In recent years, there’s been a revolution in the way we work in the UK. Individuals’ mindsets have changed; we’re challenging the age-old 9-5. Independent professionals are incorporating their own companies. They’re building a unique brand of expertise in their field. Moreover, they’re in demand in many high tech industries. So why aren’t mortgage lenders keeping up with the way we’re working in the UK?
How the economic recovery needed—and still needs—these entrepreneurs. It was this rise in self-employment that supported all UK labour market figures. Today, that growth shows no sign of stopping.
Many independent professionals striking out on their own do so on a contract-to-contract basis. To streamline their businesses, most use limited company payment structures.
Why go to all that trouble if you can’t get a mortgage?
And that’s the thanks you get
Going limited enabled contractors to earn big bucks and work in a tax efficient way. It worked then. And it’s still working today.
But do contractors expect the restrictions on mortgage lending that comes with their new territory? In most cases, definitely not.
But with mainstream lenders, that’s the reality. Advisers don’t get your payment structures. And we think it’s time for a change.
We’ve had many years now to reflect on what went wrong with the economy. Inflated interest rates, bad banking practices and global incompetence all played a part.
And after a lull to let the dust settle, the housing market has started to pick up again. New build homes, government-backed initiatives and lowest-ever interest rates are noteworthy contributors.
So how have High Street mortgage lenders accommodated these seismic shifts in thinking?
Where’s the gratitude to independent contractors now that we’re holding onto a tentative stability?
What policies have the banking industry implemented to support the flexible work force?
How have lenders try to accommodate limited company payment structures within their lending criteria?
In a nutshell, walk into a high street branch and staff will treat you as self-employed. In the context of borrowing using your contract rate, that’s not good.
The light at the end of the tunnel is growing…sort of
The good news is that more and more banks are offering contractor mortgages. Proper ones, based on gross income (not accounts).
But here’s the thing. Most lenders have seen the opportunity to appeal to contractors. Yet—at High Street or call centre level—they’ve not filtered this opportunity down.
Neither can your average broker or IFA outside a bank help. Most haven’t the expertise to place a contractor with an appropriate lender.
Even though lenders are recognising contractors, little’s changed at High Street level. You still need a contractor-specialist broker to get a mortgage using gross contract earnings.
How did contractors get mortgages before the credit crunch?
After the housing bubble burst (2007/2008), the FCA banned self-cert mortgages. That caused a problem for banks and borrowers alike.
Self certification was lenders’ go-to evidencing method for independent traders’ affordability. In truth, self-cert was most contractors’ first choice before the credit crunch, too.
So what are the big High Street banks doing to facilitate new entrepreneurial growth? With what mortgage have HSBC, First Direct, Lloyds, TSB and Santander replaced self-cert?
With self-cert gone, any uniformity in assessing self-employed people’s affordability has also gone.
Mortgages that use accounts to calculate affordability
Instead of self-cert, most lenders offer some type of self-employed mortgage. That type of mortgage deal uses accounts, SA302s, banking and trading history. Some lenders even ask for projected income, too.
Lenders put all that into the mixer and come up with a figure. That sum will form the basis of their assessment criteria, which is different from lender to lender. Roughly, it will equate to a permie’s ‘take home’ pay.
The lender’s overarching policy dictates the equation, so advisers have no choice. How they make a contractor’s income fit into their affordability calculation is inflexible.
Why lenders’ inflexibility puts contractors out of their reach
The problem? This tired affordability assessment is out of date. What’s more, it doesn’t work for most limited company contractors and freelancers.
Many clients who engage contractors are blue chip. These clients have specific criteria themselves governing to whom they can award assignments.
One is that the contractor’s skill set must match the assignment on offer. Another, and most telling, is that contractors operate through a UK PAYE umbrella company.
So unless you’re a limited company, you won’t get through the door. It’s a Catch 22, with seemingly no way out. But if you ask for help in the right place, you can exit the loop.
Why your limited company can limit your options
Trading B2B is a must for many contractor assignments. Some agencies won’t even look at a contractor’s profile if they’re not incorporated.
If they want to work in these sectors, contractors must incorporate a limited company. Government departments, NHS, the banking industry’s sensitive IT contracts are just a few examples.
But here’s the thing: running a limited company is time consuming if you don’t know what you’re doing. And most contractors set out to offer a service, not become fluent in taxation law.
These tax laws are, to a certain extent, non-negotiable. As the owner of the company, they pay both employee’s and employer’s NICs. And the dreaded IR35 if HMRC suspects that the contractor is no more than a disguised employee.
And all you wanted to do was ply your trade to the best of your ability. You didn’t want to become an accountant, marketer and your own employment agency.
What a generic lender sees in a contractor’s accounts
Low salary means low NICs. Dividend drawings are much more tax-efficient than salary.
