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Mortgage market ‘incredibly tough’ for furlough families but underwriting is better, say brokers

  • 16/04/2021
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Mortgage market ‘incredibly tough’ for furlough families but underwriting is better, say brokers
Getting a mortgage for a borrower on furlough is “incredibly tough” as lockdown restrictions ease and businesses re-open, but underwriting has improved in the last six months say brokers.


After the re-opening of non-essential shops on Monday 12 April and as pubs and restaurants get ready for indoor socialising in May, those still on furlough with no return to work date have slim pickings when it comes to getting a mortgage.

Around ten lenders are supporting the furlough market with varying degrees of caution, and these numbers are unlikely to swell further as the country continues along its road map out of lockdown.

More than 11 million jobs have been furloughed since the start of the pandemic, according to the latest figures from the Office of National Statistics.

The Coronavirus Job Retention Scheme, the official name for furlough, offers financial support to employers of 80 per cent of their employees’ salaries capped at £2,500 a month. Employers have the option of making a voluntary top up so that workers are receiving full pay.

The furlough scheme had been due to end in April, but in another extension the chancellor announced it would continue until the end of September.

At the beginning of the pandemic, most lenders were supportive of borrowers on furlough but gradually the market has shrunk.


Shrinking market

“I doubt you will see the choice of lenders increasing any further,” says David Hollingworth, director at L&C Mortgages.

“Lender numbers have certainly reduced over the last 12 months and now in most cases you need to be demonstrating you are going back to work.

“I know it’s a generalisation, but if you have been on a prolonged period of furlough you’re likely to be in a sector that has been heavily impacted by the pandemic so lenders are wise to take a prudent approach.”

The three largest lenders offering mortgages to borrowers on furlough are Santander, Barclays and Bank of Ireland and its Post Office branded loans.

Santander will allow borrowers without a return to work date to apply but it has added a recent restriction to its criteria.

Under the bank’s policy, borrowers who have been on continuous furlough will not be accepted. If they are on furlough when they apply for a mortgage they have to have been back at work at some point since June.

Bank of Ireland will not lend without a letter from the employer stating when the borrower will restart work.

Barclays will accept 80 per cent of the furloughed borrower’s basic salary up to £30,000.


Improved processes

Matt Coulson, director of Heron Financial, says that although there are fewer lenders with furlough policies in the market now, their underwriting processes are better.

“We’re dealing with a lot of clients on furlough or flexible furlough. Lenders who have furlough income policies are delivering.

“The process is taking longer, but that is because they are busier. As long as borrowers are prepared to wait, and provide some extra paperwork then lenders are offering on these terms.

“Six months ago it was a different story. Even though more lenders were saying they were accepting furlough income, in reality they had not got to grips with how to underwrite it,” he added.

Affordability issues

Chris Sykes, associate director of Private Finance, agrees that where a lender has a policy on furlough and the borrower meets the criteria and can provide evidence, the process is straightforward.

But the restrictions on income are proving difficult to work with.

“It is incredibly tough for those still on furlough to secure a mortgage,” he said.

“Any variable element to their income such as overtime, commission or a bonus will no longer be taken into account by lenders when furlough appears on a payslip.

“And only 80 per cent of their income is generally taken into account unless they are being topped up by employers, which reduces affordability even further and so borrowers cannot get the loan they need.

“At the height of the pandemic, more lenders would accept furlough income but now, as we go through the latest phase of easing restrictions many lenders are taking the view that if someone is still on furlough their job potentially cannot be relied upon for the long term. Their employer is likely to be in financial distress.”


Who’s doing what

HSBC, NatWest, Halifax, TSB, Virgin Money, Clydesdale Bank, Yorkshire Bank, Nationwide, Yorkshire Building Society, Accord Mortgages and Leeds Building Society will not use furloughed income in their affordability assessments.

However, some other lenders in addition to Santander, Barclays and Bank of Ireland are considering furloughed borrowers.

Skipton Building Society has a 60 per cent loan to value restriction in place, and Metro Bank has a cap of 80 per cent LTV.

Aldermore Bank asks borrowers to fill out a questionnaire and complete a telephone interview about their employment situation before it will make a decision.

A host of smaller building societies such as the Darlington and Principality will accept furlough subject to restrictions.

Graham Sellar, head of business development mortgage division at Santander, said: “We’re pleased to have been able to keep supporting brokers to help their clients during what has been an uncertain period for many.

“We’ve seen no issues with servicing these applications, and as lockdown hopefully continues to ease and people on furlough return to pre-pandemic working conditions, we’ll continue to provide support where we can.”


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