Since their inception, contractor mortgages have used day rates as the basis of affordability. A simple copy of a current contract, with renewal/extension where applicable, was evidence enough.
Since coming out of the first lockdown, many of our clients have seen lenders change tack.
Lenders still want to see the traditional income evidence. But they now also want to see SA302s.
This change has naturally worried many mortgage-holding contractors who still use LTD (PSCs) payment structures.
In this blog post, I hope to allay any fears. Plus, I’ll take a closer look at SA302s and how underwriters may want to use them from now on.
Why the sudden change from day rates alone?
I don’t want to labour the point, but COVID changed everything. Lenders now appropriate more types of risk to both their criteria and potential borrowers’ profiles.
This additional risk could manifest in how you worked — or didn’t — during lockdown(s). The industry in which you work may also cause advisors to be more cautious.
Lenders’ requests for contractors’ SA302s is, in our opinion, another safety net. Here’s why I think that.
Having spoken to underwriters to clarify the request, many tell us that the SA302 isn’t to assess affordability. It’s to ensure that contractors are crossing i’s and dotting t’s when it comes to paying their taxes. That’s the official line, at any rate.
Are lenders being too cautious?
Up to a point, I can understand lenders asking for additional borrower info. If you think back to the 2007/08 crash, blame was apportioned to banks for not being careful enough.
True, COVID has disrupted the economy in a different way. But, many of today’s symptoms (and backdrops) reflect the conditions after the housing bubble burst. Should the economy or markets take a dive, banks don’t want the blame heaped at their door again.
Lenders favour prevention, in this sense, over cure. How the government could learn from that attitude, eh?
Will SA302s be a temporary measure for mortgages?
Lenders might relax their stance on SA302s in time, but I don’t think so. After all, what does it take to produce that document? In addition to what self-employed people have to provide for income evidence already, it’s a small step.
If you hire an accountant, as many limited company contractors do, just ask them for the last one. If you work through an umbrella, there’s a good chance they’ll have your SA302 on record. They may even have sent it to you as part of their standard service.
Getting your hands on your SA302
If you do your own accounts, it’s a bit different. You may have filled in your online tax return and left it at that, which I totally get. But it does mean you have to approach HMRC separately to get your SA302.
According to a (now ring-fenced) HMRC response in their Community Forum, if you fill in your tax return online, they should process it in ’72 hours’. If you filled it in manually and sent it by post, the wait could be ‘a few months’.
These lead-times HMRC published before COVID, though. And both reflect processing time at the taxman’s offices rather than how long it takes them to get you your SA302 in your hand.
In lieu of the document itself, HMRC advised showing a lender the receipt of your debit/credit card payment (again, the response is in the BETA forum). In the absence of your SA302, proof of you paying the last tax bill may be your next best option. How successful that is will depend upon the lender and the current situation.
The government has laid out a range of web pages to help understand SA302s. Perhaps most relevant to this article is their list of mortgage lenders who accept SA302s.
As this list is beyond our capacity to control, it’s difficult to keep tabs on all listed there. What I can say is that they all may accept SA302s, but their lending criteria will differ greatly.
That’s especially pertinent if you’re a contractor, or have switched back to sole trader or umbrella company because of recent IR35 changes.
What to do next if you need a mortgage PDQ:
My advice would be to talk to us first. We don’t want you chasing shadows with lenders who can’t help you because of the way you work.
Neither do we want hostile lenders running hard credit searches, and then letting you down (not gently). This could harm your chances of getting a mortgage with a lender who does understand what you’re about.
Talk to one of our advisors if you’re concerned about the documentation you can produce. Also, tell us what your recent work experience has been like. We’ll then be able to advise which lender is best suited to your circumstances.
Be ready to accept that your new course of action may mean approaching a new lender. Chances are, that lender could be one who is ‘intermediary only’, who you won’t get access to as the end client. We, on the other hand, could make that happen for you. It’s what we do. Daily.
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.