Taking out the biggest loan of your life, securing it against your home and then repaying it every month over decades is never straightforward.
Different circumstances mean borrowers can often be rolling the dice as to whether they get a deal in the mortgage game. Situations change and borrowers’ positions when they agree the loan are often different by the time they end.
During the boom lenders dished out loans like they never had to be repaid to anyone with a pulse. Now the pendulum has swung the other way, with the credit crunch and tougher regulation meaning affordability checks try to see further into the future.
For instance, Santander provoked ridicule and anger last month when it revealed it would include birthdays and Christmas spending in its affordability calculations.
For many individuals such standard affordability checks will be appropriate and they will sail through but for others more flexibility is needed. No two individuals are the same and many are not an ideal fit for lenders’ models through no fault of their own.
Having a disability, serving in the armed forces, living with friends or getting divorced are all scenarios that require more nuanced underwriting. Such borrowers have no lower aspiration for home ownership and no less demand but solutions are not easy to come by.
Through a combination of government and charity support with lender help there are a number of unusual deals to be had for such individuals. It is useful for brokers to have some knowledge about these rare cases and be ready if one should come through the door.
Deals for the disabled
People with a disability that prevents them from working can get government support in the form of benefits but many still aspire to home ownership.
There are 6.4 million adults registered disabled in the UK and in England just under one million own a home, according to the English Housing Survey. The latest survey figures from 2008/09 show there are 985,000 disabled home owners but only 200,000 used a mortgage to buy.
This means just 20% of disabled home owners use a mortgage – because most lifelong disabled people struggle to get a loan as they are mostly reliant on benefits and cannot work. But it is possible for those on benefits to access mortgages and they could qualify for mortgage interest support from the government.
Housing benefit can be used to pay for the interest on their mortgage loan, on any other loans for property repairs or adaptations to make the home more suitable for their needs, or for service charges.
The Support for Mortgage Interest scheme applies on loans of up to £200,000, plus the cost of any adaptations. The amount may be restricted if the Department for Work and Pensions decides the house is too big or in an unnecessarily expensive area.
Shelter says disabled people should explain to the DWP if they need a larger home – for example, if they have a live-in carer or need to live in a particular area to be near family or hospital to receive treatment. The SMI scheme has proved to be the most crucial tool in allowing lenders to offer loans to disabled borrowers.
The Council of Mortgage Lenders says 64,000 disabled home owners claim SMI, about a third of the total claiming the benefit.
But the government slashed the rate at which SMI is paid by 40% in October 2010 from 6.08% to 3.63%.
“We know that there is no foreseeable prospect of the government restoring SMI to its former rate,” the CML stated in its News & Views in March 2011.
“But if lenders are to rely on the benefit, there needs to be a commitment by the government to long-term support. Without this, it is difficult for lenders to have the confidence to support this kind of niche borrower, even though home ownership may be a more cost-efficient tenure for them.”
Specialist provider My Safe Home helps disabled people buy a home with schemes through certain lenders. It is authorised by the Financial Services Authority to give advice but doesn’t describe itself as a broker as it deals only with disabled people.
The cuts to SMI saw its main provider, Kent Reliance Building Society, pull out of the scheme in March 2011, which meant that the firm was unable to arrange any mortgages for the rest of the year.
Daron Billings, marketing manager at My Safe Home, says all its buyers have lifelong physical or mental disabilities and most are incapable of working.
“When the government cut SMI rates it had a big impact on us and those we try to help,” he says. “When the cuts came in our main lender was Kent Reliance, which was going through a merger with One Savings Bank. It was the perfect storm for us and we were unable to support anyone for 2011.”
Late last year My Safe Homes struck deals with Hanley Economic Building Society and Saffron Building Society to offer mortgages again and is in talks with a number of other lenders.
The firm estimates it has helped more than 1,000 disabled people to buy homes since it was formed in 1997.
Hanley’s deal has a rate of 4.63%, or 1% over SMI, up to 95% LTV with a £99 booking fee. It is a shared ownership product and is only available on homes up to £150,000 within a 25 mile radius of Stoke on Trent and only through My Safe Home.
David Lounds, head of risk at Hanley, says it fits in with what the society wants to do in niche areas where other lenders don’t operate.
“We also see it as part of our corporate social responsibility in our local area,” he says. “We have set aside a limited tranche of funding over the next 12 months.”
