Mortgage Prisoners Part 2: Self-Employed and Interest-Only Prisoners
Written on 9 December 2019
A “mortgage prisoner” is an individual who’s unable to remortgage to another lender due to their current circumstances falling outside lending policy. This leaves that person potentially tied to the lender for the foreseeable future. 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 as they offer monthly payments that are more affordable than repayment mortgages because nothing is going towards reducing the outstanding balance.
Interest-only mortgages were offered quite enthusiastically in the 1980s-1990s with a variety of repayment methods being agreed, such as endowment, pension and sale of the property. Unfortunately for many, their current repayment vehicle may now no longer exist or is no longer acceptable after lender changes in 2008. In order to agree a new rate lenders are requiring some or all of the outstanding balance to be converted to repayment before the new product can start. 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 remortgage to a new lender they’re being asked to produce evidence of their income, covering 2 years or more. If they’re unable to produce evidence covering 2 years, or if the start-up year shows little net profit, they can be declined by that lender based on affordability. This can be frustrating when looking to secure a new mortgage with a new lender which may be lower than the one they’re currently on.
What to Do?
Both sets of people may feel they’re being treated unfairly, but often it’s well within the rights of the lender to decline their application. It’s extremely frustrating to go to several lenders to be declined, but you may have more options than you’re aware of.
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 the 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.
If you’re looking to maybe borrow some more money for home improvements, or a gift for example, and your current lender won’t assist then you could look to take out a second charge mortgage. This is where another lender agrees to lend with the original mortgage still in place. This would enable you to get what you need even though you cannot switch main mortgage lender.
Independent Mortgage Advice
For the public, these solutions aren’t always easy to find. Therefore, the 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 more lenders 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 0330 433 2927 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.