Wealthy borrowers are finding it increasingly difficult to obtain mortgages from high-street lenders, as banks and building societies continue to restrict their lending criteria in anticipation of new regulations.
Research this week suggested that the lending rules being proposed by the Financial Services Authority (FSA) under its mortgage market review will affect both lower and higher earners.
According to a Council of Mortgage Lenders’study, the rules – which include affordability tests and a requirement to prove all income – would have prevented half the home loans made between 2005 and 2009 ever being approved. Estimates showed that 3.8m “good” loans – on which borrowers are meeting repayments without difficulty – would not have been granted.
Mortgage brokers claim that these rules – which were published in July but are not yet finalised – are already limiting the options for wealthy borrowers.
In particular, they are having an effect on borrowers who have recently switched to self-employment or started their own limited companies. Under the new regime, they will no longer be able to get self-certification mortgages – for which no proof of income is required – because lenders will need a track record of earnings. Some are already insisting on this.
David Adams, of estate agents Chesterton Humberts, says he has seen several cases in recent weeks where would-be home buyers have been denied finance by several banks because they were self-employed. In one instance, a purchaser who wanted to borrow only £60,000 to buy a £500,000 property could not obtain a mortgage from the high street.
A second purchaser who, along with his wife, has a combined income of in excess of £400,000 a year was denied a mortgage of £300,000 at 60 per cent loan-to-value because he had not earned that amount of money for the previous three years.
Nigel Bedford, of broker Largemortgageloans.com, says the situation for self-employed borrowers will get even worse from next week when Alliance & Leicester (A&L), part of Spanish bank Santander, stops new lending.
A&L will currently accept one year of accounts from the self-employed as proof of income on a loan of less than 75 per cent loan-to-value. It is also the only lender that will consider lending up to six times joint income.
Until recently, Cheltenham & Gloucester, part of Lloyds Banking Group, would accept one year’s accounts and an accountant’s projection from applicants who had been self-employed for less than two years. “Now they will not accept a projection,” says Bedford. “Often, this helped those who made only a small profit due to set-up costs, but where year two was looking much better.”
Borrowers requiring large interest-only loans are also struggling to get funding on the high street.
In July, the FSA said it would consider tighter regulation of interest-only mortgages, amid concerns that borrowers were taking them out without a repayment mechanism.
A consultation will take place this autumn but brokers said many lenders are already refusing interest-only loans – even for wealthy borrowers.
Last week, Skipton Building Society became the latest lender to stop offering interest-only loans of more than £500,000.
Its move followed similar decisions by Lloyds Banking Group and Coventry Building Society.
Melanie Bien of Private Finance, the mortgage broker, says her firm has a client who earns £1m a year but who was not able to borrow £2.5m at 70 per cent loan-to-value on an interest-only basis. Private Finance ended up securing a deal with a private bank instead.
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