Last year Ipswich Building Society launched a shared ownership mortgage for consumers with lifelong disabilities.
Saffron Housing Trust and Orwell Housing provide the property, Ipswich supplies the mortgage and Suffolk County Council identifies suitable applicants and provides an underpinning guarantee.
“We believe everybody should have the right to own their home no matter the circumstances, and this scheme is a great example of how local organisations can come together to support a vulnerable part of society,” says Paul Winter, chief executive of Ipswich.
The problems for disabled borrowers on benefits are huge but charities such as Shelter and Scope provide some basic housing advice.
Many will need more detailed financial advice and brokers should be aware that it is possible to arrange mortgages for this sector of society.
Another sector of society where people struggle to get on the housing ladder is the military where the need for advice is crucial to guide them through the numerous possibilities and problems they will face.
British military personnel are engaged all over the world from Afghanistan to Cyprus, meaning they often have no fixed address. When on duty all military personnel are assigned a British Forces Post Office number where they can receive post. As this number is not a proper address it does not appear on a credit search so all military would fail credit checks and be refused a mortgage.
Even those based in the UK move around so often that normal credit and affordability checks would reject them out of hand.
But Ministry of Defence statistics show there are 178,000 full-time British armed forces personnel, and they want to own a home too.
Nigel Garside, broker at British Forces Germany Mortgages, specialises in providing those in the armed forces with mortgages. Last year he travelled to Germany 18 times and Cyprus six times to deliver presentations to soldiers looking to buy property.
Garside says the unusual circumstances of people in the military mean they often don’t meet lenders’ standards for mortgage loans.
“The overseas posting means armed forces have a British Forces Post Office number as their address,” he says.
“It is not searchable by credit reference agencies so it is difficult to pass lenders’ checks. Lenders need to underwrite cases manually rather than automatically. The second issue is that even forces based in the UK move around a lot. One client has lived in five or six houses in the past year as he moves to different bases. It means that even with a searchable postal address he will still struggle on credit scoring.”
Garside says the main lenders willing to look at military mortgages manually are Halifax, the Royal Bank of Scotland and Santander.
Nationwide allows military personnel posted overseas on operational duties to rent out their existing property without charge or having to switch to a buy-to-let deal. The building society says employees have been given specific guidance on armed forces customers and the flexible approach needed.
Martyn Dyson, head of mortgages at Nationwide, says that at a time of active conflict overseas mortgage lenders must support the military.
“Together, we need to offer practical initiatives that help remove financial worries from these brave people and their families, particularly when they are risking their lives daily to support us and ours,” he says.
There is a series of government-backed schemes to help soldiers get on the property ladder when they return from duty. They are listed as a priority for the FirstBuy scheme, which is used regularly by armed forces borrowers.
The Long Service Advance of Pay scheme provides an interest-free loan of up to £8,500 or 183 days’ pay, whichever is lower, as a deposit on a house.
Service personnel qualify for the loan if they have four years service in the army, Royal Air Force, Royal Navy or Royal Marines.
They must either be serving with three months or more left to discharge and be medically fit, or have given notice or applied for Premature Voluntary Release.
There are exceptions – for example, if the individual has qualified for a terminal grant which is greater than the LSAP and from which the loan can be repaid and they must have drawn no terminal benefits or been warned for discharge.
The government is passing a new military covenant that proposes forcing lenders to give military personnel and veterans easier access to mortgages.
Like fighting Britain’s enemies abroad, squabbling with a partner at home can also have implications for a mortgage. Indeed, some couples stay together for their kids, some for their marriage and some, maybe, for their mortgage.
There were predictions that the financial crisis would see a fall in divorce rates as more couples simply couldn’t afford to split.
An already emotional period can be made much worse by a fight over a property. It is probably why divorces are one of the key causes of arrears and repossessions.
Predictions were confounded though as there were 119,589 new divorcees in 2010, a rise of 5% on 2009, Office for National Statistics data shows.
It is a fair bet that many shared a mortgage that needed to be split. Many more unmarried couples share a mortgage and their separations can be equally financially difficult.
Splitting a mortgage mid-term is problematic because the cost of the property has to be dumped on one partner who may not be able to afford it.
To perform a transfer of equity borrowers will need to get a valuation of the property. Lenders will then review whether the new situation fits their affordability criteria and while some lenders offer payment holidays, others don’t.
