Two fatal mortgage judgement calls almost all contractors make

Many contractors still find it hard to secure mortgages from High Street lenders. There are two classic reasons, both of which could be resolved with better education:

1. they approach familiar lenders, most of whom have no bespoke contractor mortgage policy;
2. branch/call centre staff at these institutions don’t understand how contractors and freelancers work.

On one hand, contractors need to understand that their income is non-standard. In branch, you’ll rarely find anyone who understands limited company income.

In both cases, the contractor needs an interpreter. That’s where specialist brokers come in.

The eagerness of youth: wasted on young financial advisors

Rejection is tough enough to deal with. Especially when you know you can easily afford the repayments, but the advisor can’t see it.

But the problem goes much deeper than worn shoe leather and wasted time. And as a self-employed entity, you know the importance of optimising time. So, let’s look at the problem from all perspectives.

When you walk into a bank straight off the street, in most cases you won’t be dealing with a senior IFA.

Instead, you’ll be trying to explain to a fresh-from-training clerk that you:

• are an in-demand limited company contractor;
• own your own limited company, which is your payment structure;
• earn £400 per day, 5 days a week, 48 weeks a year;
• thus earn a hefty annualised contract income of £96,000, most of which you retain as profit;
• draw low salary for tax purposes and your SA302 doesn’t reflect your mortgage affordability.

We guarantee that 99% of branch clerks or call centre staff won’t grasp any of that. If they latch onto anything, they’ll ‘hear’ that you’re self-employed.

Eager to impress you, their boss or make a sale, they’ll use their self-employed formula. On your ‘declared’ income, it just doesn’t work!

They just don’t get contracting. And you don’t want a self-employed mortgage when you have a £100k contract as a bargaining chip.

At that point, say ‘thanks, but no thanks’. If they go ahead and run a credit search, the effects could be detrimental to your dreams. It will fail, and you will have a mark on your file for the next lender to see. It’s time for a sharp exit, stage right.

Have contractor mortgages always been so elusive?

Once upon a time, several lenders offered bespoke mortgages for contractors. Abbey, for instance, was what we call a “contractor-friendly” mortgage lender.

But since the credit crisis, Abbey (like many other lenders) has tightened its lending policy. As we come out of lockdown, all lenders are updating their lending criteria daily!

In contrast, other lenders have shown balls big enough to run with contractor mortgages.

There are more now than ever. Some are often not household names, and many won’t deal with contractors direct. They prefer specialist brokers who understand contract income to vet contractors first. The broker will then prepare applications to show only what the underwriters need to see.

Working with the decision-makers: the underwriters

With the growing ranks of self-employed in the UK, something had to give. It’s not as if contractor lending criteria is top secret. But we’d forgive you for thinking so if you’ve banged your head against a bank’s brick wall often enough.

So, a devout few specialist contractor mortgage brokers set out to educate lenders. The days of employee loyalty are, in our eyes, a thing of the past. A contractor on a 6-month contract is no more risk than a super-employee head-hunted twice a year.

It’s many of these super-employees who turn to contracting. They see that they can make far more money as a self-employed entity than on PAYE. Thus, they create a tax-efficient limited company and contract out their services.

We worked with underwriting teams to help develop their contractor lending criteria. We helped (and are helping) them identify which criteria to use from such contracts.

We’ve been unable to convince all lenders that contractors provide low risk mortgage lending. But the huge effort exerted in negotiating special income underwriting terms has paid dividends.

A select few High Street lenders, and some not so well known, have a new product. It’s called contract-based underwriting, and their underwriters use this method to confirm affordability.

It’s this that enables specialist brokers to secure competitive mortgages based on your contract. Not your accounts. Not always your continued employment history. Your contract!

Why do contractor-friendly lenders use specialist brokers?

By now, we hope it’s clear why you don’t or won’t have much joy on the High Street. Underwriters are willing to accept the risk associated with contracting. But they won’t burden in-branch or call centre staff with that responsibility.

As part of the bargain, if you like, underwriters also requested something from us. Only fair, right?

It goes like this. If they’re going to accept applications from contractors, they must only contain necessary information. In other words, they don’t want to have to deal with a lot of unnecessary bumf.

So specialist brokers need the necessary information from the contractor and break it down.

The result of this analysis will form the basis of the mortgage application. It will display the contractor’s full earnings potential, including retained profits.

By extracting the information thus, it also helps the specialist broker.

How come? Because they deal with contractor friendly lenders every single day. Seeing details laid out helps identify which lender’s products suits the given circumstances.

Criteria depending, the mortgage offer could be 4-5 times the annualised contract rate. Some lenders, like Nationwide, have reduced this multiplier post-lockdown. Until the market settles, it’s well worth calling us to see which lenders best suit your needs!

“Whole of Market” mortgage service

To give you the best chance of mortgage success, appoint an experienced specialist broker. Their in-depth knowledge of the contractor market and relationship with underwriters is essential.

A good pointer is to check whether they offer a “whole of market” service. If so, they can access suitable mortgages from all lenders in their product portfolio.

If a broker represents a panel of lenders, you will get a reduced choice. This could mean missing out on genuine contractor-friendly lenders!

They should offer mortgages based on your contract rate alone. Working through a limited company or via a payroll umbrella company shouldn’t matter! They should always use your annualised contract rate

Does all this sound as if it’s a case of “not what you know, but who you know?” Maybe, but don’t underestimate the role of underwriters. Nor brokers who can get you access to them. They make or break your contractor mortgage application, not the High Street junior.