Posts By :

Miles Bradley

Bank of England Announces End of Affordability Stress Tests.

Bank of England Announces End of Affordability Stress Tests. 1920 1080 Kind Financial

The Bank of England has recently announced they are going to scrap the affordability stress tests that were put in place following a review of the mortgage market after the 2008 credit crunch. The timing of this announcement is very strange for a number of reasons, with many feeling that while the country is in crisis over the cost of living, long-term affordability should be the current top priority.

What is the affordability stress test?

Lenders and Financial Advisors are required to demonstrate that a customer can afford the lending they are offering them, both at the current rate and on the lender’s standard variable rate (the rate it reverts to after the deal ends) plus 3%. This can often be more than double the interest rate that a customer is actually paying on the mortgage and the probability of someone being forced onto the lender’s standard variable rate is low. Both the adviser and the lender have a duty of care to inform borrowers of when their current deal ends and make sure that the customer is on the best deal that’s available to them at that time.

What impact will it have on my ability to get a mortgage?

We will not know for sure until we get more detail on how lenders are going to implement these changes, but I suspect that ending affordability stress tests will not have a huge impact.

All lenders use an affordability calculator to assess how much someone can borrow. This usually factors in the customer’s income and expenditure, but also factors in general costs of living. Many lenders use the Office of National Statistics (ONS) figures to estimate the cost of living. These figures are regularly updated and adjusted and so an affordability calculation now will take these higher costs of living into account.

The main driver of affordability however is something called the “loan to income flow limit” which is essentially a cap on how much someone can borrow against their income. Many lenders cap this at 4.5x income but some go up to 5x and higher under certain circumstances. Lenders must report how much of their lending is at these higher levels so that the Bank of England and the Financial Conduct Authority can keep track of this higher-risk lending. This is staying in place and tends to be a much bigger indicator of what lenders will lend over the affordability stress test.

In summary 

This is a bit of a chicken and egg problem. Greater affordability can push house prices up, meaning that we need to increase affordability, in turn, to make sure people can afford homes, which in turn can increase prices, and so on. This can cause spiralling house prices and potentially create a bubble at risk of bursting. These affordability restrictions were brought in because of that situation happening before Whilst the economic challenges we’re facing now are very different, we need to remember the lessons from the past.

Can I Get a Mortgage When I’m a Contractor?

Can I Get a Mortgage When I’m a Contractor? 1024 768 Kind Financial

Many contractors worry that they won’t be able to get a mortgage due to their complex income structure. Lenders do assess income for contractors slightly differently to self-employed or employed applicants, but an understanding these differences can help to get the best mortgage for you. An experienced adviser who has specific knowledge in this area will be able to guide you through your options.

 

Income and Affordability Assessments.

 

Mortgage lenders need to establish if a mortgage is affordable to you right now, and if it will continue to be affordable in the future. For an employed applicant, this is pretty straight forward because the income is the same each month. For a contractor they have to factor in the significant fluctuations that can happen over a single year as you move between different projects.

 

Most lenders that specialise in contractors and understand contractor income will use a multiple of your day rate. The actual multiple varies between lenders, but is typically between 46 and 48 weeks. For example if your day rate is £300 this would be multiplied by 5 (days a week assuming those were your contracted days) and then by 48 weeks, which would give you an income of £69,000 per year to use for your affordability assessment.

 

Some lenders treat contractors as self-employed for the purposes of the mortgage assessment, with these lenders you need tax calculations and tax year overview documents. Your adviser would look at both options and assess which is most favourable to you in terms of income and lender’s rates in order to be able to make a full recommendation.

 

Employment History & Gaps Between Contracts.

 

In order to assess how stable your income might be the lenders may ask for certain criteria to be met, such as having at least 6 months remaining on your existing contract, having a contract of 12 or more months lined up, or having previously been renewed by your current client. It’s vitally important to talk to an adviser well in advance of looking for a property because the timing of your mortgage application in relation to your contracts could have a significant impact on the number of lenders available to us.

 

The sector you work in can also have an influence on a lenders assessment. I had a case recently where the contractor had only a few months left on a project, however due to them being in a sector which has an experience and skills shortage (and after looking at the applicants experience) they decided that he would be able to get a new contract without any issues at the end of the current one.

 

Lenders may also be wary if you have lots of gaps between contracts for longer than 3 months at a time. The reason for this is that it might be a sign that you are struggling to find replacement contracts. We know however that in some cases you might deliberately plan gaps between contracts to allow for holidays, down time or childcare. If this applies to you your adviser will potentially need to exclude some lenders when looking to make a recommendation.