David Hollingworth, mortgage specialist at London & Country, says divorcees can approach their broker to find a mortgage solution.
“If one person is buying out their partner they are going on to a smaller income with the same level of borrowing, or sometimes more borrowing,” he says. “If there are children involved there may be some maintenance income, and lenders take different views on including this in affordability assessments.
“It can add up to it being difficult to meet lenders’ criteria. Sometimes that can lead to the sale of the marital home. Many people are reluctant to do that in the current depressed market or if they have to move their children so prefer to hang onto the property. Lenders aren’t targeting divorcees as a specifically risky area but all the criteria have tightened so it is getting tougher.”
Brokers report that criteria changes from lenders make this change of borrower a more difficult process now.
Stuart Gregory, broker at Lentune Mortgage Consultancy, says the issue is that it used to be straightforward.
“Lenders used to have the leeway,” he says. “If one borrower could prove they had been paying the mortgage for some time then it could be transferred. They are being stricter now and can’t always make the adjustment. Most lenders are applying the same criteria to a divorce scenario as they would to clients coming to them for the first time.
“I had a case recently where the only way for my client to keep paying the mortgage was to bring her new partner into the deal.”
Gregory says lenders are being ultra-careful because they fear retrospective action further down the line from regulators or government.
“Most of the time it is simply a legal exercise to recognise who owns the house but there are now issues over whether the new borrowers can pay the mortgage by themselves and whether that feeds into lenders’ criteria,” he adds. Criteria has certainly tightened and products designed for divorces have now been scrapped.
Yorkshire Building Society pulled its Fresh Start product for new divorcees last year, which had the first six months interest-free. There was a sting in the tail when the rate jumped to 7.29% for the next five years, although it was available to 95% LTV.
A spokeswoman for the Yorkshire says borrowers should contact them as soon as possible if they are divorcing.
“We will look to tailor a solution,” she says. “This could include a short-term payment holiday, a short-term switch to interest-only, a transfer of equity or help with porting the mortgage.”
The emotional strain of a divorce is bad enough but the financial pressure could be just as painful if the home must be sold in a weak market.
If the number of married couples separating is so high after the solemn reciting of vows and even having children, it is easy to see why friends are even less secure.
But that hasn’t stopped government support for friends pitching in to buy a house together over a 25-year period.
At a first-time buyer summit last July housing minister Grant Shapps urged lenders to look at so-called mates mortgages to help people onto the property ladder.
“If there are mates who are perfectly capable of paying monthly mortgage payments but are struggling to fund a deposit of their own, there should be straightforward options to unite with their friends and take the first step on to the housing ladder together,” he told lenders at the summit.
Shapps’ proposal was not new as there were lenders offering up to four applicants on a mortgage. A number of lenders have allowed four applicants for many years although it was not marketed at groups of friends.
Brittania has a Share to Buy deal that targets friends or family moving in together.
Immediately following Shapps’ call, Bath Building Society launched a specialist mates mortgage that allows up to 50% of the loan to be covered by rental income from letting a room in the property.
The balance of the loan amount must be covered by income and the rent must be no more than three times the borrower’s income.
Take an applicant earning £25,000 who wants to buy a property at £180,000 with a 20% deposit. The loan amount of £144,000 would be well outside most lenders’ standard multipliers so although the applicant has a fair deposit, they still cannot buy the property.
Steve Matthews, head of lending at Bath, says buying a home is a long-term commitment but living with a mate may not be.
“Income Plus lets an individual to borrow the amount they need while allowing them to choose a housemate rather than a long-term financial partner,” he says.
Despite the availability of some deals it seems unlikely that mates mortgages are about to become anything more than a niche area.
Abbey for Intermediaries is scaling back its offering by reducing the maximum number of applicants on broker applications from four to two, although four are allowed direct.
Hollingworth says that supporting mates mortgages is an easy line for policy makers to spin but there are some difficulties.
“Borrowers think they are going to get four times all their incomes when lenders often simply look at the incomes of the two highest paid borrowers,” he says.
“Buyers can pool the deposit which is the main benefit but they can’t always pool their incomes, even though most think they can. There are also the implications of owning a property with just mates not a partner or family and whether it is a good idea.”
The CML has raised a number of serious concerns about mates mortgages, saying that demand is limited and lenders are right to be cautious.
It asks what would happen if the relationship broke down, one was unable to pay or one wanted to sell unexpectedly.
