As we delve deeper into the 21st century, the societal landscape continues to evolve in profound ways. One persistent issue in the UK and indeed globally, is unemployment. Whether it’s due to economic downturns, personal circumstances, or the drive to venture into entrepreneurship, unemployment presents a unique set of challenges. Among these challenges, financing a mortgage often tops the list. This article aims to shed light on various mortgage financing options available for unemployed individuals in the UK, analysing how each one works and their associated benefits.
Mortgage Financing: The Basics
Before we delve into the options available to the unemployed, it’s crucial we understand some fundamentals about mortgages. In essence, a mortgage is a loan used to buy property or land. The loan usually runs for a long period, typically up to 25 years, but the term can be shorter or longer. The loan is ‘secured’ against the value of your home until it’s paid off. If you can’t keep up with your repayments, the lender can repossess your home and sell it to recover the money.
Mortgages come with either fixed or variable interest rates. In a fixed-rate mortgage, the interest rate stays the same for a set period, typically between 2 and 5 years. Variable rates, on the other hand, move up and down in line with the Bank of England base rate.
Financing Option 1: Guarantor Mortgages
One of the financing options available to the unemployed, albeit with certain conditions, is guarantor mortgages. A guarantor mortgage is a type of mortgage where a third party, usually a family member or close friend, agrees to cover your mortgage payments if you are unable to. It’s a method that lenders use to lend to borrowers with low income or zero income.
The guarantor gives a guarantee to the lender that the mortgage repayments will be made. This guarantee can be made in several ways. The guarantor can offer their property as security, promising that if the borrower can’t repay the loan, they will sell their home to pay off the debt. Alternatively, they can guarantee the mortgage using their savings as security.
Financing Option 2: Joint Mortgages
Joint mortgages are another financing option that unemployed individuals can explore. This option allows two or more people to share the responsibility of paying off a mortgage loan. It’s particularly beneficial for unemployed individuals as the other party or parties involved in the joint mortgage provide the income necessary for approval.
The most common type of joint mortgage is a ‘joint tenants’ mortgage. Under this arrangement, each person is equally responsible for the mortgage. If one person can’t keep up repayments, the others will have to make up the shortfall. There’s also ‘tenants in common’ joint mortgages where each person owns a certain share of the property.
Financing Option 3: Government-sponsored Schemes
The UK government has several schemes aimed at helping individuals with low or no income to own homes. These include the Shared Ownership, Help to Buy, and the Right to Buy schemes.
Shared Ownership allows you to buy a share of a property (between 25% and 75%) and pay rent on the rest. The Help to Buy scheme offers interest-free loans for the first five years if you have at least a 5% deposit. The Right to Buy scheme allows council tenants to buy their council home at a discount.
Financing Option 4: Specialist Lenders and Products
For individuals unable to access the above options, there are specialist lenders who offer products targeting the unemployed. These lenders often consider other forms of income like benefits, pensions, or investments when determining eligibility. It’s important to note that these specialist products often come with higher interest rates due to the perceived risk.
One such product is the ‘self-certified’ mortgage, aimed at people who have an irregular income. These mortgages allow you to declare your income, without necessarily providing proof. However, these are less common nowadays due to stricter lending criteria.
These financing options serve as a lifeline for unemployed individuals eager to buy a home. However, it’s crucial to consider the suitability of each option carefully, taking into account your personal circumstances and financial capacity. Remember, the goal is not only to own a home but also to do so without plunging into financial distress.
Financing Option 5: Mortgage on Benefits
Another viable option for unemployed individuals in the UK is obtaining a mortgage based on benefits received. This is a solution that some lenders offer to those who are on universal credit or other government benefits. In essence, these benefits are considered income and are used to assess the individual’s ability to make mortgage repayments.
A key point to remember here is that not all types of benefits are generally accepted by mortgage lenders. For instance, short-term benefits may not be considered as they don’t provide a secure, long-term income. Hence, it’s always crucial to check with potential lenders or a mortgage advisor regarding which types of benefits they take into account.
Moreover, having a bad credit history can pose an additional challenge for unemployed individuals seeking to secure a loan. Lenders will likely scrutinise your credit score more thoroughly if you’re relying on benefits as income. However, some lenders specialise in offering mortgages to individuals with bad credit. It’s worth speaking to a mortgage advisor who can guide you to these specialist lenders.
Financing Option 6: Personal Loans
An alternative to a traditional mortgage for unemployed individuals is a personal loan. Although not typically used for purchasing property, personal loans can provide the necessary funds in certain situations. For instance, if the property cost is comparatively low or if the individual has substantial savings but lacks a steady income.
Remember, personal loans generally have higher interest rates than mortgages. Additionally, the repayment period is usually shorter, meaning the monthly repayments will be higher. However, personal loans are typically unsecured, which means your home is not at risk if you’re unable to keep up with repayments.
It is also important to note that while personal loans can be a viable option, they are not specifically designed for property purchases like mortgages. Therefore, before opting for a personal loan, it’s crucial to explore all other options and discuss your circumstances with a mortgage advisor.
In Conclusion
In conclusion, while unemployment can present a significant hurdle when seeking to finance a mortgage, it certainly doesn’t make it impossible. The UK provides a range of options for unemployed individuals, including guarantor mortgages, joint mortgages, government-sponsored schemes, mortgages based on benefits, and personal loans.
Before exploring these options, ensure you have a good understanding of your financial situation and remember to consider factors such as your credit history and the interest rates associated with different loans.
It’s also recommended to engage the services of a mortgage advisor. They can provide valuable advice tailored to your circumstances, help you navigate the complexities of mortgage applications, and potentially point you towards lenders better suited to your needs.
Remember, buying a house is a significant financial commitment. Hence, it’s important that you make informed decisions that align with your financial capacity and long-term financial health.