding. Getting good advice will help ensure that you manage your finances effectively, especially later in life.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.

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Borrowing age elevated by extra-long mortgages

The traditional 25-year mortgage may soon be a thing of the past as many firsttime buyers are choosing loan terms of 30, 35 or even 40 years. Data from estate agents Countrywide1, shows more than one third of mortgages taken out in 2017 are unlikely to be repaid until after the borrower has turned 65. This trend means more mortgages could extend beyond the current state pension age, in some cases up to age 85.

The Financial Conduct Authority urged lenders to be more innovative in their approach to the needs of older borrowers. An increasing number of lenders are now prepared to grant mortgages for a maximum term of 40 years, softening their attitude to lending that extends well into a borrower’s retirement years, providing that they can meet the necessary affordability tests.

STRESS TESTS

Getting a mortgage has become more difficult since the introduction of rules designed to “stress test” a borrower’s ability to comfortably make mortgage repayments if interest rates were to rise to at least 3% higher than those offered on their loan. By extending the term of the mortgage, borrowers can stand a better chance of getting their application accepted as their monthly repayments could be more affordable, although they will pay more interest as a result.

However, having a mortgage more than the standard 25 years could give rise to other problems. The longer the period of the borrowing, the greater the likelihood that the borrower might encounter unexpected problems like ill health. There is also the risk that long-term mortgages could leave borrowers with large debts to pay off in the run up to retirement and beyond.

Whilst longer mortgages can be an advantage in the early years, it makes good sense to regularly review your deal. That way, you can ensure that your mortgage keeps in step with your financial circumstances.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.

1 Countrywide, 2017

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Buy-to-let landlords raising rents as tax changes bite – tenants beware

The last few years have been a boom time for buy-to-let landlords, with rental properties in high demand.

However, in 2015 the then Chancellor, George Osborne, introduced measures that he hoped would ‘level the playing field’. To deter more buy-to-let landlords from entering the market and encourage some to sell their properties, he restricted the tax concessions available on their mortgage interest payments, hoping that this would mean that more entry-level properties would be freed up for first-time buyers.

The changes start to bite

These tax changes mean that buy-to-let landlords, accustomed to claiming relief worth 40% or 45% will find their relief restricted to the basic rate of 20% once the changes are fully implemented in 2020. The tax relief that landlords of residential properties get for finance costs will be restricted to the basic rate of income tax, phased in from April 2017. This figure decreases by 25 percentage points each year until none can be accounted for in 2020-21, although a 20% tax credit will help. In addition, the 10% wear-and-tear allowance was discontinued from April; landlords can now only deduct the costs they have incurred.

This came on top of changes in Stamp Duty Land Tax (SDLT). From April 2016, anyone purchasing an additional residential property for £40,000 or more pays a surcharge of 3%. So, a landlord who bought a property for £200,000 prior to April 2016 would have paid just £1,500 SDLT. Now, a landlord purchasing the same property would see their bill rise to £7,500. Similar rules were adopted for Land and Buildings Transaction Tax in Scotland.

Effects being felt in the market place

Data from the Association of Residential Letting Agents1 suggests landlords seeing their rental yields fall are beginning to press their tenants for higher rents to cover their costs and income shortfall. In November 2016, only 16% of agents saw landlords increasing rents, but that figure has risen to 35%, and is widely expected to rise further over the coming months. Clearly, following the recent rise in interest rates, more landlords will be endeavouring to offset their rising costs by raising rents.

In addition, lenders have introduced more stringent vetting procedures for buy-to-let mortgages where landlords already own four or more mortgaged properties. This may give rise to further changes in the dynamics of the buy-to-let market.

The Financial Conduct Authority does not regulate Commercial Buy-to-Let mortgages & Tax advice

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

1ARLA (Association of Residential Letting Agents) Propertymark, Private Rented Sector report, August 2017

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What does it cost to move?

Moving can be an exciting but expensive time. Drawing up a budget will help you work out how much cash you will need for the fees you can expect to pay. The exact figure will depend on which rung of the housing ladder you’re on, whether you’re buying and selling, and which part of the country you live in.

There are costs involved with arranging a mortgage and your adviser will talk you through these in detail and confirm them in writing.

You’ll need a solicitor or a conveyancer to carry out the legal work. Typically, they will charge between £500 and £1,500, and will provide an up-front estimate of their fees. If you’re selling a property at the same time, you may be able to negotiate a package deal to cover both.