A limited company remains by far the best way for a contractor to retain the bulk of their income. And between you and your accountant, you do a great job of that.
But what do bank staff see when they compare a contractor’s day rate with their personal account?
They see a huge gulf between top line and take home that they cannot explain. Nor, then, can they use gross contract rate in their affordability assessment.
That disparity is an anomaly that only a trained accountant could pick out.
Now, the majority of contractors retain their income within the company’s net profits. A lay-advisor will not make the connection between:
- contract day rate;
- retained profits;
- low salary and dividend drawings.
Does the lack of in-branch training put contract income off limits?
By withholding profit, contractors’ profits are only subject to corporation tax. These rates, in turn, HMRC brackets against top line income.
All that an untrained adviser sees in post-tax accounts is equivalent salary and dividends. It’s this figure they’ll try to make fit into their affordability assessment.
So even if you get over the first hurdle, the mortgage offer based on their figures can be restrictive.
Most people use the affordability factor of 4½ or 5 times their salary as the benchmark to what they can afford.
If you’ve applied for a mortgage or remortgage based on those figures, you won’t get close. The bank’s offer will fall a good distance short of what you want to borrow.
You may be beginning to think that High Street contractor mortgages don’t exist. For the majority of banks with a High Street presence, you’d be right. At least at branch or call centre level.
But there’s a plethora of lenders who’ll go through a broker to get a contractor a mortgage. You will identify them in a search engine as having “Intermediary Only” on their sites. Here’s why they choose the broker route.
More questions than answers? Not if you look in the right place
Now, here’s a question:
if you were a trained accountant, would you be working as a call centre or in branch mortgage adviser?
We’d guess not, right? You’d earn a lot more as an accountant.
So, here’s another question:
if in-branch advisers aren’t accountants, how can a contractor get a lender to understand their payment structure?
This is where you need a specialist mortgage broker.
Talking to underwriters in a language they understand
Specialist mortgage brokers are a contractor’s key to accessing the property ladder. The vast majority only specialise in getting mortgages for independent professionals in all guises.
It’s imperative they focus on the one sector. But going the extra mile offers a win-win for both contractor and underwriter alike.
The broker is, if you like, the interpreter between the two.
In some instances, the broker has even helped the mortgage lender understand how contracting works. Based on that tuition, the lender’s been able to develop a bespoke contractor policy.
Specialist brokers also understand contractors. It doesn’t matter if the contractor uses an umbrella company or retain a unique limited company identity. A contractor mortgage specialist will understand their world.
The simplified process of contract-based underwriting
Here’s the good news you’ve been waiting for. Contract-based underwriting simplifies the whole mortgage application process.
With a broker, you’re dealing with experienced people all along the way. As such, you don’t need much in the way of evidence.
Underwriters who deal direct with brokers know what they’re looking for. They detest superfluous information; our application process is a case of “less is more”.
To kick-start the application process, a broker will ask a contractor for:
- 3-months’ bank statements;
- a copy of the current contract;
- (with the promise of an extension if the contract’s almost run its course);
- formal ID;
- an up to date CV, showing continued history in their trade of choice at time of application.
That’s it. That’s all most genuine contractor mortgage lenders need to put together for an underwriter.
In some cases, it’s even less. Contractor-friendly lenders use contract-based underwriting, but then adapt it to their brand’s ethos.
You will find criteria jumps a little from lender to lender. There’s no ‘one-size-fits-all’ method of working out a contractor’s mortgage affordability.
It’s here where the specialist broker is a contractor’s trump card.
It’s not what you know (okay – it is, a bit)
Specialised brokers deal with most contractor friendly lenders day in, day out. They know which lender offers a mortgage that’s the best fit for each contractor.
Yes, they know that each bank and building society has its own unique criteria. But through experience, they know that no two contractors are alike, either.
The broker gets all that. With that knowledge they can package your mortgage application just so. They’ll then present your affordability in a way they know underwriters can see immediately.
A specialist broker can save you time, money and heartache
The different ways lenders work out a contractor’s suitability are unique to them. So much so that you’d need a guide to all the contractor-friendly lenders to realise its scope.
But if you deal with a specialist contractor mortgage broker, you don’t need to read all that.
Our expert advisors, for instance, get to know each client inside out. By talking through your situation they can give you the best chance of mortgage success.
If you’ve struggled with mainstream lenders, know this: the problem isn’t in your contract.
It’s how High Street lenders use affordability calculations that don’t optimise your payment structure. That’s where they go wrong.
Don’t get down about your situation if the High Street’s let you down. There is a better way for contractors to get a mortgage. And, yes: you can take that to the
bank specialist mortgage broker!
Author: John Yerou
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.