Our clients often ask us the following questions relating to a UK mortgage:
- What is the maximum I can borrow?
- How can I access the cheapest mortgage rates?
- How can I get my mortgage approved as fast and easily as possible?
This week we look at what affects your maximum borrowing capacity and how to achieve the best possible terms in the UK mortgage market.
Achieving maximum borrowing when you are buying a new property or refinancing an existing property is more of an art than a science.
The Mortgage Market Review, European Credit Directive, the Bank of England and the Prudential Regulation Authority have all created a myriad of complex, conflicting and restrictive rules which lenders must comply with. The centrepiece when we are talking about maximum leverage is the notion of ‘affordability’.
Affordability is quite a simple concept – you must be able to afford the monthly payments on your mortgage (with a stress test to account for possible future rate rises) and of course, you should be able to repay the loan at or by the end of the term. All of this is perfectly understandable. That is until you apply mortgage lenders interpretation over the top.
So, to make it more digestible, I have picked a few examples based on the clients we work with to clarify what is possible.
Buy to Let Mortgages
On the whole, the rental income you receive must exceed the monthly interest-only payment on what you’ve borrowed by a set amount. The amount by how much it exceeds depends on the loan to value, the product you take, the term of the product, whether you are a higher rate taxpayer and whether the property is owned personally or via a company. Each lender judges these points differently.
Simply put, you will achieve maximum borrowing if the company is held in a limited company and you select a 5-year fixed mortgage. Lending will be most restricted if you are a higher rate taxpayer, borrowing in your personal capacity and choose a short-term tracker product.
Some lenders allow you to ‘top up’ how much you can borrow on a single property, over and above what is afforded by the rental income, if your personal income or wealth allows for a more lenient assessment. This is becoming more and more necessary, especially in London.
Buy to let lending has evolved hugely since the 125% at 5% calculations of even a few years ago, and there are more and more specialist lenders who are taking different views on how to interpret the rules.
Getting advice in this area is vital to achieve the best leverage on your properties.
Residential Mortgages
Maximum mortgage lending based on the property you live in is much more complex than buy-to-let lending, but there are some clear rules which need to be correctly approached: affordability, cost of living, debt, income structure and income in foreign currency are key factors.
As a rough guide, you start with 4.5 times joint earned income. A little less for first time buyers and a bit more for professionals. So, a £100,000 income will get you plus or minus a £450,000 mortgage. Everything is done on a case by case basis depending on your circumstances and what you can evidence.
This figure will, however, be reduced if:
- You have credit card balances, personal loans, car loans or other credit commitments which will exist after the mortgage completes
- You have several existing buy-to-let properties
- You are upsizing your main residence and have decided to keep and let your current property (let to buy)
- You have children, and you either pay childcare or school fees personally
- You have an abnormally high standard of living for your income bracket
- You have had previous credit issues
- You are applying for a joint mortgage, but only one person in the couple earns an income
As a whole of market broker, we consider all these factors, run all the calculations and present your case in the best possible light to the lender who has a criterion that caters for your individual circumstances.
There are a great deal of obstacles that need to be expertly navigated to get you the best possible lending terms.
We have seen examples of different banks offering tens or hundreds of thousands of pounds more to the same customers based on differences in lending criteria, presentation of facts and pure interpretation.
Our job is to achieve the mortgage amount you need, at the best possible price. Many of our clients will tolerate a slightly higher interest rate if it means they can borrow a higher amount.
The following are some more niche examples:
Self Employed borrowers
The only difference here is how you are paid. It’s not particularly complex to work out or demonstrate, it just takes a little more effort and paperwork.
Generally, lenders will consider your annual tax return number as evidenced by your earnings (on your SA302). Your income before tax is the number used in the assessment. This is usually the total of your employed salary and dividends.
You will usually need to have been self-employed for at least one year, or to be more accurate, you need to have submitted one set of accounts and/or one tax return.
For some industries, this is less significant if you have moved from employed to self-employed within the same company (lawyers becoming partners in their firm, for example).
Some lenders will lend in your percentage share of net profit. Some lenders will allow you to add your director’s salary back into the net profit and a small few will consider retained profit (or even directors loans).
One of the major complications is accounting periods. These can be different to the tax year and a calendar year. Assimilating all the numbers and presenting them clearly is always the best approach in order not to cause confusion.
Those on contracts (IT or other contractors) should be assessed based on how many contracts they have had, their day rate and a rough calculation if that figure is more beneficial than tax returns or tax assessments.
UK residents earning in a foreign income
If you are a UK resident but are paid in a foreign income you will find that many lenders won’t be able to help or will discount your income by as much as 50% to protect against currency movements. The less mainstream the currency the harder it will be to achieve the best possible mortgage – US Dollars, Euro, Swiss Francs are easiest to work with.
HNW borrowers
There are plenty of exceptions for borrowers classed as ‘high net worth’ by the Financial Conduct Authority (FCA) (those with an income over £300k or assets over £3m). The regulatory burden can be reduced, or other assets can be used to shore up the lending. You won’t find these banks on the high street (or often, even in the UK) but there are numerous ways to personalise lending.
Asset rich but with a lack of cash to hand
Many of our clients have significant assets, either property, cash, investments, trusts, business holdings and more, but they still find it very challenging to secure an attractive mortgage on their properties.
This is again based on income, or rather lack of it. Many factors contribute to this: bad trading years, reinvested profits, income minimised for taxation, marital changes, major investments or more.
Again, the central rule applies – if you can’t prove income you can’t get a mortgage.
But we have disproven this myth time and time again. Using the right bank (or banker), fully presenting your situation in the best possible way, negotiating hard and mitigating risk and, just as importantly, covering off the regulatory position, is very important.
If you have assets but low income there are plenty of ways to achieve very good lending terms.
Recently sold companies
Selling a company is often a highlight of someone’s professional career and the culmination of many years of risk and hard work.
However, once the excitement has passed and you begin planning what to do with the proceeds, accessing mortgage terms can present a problem. Before you sold your company, you had salaries, dividends, expenses and a whole host of other benefits. The day after sale you will end up with an account full of cash.
Lenders will see this as an issue – obviously, you have no income which means that there is no way of meeting the monthly mortgage payments, which means your borrowing capacity hits the floor.
There are very few lenders who will help, and the process is much different. There may well be elements of prepayment, Assets Under Management (AUM) or other mechanisms such as a Lombard finance or securities-backed mortgage.
Non-doms and occasional family use properties
This is one of our favourites.
If you are a high net worth, non-UK resident and are buying a property in the UK which will neither be your permanent home nor will you let it out, most lenders will be reluctant to help.
Luckily, we have relationships with several lenders who can use a small, and often unused, clause in the mortgage regulations to make this much easier.
There are of course other challenges for non-resident international borrowers, different accounting practices and requirements, local accepted customs and of course language barriers which make getting a UK mortgage as non-resident very difficult.
Whatever your circumstances, we are here to help.