The cost of selling

If you’re buying, you don’t have to pay estate agents’ fees, but if you’re selling you can expect to pay a percentage fee which can range between 0.75% and 3%, plus VAT, of the agreed selling price of your home, depending on the type of contract you opt for. Alternatively, you can adopt the DIY approach and put your property onto a website, in which case your costs will be lower, but you’ll need to do a lot of the work yourself, including arranging viewings.

You should also consider getting a survey done to ensure you aren’t buying somewhere that could end up costing you a lot of money in repairs. Depending on the type you choose, you could be paying anything from £250 for a basic report to around £1,000 for a more detailed structural survey.

Then there’s stamp duty (Lands & Building Tax or LBTT in Scotland). This is payable on properties bought for over £125,000 in England and Wales and £145,000 in Scotland, and goes up in bands. For example, it would be £5,000 on a £300,000 property in England and Wales (0% on the first £125,000, 2% on the next £125,000 and 5% on the last £50,000). Don’t forget you may also need to book a removal firm, so there are a whole myriad of costs to budget for.

As a mortgage is secured against your home, it could be repossessed if you do not keep up mortgage repayments.

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Mortgages – bank of England tightens the rules

In a move that demonstrates the Bank of England’s determination to prevent lenders getting too complacent about current low interest rates, strict new rules on mortgage affordability have been announced.

New tests to be applied

The rules, often referred to as “stress tests”, were set out in the Bank’s Financial Stability Report. Lenders will be forced to apply an interest rate stress test that would look at whether a borrower could still comfortably afford to make mortgage repayments at the end of an introductory period if the rate were then to rise by 3 percentage points.

When an introductory deal ends, it’s usual to move to a lender’s standard variable rate (SVR). The SVR is usually pegged to a percentage above bank base rate, and can be subject to change. SVRs can currently be as high as 5.75%, so this could mean that some lenders are forced to check whether a borrower’s finances could cope with a rate as high as 8.75%.

This could mean that someone with a 25-year mortgage of £200,000 paying around £700 a month would need to be able to prove they could still afford their mortgage if the monthly repayments doubled to £1,400.

In the same scenario, the previous stress test would have required a check at 5% which would mean the borrower being able to afford £1,100 per month. This means that under the new test they must be able to afford an additional £300 per month.

What the changes might mean in practice

However, as many lenders have been operating under strict mortgage criteria for some years now, the general view is that this may not be the stumbling block to new mortgages it might appear. The Bank has estimated that if these rules had been in operation in 2016, it would only have reduced mortgage approvals by less than 0.5%.

As a mortgage is secured against your home, it could be repossessed if you do not keep up mortgage repayments.

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Setting up companies leaves landlords out of pocket

In 2015, then Chancellor George Osborne announced measures that he hoped would ‘level the playing field’ for first-time buyers by reducing the many tax concessions available to buy-to-let landlords, deterring more from entering that market and encouraging some to sell their rental properties.

Landlords accustomed to claiming relief worth 40% or 45% will find their relief restricted to the basic rate of 20% once the changes are fully implemented in 2020. In the 2017-18 tax year, the deduction from property income is being restricted to 75% of finance costs, with the remaining being available as a basic-rate reduction. In addition, the 10% wear-and-tear allowance has been revoked, meaning landlords are only able to deduct costs they have incurred.

Some landlords who foresaw their rental yields falling because of these tax changes chose to set up limited companies and to transfer their rental properties into them.

Limited company drawbacks

The main benefit of holding properties within a limited company is that profits are taxed at 19%. Limited companies aren’t affected by the restrictions that took effect from April, so mortgage interest is fully deductible against tax.

However, recent research suggests that only landlords who own four or more properties stand to gain from a limited company structure. This is in part because limited company mortgage products are only available through a small number of lenders, meaning that the rates charged are often higher than those available to personal borrowers, and more liable to change with market conditions. Plus, many lenders operate under significantly different criteria when lending to limited company borrowers.

Whilst some people have considered buying a property as an individual and then moving it into a limited company, this can have unintended tax consequences. Doing this could give rise to a major capital gains tax liability and create a problem with stamp duty.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.

The information contained within the article is based on our current understanding of taxation and can be subject to change in future. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

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Is being loyal to your mortgage lender costing you money?

