If you rely solely on benefits for your income, it will be difficult getting a mortgage, warns Scope, the charity that promotes equality for disabled people.
It is not your disability – or even the fact you are in receipt of benefits – that disqualifies you from eligibility for a mortgage. Indeed, the Equality Act 2010 makes it unlawful to discriminate against someone on the grounds of their disability – so, any mortgage lender who did so would be breaking the law.
If you are on any kind of welfare benefit, your difficulties boil down to the affordability test that any lender is obliged to conduct before granting you a mortgage. Since your income from benefits alone is likely to be quite severely limited, you may not pass that affordability test. And if you cannot pass the test, the lender is obliged by the industry regulator, the Financial Conduct Authority (FCA), to decline your application for a mortgage.
If your regular and sustainable income from benefits is sufficient to support a mortgage – in other words, your benefits both now and into the many future years of a mortgage are enough to make the monthly repayments – there are mortgage lenders prepared to advance the necessary advance to buy your own home.
The quest is likely to be more difficult and your choice of potential lenders may be limited, so you might benefit from the help and guidance of a mortgage broker who specialises in this area of work.
What benefits can I use to get a mortgage?
The Chartered Accountants Benevolent Association (CABA) lists the principal welfare benefits currently in issue. Many of these benefits have been rolled up into a single payment in support of those on low incomes – so that the new means-tested Universal Credit now takes the place of:
- Housing Benefit;
- Income-based Jobseeker’s Allowance;
- Income-related Employment and Support Allowance
- Income Support;
- Working Tax Credit; and
- Child Tax Credit.
Universal Credit is means-tested, including the amount of capital you own. The amount of Universal Credit you receive is reduced if you own between £6,000 and £16,000 of capital and you will receive none at all if you have capital valued at more than £16,000.
Nevertheless, if you own the home you live in, you can still receive Universal Credit if you qualify for the benefit. It can be used to help pay your mortgage – including any mortgage under a shared ownership scheme, together with insurance for your home and its repairs and maintenance.
Other benefits which might help to supplement the income on which any mortgage application is based include Personal Independence Payments (PIPs) – if you have an illness or disability that requires additional care – or the Care Allowance that is paid to individuals caring for someone who is ill or disabled.
When taking any of these benefits into account, any lender will be looking to the regularity with which you receive them and whether you are likely to continue to be eligible for them in the future. The lender will apply various stress tests to assess whether mortgage repayments will continue to be affordable if your circumstances change or if interest rates increase.
Unfortunately, any lender is likely to consider an individual on benefits a greater than normal mortgage risk – and those at greater risk are offered loans at generally higher rates of interest. You may only be offered a loan to value (LTV) ratio of 75%, warns Scope – which means you need to find at least 25% of the purchase price as a deposit.
If you are working while also in receipt of benefits, and your spouse or partner is also working, all your sources of income may be taken into account by a mortgage lender.
Support for Mortgage Interest (SMI)
A further benefit available from the Department for Work and Pensions (DWP) comes by way of a loan through the Support for Mortgage Interest (SMI) scheme, as described by Citizens Advice.
SMI can be used for several housing-related issues, such as help in paying the mortgage on the home you live in (including a shared ownership home), loans to help you buy further shares in your home, the legal fees, stamp duty and other costs likely to be involved in buying your home, or loans to help pay off your mortgage.
It is important to remember, however, that SMI is a loan – you need to repay what you borrow and repay the loan with interest. The interest charged by the DWP, however, is considerably less than you would pay to commercial lenders. Furthermore, you will typically only need to repay the SMI loan when your home is sold.