Tighter criteria put damper on remortgaging

Wealthy borrowers and the self-employed are finding it hard to remortgage their homes because of changes to banks and building societies’ lending criteria since their original loans were granted.

Mortgage brokers claim that clients who bought their properties before the credit crunch but who have seen their income fall are now struggling to secure new finance – with many forced to stay on their lender’s standard variable rate (SVR). This has particularly affected City workers who relied heavily on bonuses to secure their mortgages because their basic salaries were comparatively low.

While previously some lenders would take into account 100 per cent of a borrower’s bonus, many banks will now only recognise 25 or 50 per cent.

Although most bankers’ basic salaries have increased to avoid the bank bonus tax, more City workers now have larger portions of their bonus in shares rather than cash – which most high street lenders won’t take into consideration at all.

In one example, a married couple who bought a property in 2005 and have
subsequently separated have been unable to remortgage. According to Mark Harris of Savills Private Finance, the mortgage was based on the salary of the woman, who was the main earner.

However, because of a drop in her salary and because she has not received a bonus for three years, her bank will not let the couple remortgage in order to take the husband off the mortgage.

“While they didn’t use his income to start with, the bank does not want the man off the mortgage as the bank would rather have two people on the mortgage as it increases its chance of getting more money back,” says Harris.

Melanie Bien of Private Finance warned that this inability to refinance could become a growing issue when interest rates start to rise.

“While SVRs are low there has not been substantial demand from borrowers to remortgage,” she says.

Self-employed borrowers looking to refinance have also seen their lending options reduced. New lending rules proposed by the Financial Services Authority have caused
lenders to tighten their criteria.

While previously, a lender would base an application on accountants’ letters and accept current-year projections, nearly all lenders now require a minimum of two years of accounts, with some lenders insisting on three years of accounts.

Borrowers with their own limited companies are also finding it tougher to remortgage, particularly where the director does not take all the profits each year.

“With the emphasis now on affordability, most high street lenders will simply look at the money taken out of the company as salary and dividends,” says Nigel Bedford of Largemortgageloans.com.

“Often, profits are retained in the company as directors will not want to take cash out unneccessarily and pay more tax than they otherwise would.”