Are company directors at risk of becoming mortgage prisoners?

ended 03. April 2022

On Friday, Santander announced that it is making changes to its affordability calculations on 6 April, taking into account not just rising energy bills and household expenditure as per the revised ONS data, but also the increase in National Insurance and dividend income tax rates.

Newspage asked brokers whether tighter affordability related to dividend income tax rates could see a lot of people who have bought big properties on exceptionally low rates end up struggling to remortgage, all the more so if their property's value has gone down? Could this result in a new demographic of highly leveraged higher net worth mortgage prisoners?

7 responses from the Newspage community

Star Quote
"With lenders now really starting to tighten their belts, we could easily see a scenario where over-leveraged borrowers with big mortgages may struggle to remortgage as lenders' affordability models are adjusted in line with tax rises and the cost of living crisis. Business owners who pay themselves in dividends will be at particular risk, being squeezed from every direction. Not only do they have to cope with the employer's National Insurance increase, corporation tax hikes, and higher dividend tax rates, hitting their own disposable income, they also have to face down calls from staff for wage increases. It's a brutal balancing act. Most borrowers will hopefully not find themselves as mortgage prisoners, but if people are in a position where they can't remortgage in an environment of rising rates, high inflation and stricter affordability assessments, then it's probably wise to consider a product or rate switch with their existing lender."
Star Quote
"Many company directors have paid top dollar for large, overpriced properties during the past two years. The Stamp Duty holiday, exceptionally low mortgage rates, housing stock shortages and the 'race for space' have driven up house prices to absurd heights. But, with an additional 1.25% on dividend tax in the 2022/23 tax year, the National Insurance hike, huge cost of living increases, and steadily increasing mortgage rates, lenders' affordability criteria are already tightening. When the time comes to remortgage, it's possible overstretched business owners could be left stranded on unaffordable SVR rates. It depends on whether their existing lender is willing to provide a new deal. Nonetheless, if house prices go into sharp reverse, which is a distinct possibility, we're looking at negative equity, repossessions, and a whole world of pain."
Star Quote
"There is a risk that borrowers who have large mortgages at higher loan-to-values could struggle to remortgage when their initial rate expires due to tighter affordability assessments. There is also a risk that those who have borrowed to their maximum capacity, on the lowest interest rates in history, could face a worrying increase in their monthly payments when their current rate expires. It is unlikely, however, that there will be a risk of borrowers falling on to the standard variable rate as usually there will be an option to switch to a new rate with your existing lender when the current rate expires, even if you are unable to remortgage elsewhere."
"Ever more stringent affordability calculations could be another nail in the coffin for Sole Director Contractors who have also been under pressure from IR35. Affordability calculators are a useful tool for lenders to maintain competitive product pricing and control volumes at the same time. Of course, they will argue they are being responsible and reacting to increasing household costs."
"With living costs spiralling out of control and National Insurance and dividend income tax rates rising, it should not come as a surprise that lenders will have to adjust how much they will allow people to borrow. They have a responsibility to ensure all borrowing is affordable. Some have done so already, while others are doing so. If anyone is in a position that they are unable to borrow when they come to remortgage, depending on the lender there may be options to switch products. However, the value of advice at this point will be more important than ever before."
"The affordability noose is being tightened, the big question is who will hang first? After a period of super-low interest rates where some borrowers have leveraged debt up to their eyeballs, there are almost certainly going to be some casualties in the coming years as current fixed rates end and borrowers feel the string of increased mortgage costs. Whilst it's unlikely that in isolation the increases in dividend tax or National Insurance are going to create high net worth mortgage prisoners, there are certainly a number of moving factors currently at play in the economy, which make it hard to clearly predict who is most at risk."
"While it is widely accepted that the updated ONS data feeding into lenders' affordability models should see the amount they offer to lend fall, there is a potential knight in shining armour coming to the rescue, in the form of the regulator. One of the controls the regulator placed on lenders following the Global Financial Crisis and Credit Crunch was enforcing the rate at which these affordability models were stress testing applicants on shorter term deals; typically at around 5.5%-6.99% (the lender's standard variable rate, or the deal's follow-on rate +3%), but there is talk of this enforced rate being removed. Lenders will still be expected to lend responsibly, but this does give them a little more flexibility. Flexibility that some of them may use to help mitigate the impact of rising costs on their affordability calculators."