Overworked luxury homeowners risk becoming mortgage prisoners
High-income homeowners could end up trapped and unable to move if they scramble to buy their property during the pandemic boom, experts have warned.
They may be unable to remortgage their homes as lenders factor in their reduced incomes during the cost of living crisis.
In particular, lenders are looking at high-income business owners – who can typically pay themselves dividends – and how recent dividend tax hikes will affect their disposable income and ability to repay their debt. mortgage.
Owners of high-income luxury properties brought in during the pandemic property boom could be hit hard by changes to lender criteria
Santander announced last week that it will take into account not only rising energy bills and household spending, but also higher National Insurance and dividend tax rates.
Lewis Shaw of Shaw Financial Services explained: “With lenders really starting to tighten their belts, we could easily see a scenario where overleveraged borrowers with big mortgages could find it difficult to remortgage because affordability patterns lenders are adjusted to tax increases and the cost of living crisis.
He added: “Business owners who pay themselves dividends will be particularly at risk, being squeezed from all sides.”
“Not only do they have to deal with increased employer national insurance, corporate tax hikes and rising dividend tax rates, all of which affect their own disposable income, but they also have to deal with calls from staff for salary increases. It’s a brutal balancing act.
Graham Cox of the Self Employed Mortgage Hub said: ‘Many business owners have paid top dollar for large overpriced properties over the past couple of years.
“Stamp duty holidays, record low mortgage rates, housing shortages and the ‘space race’ have driven house prices to absurd heights.
“But, with an additional 1.25% on dividend tax in the 2022/23 tax year, the rise in National Insurance, the huge rise in the cost of living and the rise constant mortgage rates, lender accessibility criteria are already tightening.
“When it comes time to remortgage, overwhelmed business owners may find themselves stuck on unaffordable standard variable rates. It depends on whether their existing lender is willing to provide a new offer.
“However, if property prices reverse sharply, which is a distinct possibility, we are looking at negative equity, foreclosures and a whole world of pain.”
Santander says it will consider income tax rate hikes and dividends on mortgage applications from high earners such as business owners
Santander said it would factor in rising National Insurance, household spending and dividend tax rates into its affordability.
And fixed five-year remortgage and property retained rates need to be increased.
Graham Sellar, from Santander, said: ‘We adjust our calculation of mortgage affordability on an annual basis, using updated household spending data from the ONS and taking other factors into account. , including the Bank of England base rate as well as national insurance/taxation threshold changes.
“We’ve adjusted accessibility on this basis every year for the past ten years.”
This follows the Chancellor’s announcement of a 1.25 percentage point increase in the tax rate on national insurance income and dividends.
The increase in the NI from 12% to 13.25% applies from the start of the new tax year in April.
And the income tax rates paid on dividend income increase by 1.25 percentage points for base, higher and additional rate taxpayers to 8.75%, 33.75% and 39.35% respectively. from April 2022.
At the same time, households are facing rising energy costs after the energy price cap rose by £693 from £1,277 to £1,971 earlier this month.
Imran Hussain of Harmony Financial Services. Said: ‘With the cost of living spiraling out of control and income tax and dividend rates soaring, it should come as no surprise that lenders will have to adjust the amount they allow people to borrow .
“They have a responsibility to ensure that all borrowing is affordable. Some have already done it, while others are doing it.
Borrowers who cannot remortgage in an environment of rising rates, high inflation and tighter affordability ratings, are encouraged to consider a product or rate switch with their current lender.