 

Minimum Income

 

Lenders can sometimes seem old fashioned in how they assess risk. We live in a world where contracting and flexible working is more common than ever, however lenders still consider contractors to be slightly higher risk than an employed applicant. Due to this some lenders have put in place a Minimum Income Criteria which means that in order for your income to be considered in the application you need to have a minimum income above a set threshold which is typically around £50,000 and can be as much as £75,000. Not all lenders have this in place and so please don’t be alarmed of your income in below this level, it just means that your adviser will exclude those lenders from their search when they are looking at the most competitive interest rates for you.

 

Umbrella Companies

 

If you work under an umbrella company on a PAYE basis, some lenders will ask for additional documents such as payslips and P60’s in addition to your contractor information in order to verify the umbrella company. From the payslips and P60’s they will be able to establish that tax in being paid correctly on your behalf.

 

In summary, whilst there are additional factors to take into account when it comes to assessing your income as a contractor, working with an adviser can significantly increase your chances of getting a mortgage. Most importantly working together with someone who has expertise on mortgages for contractors at an early stage in preparation for this step will give you a much greater chance of getting the best deal for your circumstances.

 

If you would like to talk to someone in more detail please contact Kind Financial Services today on 0121 796 6655 or [email protected]

 

A MORTGAGE IS A LOAN SECURED AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.

The Future of Property Looks Green

The Future of Property Looks Green 1920 1080 Kind Financial

Three letters are all over your social media feeds, your inbox and the trade publications you read right now: EPC. Energy Performance Certificates have been required for any building being sold, let or constructed since 2007, and measure how energy efficient a building is on a scale from A to G. Scoring a building takes into account a wide variety of factors including insulation, windows, and heating systems.

The increase in conversation around EPCs can be attributed to a few key factors. From 2018, landlords needed to ensure their properties were at least an E rating for new tenancies. Last year the government has announced that in 2025, that will increase to a minimum C rating for new tenancies, expanding to all tenancies in 2028. The penalty for a property not having a valid EPC will also increase substantially, from the current £5,000 to £30,000 in 2025.

That means anyone currently renting out property, or buying and building property to let, needs to start planning ahead now. There have been some gloomy reports of landlords deciding to sell off their portfolio rather than bring them up to the necessary standard, but much of the industry recognises this as an opportunity. More energy-efficient homes are cheaper to live in and run and will increase tenant satisfaction, potentially delivering better returns for longer.

The cost of upgrading houses is a serious consideration though, and one that we’re beginning to see solutions to. Several specialist lenders are now offering green Buy to let loans that factor in EPC grades – a more energy-efficient home can net the borrower a better deal. I think over the next 12 months we’ll see more and more green deals both from the High Street and alternative providers, enabling developers to create future-proof portfolios of property that are 2025 ready.

If you’re concerned about how the changing EPC rules could affect your plans, get in touch today and one of our advisors can discuss future growth plans and your current situation.

Life Insurance: Protecting Your Family

Life Insurance: Protecting Your Family 1600 900 Kind Financial

Death is a sad but unavoidable part of life, and in the insurance business, we have reason to think about it a lot more frequently than many people. Still, no matter how many of them I see, looking over reports on life insurance pay-outs is always sobering reading.

The most recent reports from Aviva showed that in 2020 the most common reason for life insurance claims for those under 30 and those aged 30 – 39 was suicide, followed by cancer as the most common cause in all other age categories. Cardiovascular problems are also very prevalent, being the second most common overall cause for a claim, followed by respiratory problems and Covid-19. Vitality’s reporting showed that while the majority of deaths for people aged over 40 were caused by cancer, for the under 40s the leading cause was “unnatural death” – a grouping which includes suicide, but also motor accidents, drownings, falls and alcohol and drug-related deaths.

I think we have a tendency in my line of work to focus on older customers and think primarily about illnesses as the causes of death, but these statistics are a vital reminder that there’s value in being insured and protected at any age.

It’s encouraging then, to see consistently high payout rates. The most recent numbers from Aviva show 99.3% of life insurance claims are being paid out, along with 87.5% of income protection claims and 92.7% of critical illness claims. With VitalityLife, 99.6% of life insurance claims are paid, along with 96.8% of income protection claims and 91.3% of serious illness cover.

At Kind Financial Services we take pride in searching for the best and most suitable products for our clients and make sure all customers have the right protection in place – whether it’s for life cover, critical illness or income protection.

These aren’t pleasant topics to consider, but I think it is important to plan ahead and make sure you’re covered just in case. The loss of a loved one is never easy, and it can be made much worse by the stresses of the financial burdens created by a family member passing.

Get in touch today to discuss your insurance needs. Maybe you’ve not thought about life cover before and are currently uninsured. Maybe you took out a policy years ago and are unsure as to what cover is and is not included. We can take a look and talk through what will happen in the event of you falling critically ill or passing away. Whatever your current situation, we can make sure the right plans are in place to ensure that your loved ones will be taken care of.

Johan Kruger

[email protected] / 07758781574.

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