The high-earning mortgage prisoners! Over-stretched luxury homeowners face being unable to refinance as lenders restrict loans amid tax hikes
- Lenders start tightening lending criteria to take into account tax increases
- Santander says it will take into account NI and dividend income tax rate hikes
- High earning company directors could be hardest hit by lending changes
High-earning homeowners could end up being trapped and unable to move if they overstretched themselves to buy their property during the pandemic boom, experts have warned.
They may be unable to remortgage their homes as lenders consider their squeezed incomes during the cost of living crisis.
In particular, lenders are looking at high earning business owners – who may typically pay themselves in dividends – and how recent dividend tax hikes will affect their disposable income and ability to pay their mortgage.
The high earning owners of luxury properties brought during the pandemic property boom could be hit hard by changes to lenders criteria
Santander announced last week that it will take into account not just rising energy bills and household expenditure, but also the increase in National Insurance and dividend income tax rates.
Lewis Shaw, of Shaw Financial Services, explained: ‘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.’
He added: ‘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.’
Graham Cox, of the Self Employed Mortgage Hub, said: ‘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 per cent 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 Standard Variable 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.’
Santander says it will take into account NI and dividend income tax rate hikes on the mortgage applications of high earners such as company directors
Santander said it will factor in increased National Insurance, household expenditure and dividend tax rates into its affordability.
And five-year fixed, like-for-like remortgage and retained property residential stress rates are to be raised.
Graham Sellar, of Santander, said: ‘We adjust our mortgage affordability calculation on an annual basis, using updated household spending data from the ONS and taking account of other factors including the Bank of England base rate alongside national insurance/tax threshold changes.
‘We have adjusted affordability on this basis every year for the last ten years.’
It follows the Chancellor announcing a 1.25 percentage point increase to the national insurance and dividend income tax rate.
The NI increase from 12 per cent to 13.25 per cent applies from the start of the new tax year in April.
And the rates of income tax paid on dividend income, increases by 1.25 percentage points for basic, higher and additional rate taxpayers to 8.75 per cent 33.75 per cent and 39.35 per cent respectively from April 2022.
At the same time, households face increased energy costs after the energy price cap rose £693, from £1,277 to £1,971 at the beginning of this month.
Imran Hussain, of Harmony Financial Services. Said: ‘With living costs spiralling out of control and NI 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.’
Borrowers who unable to remortgage in an environment of rising rates, high inflation and stricter affordability assessments, are advised to consider a product or rate switch with their existing lender.
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