How does furlough affect your mortgage? From first-time buyers to remortgaging

MILLIONS of workers have seen their pay drop due to being put on furlough – but what does it mean for your mortgage?

Up to 27 per cent of the UK's workforce has been furloughed, according to the Office for National Statistics (ONS).

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This is part of the government's coronavirus jobs retention scheme to keep workers employed even if they're unable to work during the pandemic lockdown.

But if you're a homeowner – or applying to be one – where does this drop in income leave you in terms of how much you can borrow?

We've spoken to the experts to find out how being put on furlough affects your mortgage, particularly if you're a first-time buyer or a looking to remortgage.

How is my mortgage calculated?

Lenders take into account numerous different factors when working out how much you can borrow for a mortgage – only the best rates will be offered to the strongest applicants.

Usually, lenders will offer you between four and four and a half times your income.

But things like your credit score, whether you're self-employed and your outgoings will also be taken into consideration, which may lower the amount you can borrow.

Mortgage applications are very personal to you so what offers you get depends wildly on your circumstances.

Home loans for first-time buyers and those who are remortgaging are calculated in the same way.

What is furlough?

THE aim of the government’s jobs retention scheme is to save one million workers from becoming unemployed due to the lockdown.

Under the scheme, the government will pay 80 per cent – up to £2,500 a month – of wages of an employee who can’t work because of the impact of coronavirus.

Workers will be kept on the payroll rather than being laid off.

The government will pay the associated employer national insurance contributions and minimum automatic enrolment employer pension contributions on top.

The scheme has been extended to run until the end of June and can be backdated to March 1 2020.

It’s available to all employees that started a PAYE payroll scheme on or before March 1, 2020.

If you’re between jobs, have started at a new place of work or were made redundant after this date then you can ask your former employer to rehire you to be eligible for the scheme.

Employers can choose to top up furloughed workers’ salaries by the remaining 20 per cent but they don’t have to.

Firms who want to access the scheme will need to speak to their employees before putting them on furlough.

While on furlough, staff should not undertake any work for their employer during the scheme.

Does furlough affect my mortgage application?

First-time buyers who are only earning 80 per cent of their salary due to being furloughed won't be able to borrow as much as if they were earning their wages in full.

This is because your affordability will be calculated on how much you're earning at the time of your application.

And a smaller mortgage means that you may have to look at cheaper homes.

For example, if you normally earn £25,000 a year then you will be able to borrow a maximum of around £112,500.

But if you're only receiving 80 per cent of your £25,000 salary, your yearly earnings will be £20,000 meaning you can only borrow a maximum of £90,000.

First-time buyers may also find they have to save larger deposits as lenders pull 5 per cent deals.

The same applies for those who are remortgaging, although not being able to borrow as much may not make so much of a difference to existing homeowners.

This is because they should already have equity in the property so they'll likely need to borrow less than a first-time buyer.

What about if my employer tops up my wages to 100 per cent?

Some employers are topping up workers' salaries up to 100 per cent but this doesn't mean that a lender will use this figure to work out how much you can borrow.

Jake Ranson from finance brokers Freedom Finance said: "Sadly a lot of the workers that are currently on furlough leave realistically might not come back to their jobs."

But he adds that some lenders are continuing to accepted furloughed workers providing they can supply the terms of temporary pay cuts by their employer, for example, if they can confirm when the member of staff will be brought back on to full pay.

It's worth checking this out with a mortgage broker before you apply.

Does my bonus and commission still count towards how much I can borrow?

Normally, variable income such as commission, overtime and bonus payments, do count towards working out how much you can borrow to buy a home.

But unfortunately, many lenders have paused accepting this kind of income on applications due to the coronavirus cash crisis.

Once again, this could lower the amount that you are able to borrow and you may have to readjust your property budget.

Habito's Will added: "The treatment of furloughed income does differ lender to lender, so it's worth checking with the lender you're applying to."

Should I still apply for a mortgage if I've been furloughed?

Some lenders are still accepting mortgage applications from borrowers who have been furloughed.

But the amount you can borrow will be lower than if you were earning your full salary.

This could impact the price of the home that you're able to buy.

Mortgage expert Gemma Harle, from Quilter Financial Planning, says those who've been furloughed may be better off waiting "to submit a new lending application until such time as they have returned to work depending on their circumstances".

What if I already have a mortgage offer?

Lenders have already announced that they will extend mortgage offers by up to three months if a property purchase has been delayed due to the coronavirus lockdown.

But if your financial situation has changed since then, such as you've been furloughed, you should let the lender know straight away.


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"If you’re in the process of getting a mortgage, depending on where you are in the process your offer could be impacted," explained Will Rhind, mortgage expert at online broker Habito.

"Lenders can withdraw their offer if your circumstances have changed making the mortgage unaffordable, so you should speak to your broker about how being on furlough may affect you and your mortgage offer."

What if I already have a mortgage?

If you've already got a mortgage and you're not applying to remortgage or for a new deal,then being furloughed shouldn't affect you.

But if you find that you're struggling to make your mortgage payments every month due to a drop in income, you can ask your lender for a break.

Most lenders are offering three month payment holidays. You can find out what your bank or building society is doing here but bear in mind you will still be liable for these payments later down the line and interest will still build up.

Comparison site MoneySuperMarket has launched a free mortgage holiday calculator to help you work out how deferring payments will affect you.

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