These are all real concerns for lenders and it seems unlikely that the often transient nature of friendship is a good basis for an enormous debt paid back over 25 years.
CML statistics show that between 1983 and 2005, when it stopped collecting this data, purchases by three or more people accounted for well under 1% of all first-time buyer transactions. There were no more than a few hundred cases per year.
“There are a number of reasons why mates mortgages are not attractive, particularly in current market conditions,” the CML stated in News & Views in July 2011.
“One of the key benefits of owner-occupation is that it confers greater security and control over living arrangements than renting. But these benefits are significantly diluted if ownership is shared with a larger group of friends.”
There are options for mortgages for three or more applicants and they are worth knowing but they are a small part of the market and lenders are reluctant to dive in.
Lenders want the average person with standard life circumstances and no unusual situation – anything else starts the alarm bells ringing. But why should single people who want to buy a home with friends not be allowed to do so?
And for disabled people, those serving in the armed forces and divorcees, mortgage options can be limited under inflexible lender criteria and processes.
Yet there are lenders willing to support these people and niche options to consider, although they are rare and hard to arrange.
Such borrowers need advice to guide them through the mortgage game and with the right broker they could end up rolling a double six.
Disabled mortgage case study
Lender: Kent Reliance Building Society
James Cooper, 30, has profound and multiple learning disabilities, complex health needs and severe physical disabilities.
He lived with his parents but their house was three hours from the nearest medical centre he needed to attend for treatment. James receives 24 hour care but needs his day care services five days a week. To move closer to his care services in 2007 his mother Tina contacted her local authority, Worcestershire County Council, about James becoming the shared owner of a property.
The council put her in touch with a nearby housing association, Advance Housing, where she was introduced to My Safe Home. James cannot read or write so Tina had to become a deputy for her son by applying to a judge through the Court of Protection and the Public Guardianship Office.
Tina was able to sign for James’ mortgage, in his name, and he could part own his home. He was able to take out an interest-only mortgage for £100,000, paid for by income support, and owns 59% of the property on a shared ownership basis.
The lender was Kent Reliance Building Society and the rate was 6.08% with the fees payable met by the buyer and family.
Military mortgage case study
Staff Sergeant John and Fiona Williams
John Williams, 37, and his wife Fiona, 29, are based in northern Germany with their two children aged 11 and six.
John has served in the British army for 19 years and his family has spent the last eight years overseas, meaning they have no UK postal address history for credit-searching agencies to check.
When buying a property John applied for the Long Service Advance of Pay facility – a Ministry of Defence £8,500 interest-free loan to be used for house purchase deposit or fees. In addition the family had £9,000 of its own savings.
John and Fiona found an appropriate new-build property on the market for £154,000. It was located near their relatives and they used FirstBuy funding.
Military personnel are considered a priority when the government allocates FirstBuy money. BFG Mortgages facilitated the family’s FirstBuy application and after they received approval the broker arranged a Halifax mortgage using both LSAP and their own savings.
The resulting monthly payments on a 25-year repayment deal were no more than the current rent. When John leaves the military after 22 years his tax free gratuity will be used to repay the FirstBuy funding.
John will stay in Germany to finish his current tour while Fiona and the children move into their new home and settle the family for the first time. With three years left to serve, John, Fiona and the children have a new family home that was only made possible by using the current available schemes.
Mates mortgage case study
James, Rosie and Rhys
Lender: Brittania Building Society
James Stratford, 28, took out a mortgage with two friends – Rosie Campbell and Rhys Cockerall, both also 28.
James and Rosie work as secondary school teachers, and Rhys is a civil servant. James, Rosie and Rhys had all been renting independently since moving to London in 2004, and had reached the stage where they were keen to get on the property ladder.
James and Rhys had met at Bath University, when they were studying for their undergraduate degrees, while James met Rosie through a mutual friend. Individually they had narrowed down where they wanted to live and the type of property they’d like to purchase, but as first-time buyers, they just couldn’t afford what they wanted, due to borrowing criteria and house prices.
The three friends made the decision to pool their resources – deposits and income – and buy together. They took out a deal through Britannia Building Society called Share to Buy available up to 90% LTV.
There was no initial or overpayment fees and should they wish to move from a variable to fixed rate mortgage in the future there are no transfer fees.
Together they were able to buy a four-bedroom property in Tulse Hill, south London for £397,000.