Remortgage on Tax Credits

Can You Remortgage If You Receive Tax Credits?

Yes, you can remortgage if you receive tax credits. Many lenders across the UK mortgage market will accept working tax credits and child tax credits as part of your income when assessing affordability. However, the way lenders treat this income varies considerably, so choosing the right provider is important.

Some lenders will accept 100% of your tax credit income alongside your other earnings, while others may only consider a portion of it or disregard it entirely. The key is to find a lender whose criteria align with your financial circumstances.

It is worth noting that tax credits are gradually being replaced by Universal Credit as part of the government's welfare reform programme. If you are still receiving legacy tax credits, most lenders will continue to accept them. However, you should be aware that a future migration to Universal Credit could affect how lenders assess your income at a later remortgage.

Lenders will typically want to see evidence that your tax credit award is ongoing and will continue for a reasonable period into the future. They may also want confirmation of the amount you receive and whether it is likely to change based on your circumstances.

Your overall financial profile remains important. Lenders will consider your total income from all sources, your credit history, your existing debts and commitments, and the amount of equity you hold in your property. Tax credits form just one part of a broader affordability assessment.

How Lenders Assess Tax Credit Income

Understanding how lenders assess tax credit income is essential for knowing how much you can borrow and which deals you might qualify for. The approach varies between providers, so getting specialist advice can help you find the most favourable assessment.

Working tax credits are generally well accepted by lenders because they are linked to employment. Most lenders view them as a stable, government-backed income supplement that enhances your overall earnings. Some lenders will use 100% of the award amount in their affordability calculations, while others may apply a haircut of 10% to 25% to account for potential changes.

Child tax credits are also widely accepted, though some lenders may treat them differently from working tax credits. A key consideration is the age of your children, as child tax credits stop when a child reaches 16, or 20 if they remain in approved education or training. Lenders may only count child tax credits if they will continue for a specified period, often at least five years.

When calculating your borrowing capacity, lenders typically apply their standard income multiple of between 4 and 4.5 times your total assessed income. If tax credits are included at full value, this can meaningfully increase the amount you are able to borrow.

Some lenders may also distinguish between the guaranteed element of tax credits and any variable or discretionary components. The guaranteed elements are more likely to be accepted in full, while variable amounts may be treated with greater caution.

It is important to provide your most recent tax credit award notice, known as a TC602A, as this document confirms your annual entitlement and is the primary evidence lenders will use to verify your tax credit income.

Documentation Required for a Tax Credits Remortgage

Having the right documentation ready before you apply can streamline the process and demonstrate to lenders that your tax credit income is stable and verifiable. Thorough preparation is particularly important when benefit income forms a significant part of your overall earnings.

You will typically need to provide the following:

• TC602A award notice - This is the annual tax credit award letter from HMRC confirming the amount you receive and the period it covers
• Bank statements - Three to six months of statements showing tax credit payments being received regularly into your account
• Proof of other income - Payslips, accounts or other evidence of any employment or self-employment income you receive alongside tax credits
• Proof of identity and address - Passport or driving licence plus recent utility bills or council tax statements
• Current mortgage statement - Showing the outstanding balance, interest rate and any early repayment charges on your existing mortgage
• Property details - Evidence of your property value, such as a recent estate agent valuation or comparable sales data

If you also receive other benefits such as child benefit, disability benefits or housing support, providing evidence of these can further strengthen your application as some lenders will consider multiple benefit income streams.

Keep copies of all your HMRC correspondence and ensure that your tax credit award has not been subject to any recent overpayment recovery, as this can reduce the net amount lenders are willing to accept. If you have had an overpayment in the past, be prepared to explain the circumstances and confirm that it has been resolved.

Organising your documents into a clear file before you approach a broker or lender shows professionalism and can speed up the underwriting process considerably.

Challenges When Remortgaging on Tax Credits

While remortgaging on tax credits is possible, there are some challenges you should be aware of so you can prepare accordingly and avoid common pitfalls.

Income variability. Tax credit awards can change from year to year depending on your income, household composition and government policy. Lenders may be cautious about relying on income that could fluctuate or reduce. Demonstrating a consistent award over several years can help address this concern.

