Are Mortgage Lenders easing their criteria towards Contractors?
Since the dawn of the credit crunch, few have suffered as much under tighter lending rules as the contractor community.
The outlook for these borrowers has changed considerably but now that Loan-To-Values (LTVs) are starting to edge up and lenders are beginning to relax other criteria, isn’t it about time that they gave contractor and freelancers an easier ride? Many mortgage brokers like Freelancer Financials believe so.
Job reductions and salary freezes have pressed more ‘permies’ to branch out on their own as freelancers and contractors.
The chancellor George Osborne came out with a solid vote of confidence for small business owners and wants to encourage them to drive the economy forward.
During the budget In March he proclaimed: “This is a Budget for those who aspire to own their own home; who aspire to get their first job; or start their own business…It is a Budget for our Aspiration Nation.”
Yet in spite of the rhetoric, owning a home is often a challenge for contractors working through their own Limited Company.
If going contracting means you are locked out of the property market for years to come, this could discourage highly skilled professionals from going self employed. Most brokers argue that lenders could do more to help business owners and freelancers without having to take on undue risk.
A small number of mortgage specialists have worked hard over the years to develop strong relationships with lenders in relation to simplifying the mortgage process and what qualifies as relevant earnings for lending purposes for contractors. The key here is to ensure that the application is properly serviced and falls in front of the right decision makers rather than using staff in branch networks.
Self-Cert Mortgages consigned to the scrap heap
Self Certification mortgages, as they were better known, were consigned to the scrap heap back in October 2008. Since then, all the major Self Cert mortgage lenders have pulled their products off the market. Making these products extinct, caput, gone!
Since the credit crunch, the number of self-employed people has increased by 10 per cent. Contractors now make up 14 per cent of the UK’s workforce. Lenders cannot ignore this fact.
The Financial Conduct Authority is leaning on lenders to take a more flexible approach to avoid exclusion. Even though lenders need to do more for those with a less conventional employment status, the options for contractors are already better than some contractors imagine.
The general perception that contractors are excluded from the market is largely due to branch-based advisers who are unable to grasp a contractor’s true earnings potential. Any contractor who has applied directly to a bank or building society will have experienced this.
Bank branch staffs have a tendency to lump freelancers, business owners, contractors and sole traders into the same boat even though their risk profile may be very different. In the eyes of the branch advisers they are all placed in a box which says ‘self-employed’, without taking anything else into account.
The standard practice for most lenders is to demand two or three years’ accounts or SA302’s. But, mortgage brokers with more specialist knowledge know which lenders are the most appropriate depending on what category of non- Pay-As-You-Earn borrower they are dealing with.
What does a typical freelancer look like? What are their options?
A typical freelancer can work with multiple clients at any time and most of the projects they work on are short-term or on-call basis. Some work on site but often they will work from their own location and only visit the client’s office as needed.
Where there is no contract at all, freelancers, regardless of their trading structure, can only be assessed on a self-employed basis, similar to that of small business owners.
What does a typical Contractor look like? What are their options?
Those who are paid by the day or by the job assignment, can often earn more than their full-time, employed counterparts, yet lenders must balance this against the uncertainty over their future income stream.
The good news is that contractors generally have more options than freelancers and self-employed business owners.
They have far more options and flexibility as long as they go to a specialist mortgage broker, whose advisers know what they are doing.
Typically a contractor will work for one client at a time through a recruiting agency. They will usually be expected to keep certain office hours and projects may be six to 12 months, but paid on an hourly or daily basis. Such clients can choose to be assessed on a self-employed basis or apply for a contractor mortgage. Contact QAccounting directly, who can help with this topic.
The main benefit of the latter is that certain banks will annualise the day rate to determine income.
As a rule of thumb, you can compute the typical borrowing potential as follows: contract day rate x five x 48 weeks per year x 4.5. Thus, at £500 per day for a five day week, you may be eligible for a £540,000 mortgage.
In terms of paperwork, the contractor would have to provide a copy of the contract outlining the terms of their assignment and bank statements proving their income. Contractor mortgages are only available to contractors who work through their own limited company or a UK payroll umbrella company. For those that use Isle of Man Offshore schemes, lenders will only use UK taxable earnings to calculate affordability.
Choosing a specialist mortgage broker is vital if you want to avoid the hassle of dealing with lenders or brokers who probably don’t understand the unique way in which you work.
This means that you can arrange a mortgage based on a multiple of your entire contract earnings and not just the Taxable Element. Your borrowing will be assessed on your contract rate, projected to an annual earnings total, with the tax planning option to draw a lower salary.
To calculate how much you could borrow based on your contract rate, please contact Freelancer Financials here for a quote or contact them on 0208 421 7999 quoting QAccounting.
Author: John Yerou, MD of Freelancer Financials
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