The Facts About Mortgages for People with Low Income
What is a low-income mortgage?
If you need a residential mortgage but are concerned that your low income will make this impossible, think again! Some mortgage lenders will be very happy to consider lending to you although, you need to know which lender to approach as lenders differ greatly to what they will offer you. As an example, if you earn £15,000 per annum Lender A may offer you a mortgage of £15k and Lender B may offer you £60k.
Buy to let mortgages are treated very differently regarding your income and further explanation is provided on this further in the article. This article focuses on low income for residential mortgage requirements.
The difference between the examples shown above boils down to a few important factors;
- the mortgage company’s appetite to lend based on perceived risk factors and their general attitude to risk
- Whether or not the lender is pricing its mortgages to win market share and thus is looking for the higher income earner where affordability fits their income calculator, or a lender that understands its mortgage clients will be from the lower income segment of the market and has a slightly higher rate to compensate.
- Perceived affordability – most lenders will use affordability calculators to ascertain if you can afford a mortgage, others may use an income multiplier.
- Loan to value – it will be easier to get a larger loan based on a lower loan to value – the risk to the lender decreases the larger the deposit you put down
- Plus, many more points to consider, although the above points provide a good guide to the way mortgage companies work and why they differ in their offerings.
Are low income mortgage lenders available to you directly?
In most cases the answer would be YES. Although knowing which lender to approach is the tough question. Approaching lenders directly can be a time-consuming process as getting an answer from a bank or building society could mean you taking 1 – 2 hours of your day to get a response, and that response could simply be a ‘The computer says no…’.
Imagine the frustration of approaching a handful of banks and getting the same response, it would soon have you pulling your hair out!
Having the knowledge of which lender to approach, based on your personal or your brokers experience will save huge amounts of time and will hopefully mean your blood pressure remains at normal levels.
What is considered low income for a mortgage?
There is nothing scientific or exact in this answer, and the answer provided is based on our experience over many years within the mortgage market. Darren Pescod, our CEO comments “In my opinion, the majority of mortgage lenders calculators will consider total income of a household under £20,000 as a low income and the amount that they will consider lending will reflect this. This isn’t the case for all lenders, as we know some banks or building societies will happily lend reasonable amounts to clients, but as a guide overall income of less than £20,000 would be my definition.”
What income can I consider when applying for a mortgage?
This depends on the lender as they differ enormously and it can be a bit of a minefield trying to find who will lend you the most based on your income sources. This is probably best explained by way of an example:
- Lender A could take into account your salary, zero overtime, 100% of any benefit income and 100% of any pension income.
- Lender B may take 100% of your salary, 50% of any overtime, 100% of pension and zero benefit income.
- Lender C may take 100% of your salary, zero overtime and 100% of your pension but may exclude all of the other income in its affordability calculations.
So who lends the most?
The answer is it could be any of the above as the lending decision is based on the individual mortgage company’s algorithms and affordability calculations. In this example it’s just as likely to be Lender C, who takes less income into account and yet still offer the highest loan.
How to apply for a low-income mortgage:
Any low income mortgage broker will give you an idea of what could be available to you based on your individual circumstances. If the mortgage you are looking for is simply not going to be achievable, a good broker should be able to tell you this within a matter of minutes.
Where there is a chance for you to get you the desired loan, further research will be done for you to explore all the options. This will then enable the broker to provide quotes and to help you to consider the best option for you based on your personal circumstances.
Are residential mortgages and buy to lets mortgages treated the same?
No, they are not. Buy to let mortgages are not governed by the same rules on affordability as residential mortgages so it is possible to get a low income buy to let mortgage at much higher borrowing amounts compared to a residential mortgage. A simple example to demonstrate this is a £10,000 per annum income, with a reasonable deposit of 30 – 40% could allow you to obtain a £500,000 But to let mortgage – This is far in excess of what would be available on a residential mortgage.
Actual case study – Residential Mortgage
The following is taken from an actual case study* that one of our team has recently dealt with which highlights that mortgages are available for people on low incomes.
The client, George, was in a hurry to secure a new mortgage deal as his own house had been sold and he had just had an offer accepted on a new property. Speed of mortgage completion was important to him as he didn’t want to lose the property.
The mortgage he required was a £53,000 on a property worth £105,000 (a 51% loan to value). In the initial telephone call he expressed interest in a self cert mortgage. George felt he would only get a mortgage approved based on self-certification, as he had failed affordability at his own bank due to a low provable self-employed income of £10,500.
George initially wanted a self cert mortgage for two reasons, the first being that his latest self-assessment form showed a capital allowance deduction of £2,500 for a vehicle purchase that he considered part of his personal income (lenders don’t consider this as income) and secondly his pending tax return would show provable income in the region of £14,500 which would be sufficient for most lenders affordability calculators or income multiples.
After we advised George that self cert mortgages were no longer available, we found a high street lender that was willing to offer £51,000 as a mortgage based on the assumption of a high credit score and based on their affordability calculator, PLUS after a brief discussion with the underwriter as soon as the clients new self-assessment form was available to show the higher taxable income they would increase the loan accordingly allowing the required £53,000 (and higher if needed) mortgage to be realised.
The benefit of this mortgage structure is that the client could start the mortgage process immediately so this would minimise any delays and could look to secure the new property weeks earlier than if he waited until the end of his tax year.
A 3 or 4-week delay in submitting the mortgage application could be the difference in securing or losing the property that had accepted his offer. The £51,000 mortgage available from the lender shows a very high-income multiple of 4.85 x which is very unusual in the current mortgage market as most lenders only offer this type of income multiple on salaries in excess of £25,000 per annum.
The reason behind this particular high-income multiple on this low salary was due to 3 main reasons:
- A low loan to value
- A high credit score
- No other debts or commitments in the background
* Case study from 6th March, reference “TMBLSNGeorge – The Mortgage Broker Ltd”
What to do next:
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