Violet*, an advertising manager from Oxfordshire in her mid-40s, had confidently enquired about mortgage options to buy a new property last August.
“We had found a property we liked and had a meeting with Barclays, who our current mortgage is with. After discussing options to port our mortgage [keeping an existing mortgage deal but buying a new property], and additional borrowing to buy the new house, the bank basically tick-boxed it all and even would have lent us considerably more than we needed,” she said.
But the following week, Kwasi Kwarteng’s mini-budget came, triggering a domestic financial crisis and higher mortgage costs for millions.
“Our chain collapsed because of it, we lost the property we wanted to buy. We found a new house in the new year, for a whole £100,000 less than the one we wanted previously. Hurrah, we thought!,” Violet said.
Despite the much lower mortgage request for the cheaper property, and although all the family’s other incomings and outgoings remained the same, their bank reduced the amount they were prepared to lend by £250,000.
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When pressed, Barclays explained that the bank’s affordability algorithm had changed. “They said basically, ‘Because of everything that’s gone on in the economy, we’ve pretty much doubled the amount needed for the average cost of living per person’.
“The moment we confirmed our number of dependents – only two, we’re not the Baldwins! – a huge chunk of our monthly income was ringfenced to cover the cost of living: food, utilities, petrol.”
The couple are now hoping to secure a mortgage with a loan-to-value of 78% with a different provider. “But with the interest rates and affordability calculations changing constantly, the stress continues. It’s all become a bit of a nightmare.”
Violet is one of a number of prospective homebuyers who shared their unexpected struggles getting approved for residential mortgages.
Last August, the Bank of England abolished a key mortgage affordability test that forced borrowers to be able to afford a three-percentage-point rise in interest rates, raising hopes that thousands of potential homebuyers would find it easier to get on the property ladder.
But in the nine months since, growing numbers of people have had difficulties obtaining the mortgages they need: in January, UK mortgage approvals were the lowest since January 2009, excluding the period when the housing market ground to a halt during the pandemic.
Despite some stabilisation of the market since the disastrous Liz Truss-Kwarteng mini-budget and approvals having risen for the first time in six months in February, mortgage lenders are expected to reduce the supply of home loans in the second quarter of 2023, the Bank of England’s recent latest credit conditions survey showed.
Experts predict that even well-earning, middle-class homebuyers could have a hard time getting a mortgage in coming months, as UK lenders continue to tighten their lending criteria amid stubbornly high inflation levels, high interest rates and economic uncertainty.
“It is true that lenders are tightening their credit criteria, which will make it harder to secure a mortgage,” UK housing market analyst Anthony Codling said.
“With demand outstripping supply, lenders will be able to ‘cherrypick’ those they believe to be the best applicants.”
Although many of those who came forward to share their experiences were in high-earning professional jobs, had excellent credit histories and did not seek to stretch themselves financially, their mortgage applications were rejected because of tougher affordability checks they did not manage to pass.
Lenders, they said, had downgraded their affordability dramatically because of high costs they associated with having children, refused to count income that might not be guaranteed in future, such as from contracted or flexible work, and had no confidence in their ability to repay short-term loans, even for relatively modest sums.
As a result, they reported, banks and building societies offered vastly reduced lending amounts – if anything at all – forcing applicants to come up with tens of thousands of pounds at short notice to make up the shortfall, or to abandon their mortgage plans altogether.
‘If they aren’t lending to me, who are they lending to?’
Among them is Alison, a single mother-of-one and a partner in an architecture firm earning £220,000 annually, who tried to port a mortgage to a new property at the end of last year, but was unable to get approved for a £254,000 loan.
When she complained, she was told she had failed the bank’s affordability test because she was now a mother with childcare costs, despite her income having doubled since she took out her previous mortgage in 2021, and that the bank could only consider guaranteed income.
Eventually, she was approved for a £207,000 mortgage, about 60% of the value of her new property.
“I had to come up with shy of £50,000 extra. If they aren’t lending to me, with my significant income, no credit card debt, and cash savings of £72,000 when I applied, I don’t know who they are lending to.”
‘They would not count any of my earnings’
Sandra, 62, and her husband, from Doncaster, could not get past their high street lender’s opaque affordability checks for a loan to fund home improvements – despite a joint household income of more than £100,000.
“We wanted a small mortgage over £40,000 to build an extension. Our home is mortgage free, we never missed a payment for 30 years. We’re both still working, but because I’m self-employed and in receipt of two small private pensions they would not count any of my earnings.”
View image in fullscreenDoncaster city centre, where a couple earning £100,000 could not get a £40,000 mortgage for home improvements. Photograph: eye35.pix/Alamy
At the time of application, Sandra had been a contractor for the Ministry of Justice’s tribunal service for five years, working three days a week on average with a day rate of £310-£410. “They treated that as if it was a zero hours job.”
When the couple was turned down, it took a formal complaint before they found out the rationale, Sandra said. “I then made a complaint to the financial ombudsman, but they found nothing wrong, and said it was a ‘business decision’ to not count my self-employed income of almost £40,000.”
They decided to not bother reapplying. “We were able to save almost £30,000 in 10 months without trouble, which clearly shows we could have easily afforded the mortgage. If we can be turned down like this, what chance does anyone have? It’s crazy.”
‘My credit rating was excellent’
An attempt to remortgage by Nicola, a self-employed international development consultant from Brighton who has owned property for 20 years and has an adult daughter living at home, similarly resulted in rejection on affordability grounds, shortly after the mini-budget.
“I provided three years of tax returns, the mortgage was twice my annual income of around £120,000, my loan-to-value was 39%, my credit rating was excellent,” the 54-year-old said.
“I formally complained. They just said it was ‘the computer’, an algorithm. I was really shocked.”
Codling said: “Lenders are cautious about the economic outlook. Inflation has yet to be tamed and therefore the costs of living are still rising, and with employment levels so high, one might argue that their next move may be down. Lenders are therefore trying to manage the risks that they perceive are ahead of them.”
* Name has been changed
