Property News

Non-mainstream mortgages: the whats and the whys

Getting a mortgage is relatively simple. Once you have the deposit, the bank statements, and know your credit file is in good shape, it's just a case of calling your local bank or perhaps a mortgage broker..right?

While the above may be true for some people, it's pretty much a given that applying for a mortgage is more complex than was once the case. And this isn't only due to rising sold property prices leading to ballooning affordability issues, although this is certainly part of it. Many of the extra hoops that mortgage applicants must jump through nowadays relate specifically to the ongoing ramifications of the 2008 financial crisis.

More than anything, lending institutions want as much certainty as possible that a borrower won't default on their loan. Inevitably, this has made banks and building societies far more cautious about who they'll lend to and on what terms. As well as increasing the deposits demanded of almost everyone, it's made approval significantly harder for some applicants. We take a look at who is affected, at some of the problems they may face, and at a generic selection of non-mainstream mortgage products that may help.

Mortgages for the self-employed

The requirement to prove consistent income is a stumbling block for many self-employed people, especially those who haven't been working for themselves for long. Step one is ideally to wait until you have at least two or three years of self-employment under your belt before contemplating applying for a mortgage. However, if you were in full-time employment prior to becoming self-employed and have the financial records to prove it, this may be acceptable to many lenders. Step two is to get all the financial information - bank statements, dividend payments, invoices, receipts, even future orders and upcoming contracts - together. Step three is probably to approach a specialist broker with a good track record of matching self-employed people with appropriate mortgages.

Sometimes, the appropriate mortgage will be a mainstream product, especially for people with a long history of self-employment and a correspondingly robust income record. However, sometimes, the right mortgage will be a specialist mortgage designed for self-employed people. Not all providers offer these, and those that do won't necessarily advertise them widely. Hence, a broker is almost certainly your best avenue. CMME is a specialist in mortgages for the self employed and provides an affordability calculator which you can access here: https://www.cmmemortgages.com/self-employed-mortgage-calculator/.

Mortgages for people with poor credit ratings

It's not impossible to get a mortgage with a poor credit rating, but it's definitely harder. You'll almost inevitably face higher interest rates and demands for a larger than average deposit. Although an independent broker may be able to help you find a mortgage, it's sensible to give serious consideration to whether you can improve your credit rating - and then apply for a mortgage.

It can be off-putting to see sold property prices moving - seemingly - ever further out of your reach as you wait. However, ultimately, you may save more money and avoid unnecessary financial stresses by delaying your mortgage application until your finances and credit record are in better shape. Obviously, this suggestion is harder to follow if you're approaching the end of a fixed term mortgage and are keen to find a new product elsewhere. In this case, an independent broker is a must.

Mortgages for homes of non-standard construction

Properties made from non-standard materials or constructed in non-standard ways are often harder to mortgage. Whether they're timber-framed, concrete, thatched or whatever, a lender may view them dubiously, seeing not their obvious charms but, instead, the increased cost of maintaining them and, perhaps too, an increased risk of fire. As a result, you can expect to pay more in terms both of interest and, usually, also the size of the deposit for a mortgage on such a property. This makes having squeaky-clean, strong finances even more important than ever. It also makes it essential to really scour the mortgage market to ensure you don't miss out on a good product. Once again, a good broker who knows the nuances of the market is the best plan.

Mortgages for listed properties

Even if a property isn't non-standard construction, mortgage providers treat listed properties in a similar way. Their reasons are much the same as their concerns about non-standard homes: cost of maintenance and repairs (and the potential for financial strain on the buyer), possible increased fire risk and, also, potential difficulties in selling the property in due course.

Self-build mortgages

A self-build mortgage is a loan taken out to fund a property you're building yourself. If your application is successful, you'll receive the funds in separate tranches rather than as a lump sum. This is intended to spread the lender's risk and make sure the money is spent on what it's intended for. The final sum is usually paid on completion of the build.

Self-build mortgages can be a good option for first-time buyers, provided they have the stomach for the self-build process.

If you're considering a self-build mortgage, you have two types to bear in mind. An arrears mortgage, which is best suited to those with significant cash reserves, pays out as each stage of the build is completed. Meanwhile, an advance mortgage is paid at the beginning of each stage.

Islamic mortgages

Although not specifically aimed at people with affordability issues, problems proving their income, or those looking to buy unusual properties, Islamic mortgages are - at least in the UK - a non-mainstream product that may nonetheless be the only option for some applicants.

Designed for those Muslims for whom paying interest is religiously proscribed, an Islamic mortgage is a neat way of buying a property when you can't afford to purchase it outright. What it isn't, however, is a way of buying that property more cheaply than it could be obtained with the help of an interest-bearing mortgage. That's because instead of charging interest on the sum borrowed along with a capital repayment, most Islamic mortgage lenders charge borrowers rent and a separate payment that's usually known as an acquisition payment.

As the mortgagee's share in the property increases, thanks to their acquisition payments, so their rental payments go down. Ultimately, the structure of the mortgage is not dissimilar to a mainstream interest-charging mortgage. Just as a borrower repaying an interest-bearing mortgage cannot choose not to repay the interest, someone with an Islamic mortgage cannot choose not to pay the rental portion.

If you're interested in an Islamic, or Sharia-compliant, mortgage, you will need to contact a specialist lender or broker for advice specific to your situation.

OneDome makes introductions to CMME, a whole of market mortgage broker and part of the same group of companies. CMME is authorised and regulated by the Financial Conduct Authority. Should you require assistance or additional information, please visit https://www.onedome.com/mortgages/mortgages-explained/.

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