Popular lender makes key change to mortgages – and you could borrow more
A MAJOR mortgage lender has increased the number of benefits it will accept as income in mortgage applications.
Virgin Money will now include 15 different types of benefits income in its mortgage affordability assessments.
The change means that more people will be able to count their benefit income as part of their affordability when applying for a mortgage, potentially allowing them to borrow more.
This is because when you apply for a mortgage, the amount a lender will loan to you is largely based on your household income.
You can typically get around four times’ your annual household income.
Getting a larger mortgage could help you to keep up with rising house prices or could mean you are able to buy a larger home.
The benefits that Virgin Money will now assess as part of a mortgage affordability assessment include:
- Adult Disability Payment
- Carer’s Allowance
- Child Benefit
- Child Disability Payment
- Child Tax Credits
- Disability Living Allowance
- Disabled Person Tax Credits
- Employment and Support Allowance
- Incapacity Benefit
- Independent Living Fund
- Personal Independence Payment
- Reduced Earnings Allowance
- Universal Credit
- War Disablement Pension
- Working & Family Tax Credit
Why are lenders making changes?
The change by Virgin Money comes as mortgage rates have been creeping up after the cost of government borrowing soared to its highest level in 27 years last week, while the Pound fell in value.
Mortgage rates have been gradually coming down over the past few years and were expected to continue falling this year amid expectations that the Bank of England will keep cutting the base rate, which lenders use to set their own rates.
But now, rising government borrowing costs may have made lenders question their decision to cut their own rates.
Governments often need more money than they can raise in tax, so they issue “bonds” which they use to borrow money – also known as “gilts”.
People invest in gilts and get paid interest in return – known as “gilt yields”.
These interest rates often go up if there are expectations that interest rates will generally go up long-term, particularly if there are concerns inflation may rise.
Investors are also concerned the UK economy will not perform well and are betting against it, which is also pushing up yields.
If gilt yields rise, it can signal to mortgage lenders that they should follow suit.
The government has also been criticised for keeping mortgages rates higher than expected by decisions made in its last Budget.
How can I cut my mortgage costs?
By Laura Purkess, consumer features editor & consumer champion
There are several ways you can reduce your mortgage costs in both the short and long term.
- Increase your mortgage term
If you’re struggling with your monthly repayments, you can ask your lender to increase your mortgage term.
The longer the mortgage term, the lower the monthly repayments, as you are repaying the loan over a longer time period.
However, bear in mind that this will cost you more long-term as you will pay more interest, so opt to swap back to a shorter term when you can afford to do so.
2. Check you’re getting a good deal
Mortgage interest rates change regularly, so check if you could switch onto a better deal when your fixed term ends.
A good mortgage broker can help you find the best deal.
3. Go interest-only for a while
You might be able to switch to an interest-only mortgage for a period if you’re struggling with your repayments.
This means you just pay the interest off and don’t pay off any actual debt.
It’s best to switch back and start paying off your actual debt as soon as you are able to, though.
4. Overpay your mortgage
This can sound counter-intuitive, but overpaying your mortgage will reduce the amount you actually pay long term.
This is because you will pay less interest as you’ve paid off a larger chunk in one go.
In most cases lenders will let you pay off up to 10% of your total mortgage in one year.
‘Painful’ mortgage warning
The Office for Budget Responsibility, which analyses the UK’s public finances, had previously forecast that mortgage rates would fall to 3.8% at the start of 2025, but it has now revised this up to 3.9%.
This is expected to add over £1,000 to a middle class family’s mortgage, according to analysis by The Telegraph.
Mortgage experts warned last week that around 700,000 households could face higher mortgage costs this year as their fixed deals end.
Nicholas Mendes, from broker firm John Charcol, said: “The coming year could be another painful one for mortgage holders, as government borrowing continues to exert significant pressure on mortgage rates through its impact on gilts.”
And Mark Harris, chief executive of mortgage broker SPF Private Clients, added: “If government borrowing stays high and swaps continue to rise, then other lenders may well follow suit and increase their mortgage rates.”