With interest rates at their lowest levels for some years, borrowers are often content to stick with their existing mortgage deal. However, new research from Citizens Advice reveals that being a long-standing loyal customer of your mortgage provider might be costing you money. What’s more, they calculated that 1.2m mortgage holders could be better off by shopping around for a new deal.

Their conclusions are based on homeowners who remain on their lender’s standard variable rate after their two-year fixed term mortgage deal has come to an end. The penalty for staying with their existing lender can be around £439 a year. For first-time buyers, who are likely to have a bigger mortgage outstanding payable over a longer period, the figure based on the same scenario is even higher at £1,359 a year.

As the monthly mortgage repayment is often a family’s major outgoing, it’s a good idea to review your mortgage from time to time. If you’d like some advice please contact us.

As a mortgage is secured against your home, it could be repossessed if you do not keep up mortgage repayments.

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Interest-only mortgages under investigation by the FCA

The Financial Conduct Authority (FCA) has announced that it will investigate mortgage lenders with borrowers on their books who have interest-only mortgages to ensure that they are being treated fairly.

The FCA says that 1.8 million UK home owners have this type of mortgage (excluding buy-to-let) and many loans are due to be repaid over the next couple of years. In some cases, borrowers don’t have adequate plans to repay them. The FCA acknowledges that these borrowers will need urgent help and support from their lender to find a workable solution.

Before the new stricter rules on mortgage eligibility came into force, interest-only mortgages were in widespread use. An interest-only mortgage is one where the monthly payment only covers the interest owed, meaning that at the end of the mortgage term the borrower must repay the original capital sum that they were lent.

THE SCALE OF THE PROBLEM

The average amount owed by those aged over 55 with interest-only mortgages is put at £91,000, with one in seven owing more than £150,000.

Many borrowers have yet to give proper consideration as to how they will repay the capital amount when it becomes due at the end of the mortgage term. They may have to resort to selling the property, downsizing, or using their savings or pension pots to clear the debt. If the money can’t be found, then the homeowner could, in extreme cases, face repossession.

Lenders are increasingly aware that some people with interest-only mortgages are likely to face difficulties in the future and are putting plans in place to avoid the risk of borrowers defaulting and the need to sell. Some are providing their interest-only borrowers with information on mainstream or lifetime mortgages (a form of equity release), for example.

If you could use some advice on your interest-only mortgage, please get in touch.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.

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To buy or rent? What you need to consider

Buying your own home is a big financial decision and one you need to approach with your eyes wide open. There are many things to consider and you’ll need to weigh up the pros and cons carefully before opting to become a homeowner.

RENTING GIVES YOU FLEXIBILITY, BUT YOU PAY FOR IT

Renting your home gives you a roof over your head, the flexibility to move on pretty much when you choose and has the added benefit that you aren’t generally liable for any maintenance costs. However, the downside is that you aren’t building up valuable equity in your home. Buying gives you a growing stake in your property and means that if it increases in value you make a profit. You also have the satisfaction of knowing that when you’ve finally paid off your mortgage, you’ll own your home outright. Is buying a property right for you? Here are some questions that can help you decide.

IS IT CHEAPER TO RENT OR BUY?

In the short term, it can be a cheaper option to rent. The rent you pay could be cheaper than the cost of a mortgage. Also, the deposit for a rental property can often be much less than the deposit required to purchase a property. However, the mortgage market is currently very competitive and there are some good deals available. We can advise you on what type of deal might be available for someone in your financial circumstances.

WILL YOU BE ABLE TO AFFORD TO OWN?

Saving up for the deposit is only the first step. You and your mortgage lender will need to be certain that you can budget wisely and will be able to afford the monthly payments now and in the future. You will also need to have enough cash available for other home buying expenses like survey costs, legal fees, stamp duty (payable on properties with a purchase price of more than £125,000 in England and Wales, and LBTT above £145,000 in Scotland), plus moving costs. You’ll need to consider all the ongoing expenses that come with home ownership, like buying furniture, utility bills, insurance and maintenance costs.

WHAT ARE YOUR OTHER FINANCIAL GOALS?

Whilst buying a home is a major goal, it won’t be your only one. Everyone should have a financial plan in place that takes care of important things like saving for the future and making provision for retirement. For instance, if you’re thinking of setting up your own business or pursuing other interests or dreams, you might want to prioritise these goals over buying a home for now.

If you would like some professional advice, do get in touch.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.

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