High Earners at Risk of Becoming Mortgage Prisoners


Many high-earners with large mortgage obligations are finding themselves unable to refinance as lenders tighten lending criteria following the recent tax increases. Many homeowners who bought during the pandemic, when the market was booming, may find themselves trapped and unable to move if they have gone beyond their means to buy the property.

With lenders taking the recent cost of living increases into account when considering refinancing loans, the likelihood of being approved has massively decreased. Lenders are looking at high earners, especially those who are paid by dividends and are considering the increased tax on dividends when looking at affordability.

This month, Santander announced that they will be adjusting their lending criteria to include the recent energy, fuel, inflation, and tax hikes.

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, but 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 stated that the new increase in national insurance, increased household outgoings, and dividend tax will be factored into the affordability test.

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 and tax threshold changes.

‘We have adjusted affordability on this basis every year for the last ten years.’

This comes following the Chancellor of the Exchequer’s announcement of a 1.25% increase in dividend tax and national insurance contributions (from 12% to 13.25%). Tax on dividends has increased by 1.25%, so for basic, higher, and additional tax earners, it becomes 8.75%, 33.75%, and 39.35%, respectively.

Adding to the misery, energy price caps have risen from £693 to £1971 at the start of the 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.’