Mortgage Prisoners Part 2: Self-Employed and Interest-Only Prisoners
Written on 13 August 2019 by
A “Mortgage Prisoner” is an individual who’s unable to alter the terms of their mortgage based on their current lending policy, due to the lender not allowing them. This leaves that person potentially tied to the lender. Following on from our previous blog post on mortgage prisoners, we’ll now look at two common scenarios and possible solutions – interest-only borrowers and the self-employed.
Interest-Only mortgages are popular because they offer monthly repayments that are more affordable than repayment mortgages. But they’re rarely offered by high street lenders any more due to the risks.
Interest-only mortgages were offered quite enthusiastically in the 1980’s-1990’s with a variety of repayment methods being agreed, such as endowment, pension and sale of the property. Unfortunately for many, their agreed repayment vehicle may no longer be acceptable under their new lenders criteria. In order to agree a new rate lenders are requiring the entire mortgage, or a percentage of it, to be converted to a repayment mortgage before the change can be affected. Sometimes the resulting monthly payments are deemed unaffordable and therefore declined.
The Self-Employed can often find themselves caught in a similar situation. Over the last few years many previously employed people went self-employed, for a variety of reasons. When looking to make changes to their mortgage they’re being asked to produce evidence of their income, covering two years or more. If they’re unable to produce evidence covering two years, or if the start-up year shows little “net profit”, they can be declined by their lender based on affordability. This can be frustrating when looking to secure a new product which may be lower than the one they’re currently on.
Benefits to the Market
Both sets of people may feel they’re being treated unfairly, but often it’s within the rights of the lender to decline their application.
This type of occurrence happens regularly, which requires lenders to more rigidly assess whether customers can afford a mortgage. Testing affordability can lead to more conservative underwriting in places, for the right intentions. Many people will try another lender, possibly on the high street, but encounter a similar result. With multiple lenders turning them down, the experience can leave them feeling like prisoners with their existing lender.
However, an independent mortgage broker will have access to a broad range lending criteria for all lenders open to intermediary business. For those on interest-only mortgages, there are lenders who would possibly accept “sale of main residence” as a repayment method if downsizing is a realistic possibility.
They may also accept equity in other properties, equity-based investments, or in some circumstances agree to extend the term to a point where an equity release mortgage may then replace an existing conventional mortgage.
Some contractors who have recently become self-employed in the same field they were previously employed in, may find that a few lenders will work from their current contract rather than two years of accounts. Although, this is certainly not the case for all industries.
For many, these solutions aren’t easy to find. Therefore, knowledge and expertise of an independent broker, together with a more personal approach, may be able to help free them from their perceived prisoner status.
If you’re a mortgage prisoner, you can help yourself by overpaying your mortgage or attempting to pay off your mortgage early. This will increase your equity and will make lenders more inclined to lend to you. This then raises your chances of qualifying for better mortgage rates in the future.
If you’d like some further advice of guidance on the mortgage process call us on 0344 346 3672 or send us an enquiry.
The blog postings on this site solely reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.