At the start of lockdown, startling research showed that lenders had limited their remortgaging options for furloughed homeowners, leaving them at risk of paying higher rates.
However, as we have adapted to life with the Coronavirus/Covid-19, it has become clear that the ability to remortgage will not necessarily be affected by furlough leave. Most mortgage lenders are accepting applications for furloughed homeowners although the affordability criteria will take into account your furlough income. For homeowners who simply want to switch deals with their current mortgage lender, the process is even easier – most mortgage lenders are happy to do this without undertaking any affordability assessment.
Why remortgage?
Most people choose to remortgage when they reach the end of their fixed rate deal with their existing lender. Rather than automatically moving to the lender’s variable rate – which is usually much more expensive and can go up and down depending on the Bank of England base rate – it is usually a better option to get a new fixed rate deal. Homeowners can either switch their deal through the same lender or move to a new lender on a new fixed rate deal.
Other reasons you might choose to remortgage include:
- You want to release some of the equity in your home, for example, to pay for home improvements
- To pay off other debts
- To switch from an interest-only mortgage to a repayment mortgage
- To get better mortgage terms, for example, if you want to overpay but your current lender will not let you
- Your home has gone up in value putting you in a better loan-to-value band and making you eligible for lower mortgage rates
Typically, the lender will undertake an affordability assessment to check whether you can afford to remortgage, just like when you originally took out your mortgage. If you fail the affordability checks, you may be unable to remortgage and could be stuck paying higher rates.
How does the Furlough Scheme work?
The Coronavirus Job Retention Scheme or Furlough Scheme was introduced in March 2020 to help businesses affected by the COVID-19 pandemic to keep on their staff. Under the first phase of the Scheme, which ran from March until the end of June, businesses could place their employees on leave and claim up to 80% of their salary from HMRC.
Since 1 July, the Scheme has become more flexible. Businesses can furlough their employees and bring them back to work as and when they are needed, however, they must also start contributing to their salaries and National Insurance and pension contributions.
The Scheme is officially going to end on 31 October 2020 forcing businesses to either bring their employees back to work (on their normal hours and salary or on a varied contract) or make them redundant.
How does the Furlough Scheme affect homeowners?
Although employers can top up their employees’ salaries to the full amount rather than leaving it at 80%, they do not have to. This means that millions of employees are currently receiving a reduced income
The initial worry for homeowners is likely to be keeping up with mortgage payments. However, most mortgage lenders are allowing payment holidays for homeowners who are financially struggling due to Covid-19. Many homeowners have also been forced to put moving plans on hold due to financial uncertainty, although for those who do feel able to take the plunge, the Government has introduced a generous Stamp Duty holiday.
The biggest concern for furloughed homeowners coming to the end of their fixed rate mortgage deal is likely to be their ability to remortgage. How do mortgage lenders assess your ability to repay when you are on a reduced salary?
How is furlough income assessed by mortgage lenders?
If you are simply switching your deal with your current lender because your fixed rate has ended (a ‘product transfer’), being furloughed is unlikely to affect you. Most lenders will not do an affordability assessment and all you need to do is call up and ask to arrange a remortgage.
However, if you need to extend your mortgage or you want to remortgage with a different lender, you will need to undergo an affordability assessment. The lender will typically assess affordability according to 80% of your normal salary as this is what you are entitled to receive under the Furlough Scheme. Some lenders will also take it into account if your employer tops up your salary to 100% so it is worth checking whether your desired lender does this.
Beyond income
It has been reported that mortgage lenders are relying more on humans to assess the impact of Covid-19 on homeowners’ employment and finances (before Covid-19, affordability assessments were primarily an automated process based mainly on income).
The lender may even contact your employer to check whether it is likely you will be brought back from furlough or whether there is a risk you will be made redundant.
Remortgaging after returning from furlough
From the moment you go back to work or receive a date when you will go back to work, mortgage lenders should be able to use your normal salary to run their affordability checks. However, it is not clear yet whether this will become the standard position across lenders, so it is worth contacting a mortgage advisor for advice before making an application.
When should you remortgage?
Typically, it is recommended that you start your remortgage about four months before the end of your fixed rate. However, as Covid-19 has increased the workload for many mortgage lenders, it may be worth starting the process sooner – around six months before your existing rate comes to an end.
Get expert advice about remortgaging
At Bird & Co, our Conveyancing Quality Scheme accredited specialists can help with all legal aspects of remortgaging your home.
As part of our all-inclusive service, we will liaise with your lender on your behalf, review and advise upon mortgage documentation and complete all relevant legal documents to the highest degree of accuracy.
Give us a call to speak to one of our remortgage solicitors or fill in our online enquiry form and a member of our team will be in touch shortly.