Migration to Universal Credit. The ongoing transition from legacy tax credits to Universal Credit creates uncertainty for some lenders. If you are moved to Universal Credit during the term of your mortgage, your benefit income may be assessed differently at your next remortgage. Some lenders factor this transition risk into their assessment.

Tax credit overpayments. If HMRC determines that you have been overpaid tax credits, they will recover the excess from future payments. This effectively reduces your net income from tax credits and can affect your borrowing capacity. Lenders may ask whether you have any outstanding overpayments.

Limited lender choice. Not all lenders accept tax credit income, and those that do may have specific conditions or restrictions. This can limit the range of products available to you, potentially meaning fewer competitive rates to choose from. A specialist broker can help you identify the widest possible selection.

Combined affordability. If tax credits form a large proportion of your total income, some lenders may view this as a higher risk. Having additional employment or self-employment income alongside your tax credits will generally make your application stronger.

Despite these challenges, many borrowers who receive tax credits successfully remortgage every year. The key is working with an adviser who understands how different lenders treat this type of income and can match your circumstances to the most suitable products available.

Tax Credits Versus Universal Credit for Remortgage Purposes

As the government continues to migrate claimants from legacy tax credits to Universal Credit, it is important to understand how this change may affect your remortgage prospects. The two systems are treated differently by many lenders, and the transition can have practical implications for your application.

Legacy tax credits, administered by HMRC, have been part of the benefits system for many years and are well understood by most lenders. The TC602A award notice provides a clear, annualised figure that lenders can use straightforwardly in their income calculations.

Universal Credit, administered by the Department for Work and Pensions, consolidates several benefits into a single monthly payment. While an increasing number of lenders now accept Universal Credit, the monthly payment can vary based on earnings and other factors, which some lenders find harder to assess consistently.

If you are currently on legacy tax credits, you do not need to move to Universal Credit until HMRC contacts you to begin the managed migration process. When you are migrated, you may receive transitional protection to ensure you are not worse off initially, though this protection can reduce over time if your circumstances change.

For remortgage purposes, the most important thing is to ensure that whichever benefit you receive is clearly documented and that you can demonstrate a stable, ongoing entitlement. Whether you are on tax credits or Universal Credit, a specialist broker will know which lenders offer the best terms for your specific situation.

If you are planning to remortgage in the near future and expect to be migrated to Universal Credit soon, it may be worth considering your timing carefully. Applying while you are still on tax credits may give you access to a wider range of lenders, depending on current market conditions.

Tips for Getting the Best Remortgage Deal on Tax Credits

Securing a competitive remortgage deal when you receive tax credits requires careful preparation and the right approach. The following tips can help you maximise your chances of approval and access the best possible rates.

Use a specialist broker. A mortgage broker who is experienced with benefit-based income applications will know exactly which lenders accept tax credits and how each one calculates affordability. This targeted approach saves time and avoids unnecessary rejected applications that could harm your credit score.

Maximise your equity. The more equity you have in your property, the better the interest rates available to you. If possible, aim for a loan-to-value ratio of 75% or lower to access the most competitive deals in the market.

Maintain a clean credit record. Check your credit file with all three main credit reference agencies well before you apply. Ensure there are no errors, pay down any outstanding credit card balances and avoid making new credit applications in the months leading up to your remortgage.

Demonstrate income stability. If you can show that your tax credit award has been consistent or increasing over the last two or three years, this will reassure lenders about the reliability of this income source. Keep copies of all your annual award notices.

Consider your timing. If your tax credit award is due to be reviewed or renewed, it may be worth waiting until the new award is confirmed before applying. Lenders prefer to work with confirmed, current figures rather than estimates.

Reduce your outgoings. Lenders assess affordability based on your income minus your committed expenditure. Paying off personal loans, credit cards or other debts before applying can improve your affordability ratio and increase the amount you can borrow.

Remember that every lender regulated by the Financial Conduct Authority (FCA) must carry out a thorough affordability assessment. Presenting a well-organised application with clear evidence of stable income gives you the best possible chance of a positive outcome.