It’s no secret. If you’re self-employed and don’t work PAYE, you struggle with High Street mortgage lenders. But some lenders have thrown freelancers and contractors a mortgage lifeline.
A growing number of lenders are looking beyond beyond typical IT-based check-boxes.
They’re now basing mortgage affordability instead on independent professionals’ annualised contract rate.
The downside is, this criteria bypasses less-educated branch and call centre staff. Advisors may even have told you, as a contractor, that you only qualify for a self-employed mortgage.
But mortgages for contractors don’t rely on payslips and accounts, as they’d have you believe. There is a better way!Whether you trade through a limited company or umbrella, you can get a mortgage using your annualised contract rate. I know it. You know it. So why are you having such a hard time convincing lenders you’re good for the loan?
Small Business Owner Volume Increases; Mortgages Offered to them Plummet
Let’s have a look at a couple cold, hard facts:
- since the credit crunch in 2008, the number of self-employed people has increased by 10 per cent;
- in more recent times, lenders have eased up on imposing only the most strict easing in lending criteria;
- coronavirus has impacted lending criteria across the board; take nothing for granted!
Despite these three trends, self-employed workers still face uphill struggles to secure the borrowing they need.
And we’re not just making this up. A recent ONS report confirmed a rise of almost one million in the number of self-employed people since the credit crises. Has the amount of lending increased to match this swelling in the number of UK small business owners?
Not according to the CML, a leading committee monitoring 95% of all UK mortgage lenders. Their recent report suggests a drop in borrowing from the sector of 73%.
So what’s gone wrong? Have independent professionals sacrificed home ownership to make a go of it on their own?
Of course not. But the FCA outlawing the self-cert mortgage was the catalyst to the new contractor-friendly solutions.
The Rise and Fail of the Self-Cert mortgage
Before the credit crunch, inexperienced IFAs would offer all self-employed workers the same self-cert mortgage. Whilst it was never the most appropriate mortgage for contractors, many took their IFA up on their offer.
BThey were so popular at one point that one in four mortgages used self-certification of earnings. It’s not surprising.
All anyone needed to do was self-certify their earnings and they’d pass the affordability test. No need to supply payslips and accounts, oh no.
Can you see the flaw? Of course you can. So many people falsified their budget that this type of mortgage became known as the “Liar Loan”.
The applicant was soon found out when they couldn’t keep up with the high repayments they’d said they could afford. When the price of houses started to plummet, it left lenders with a trail of repossessions on their hands.
So, post-economic collapse, affordability verification changed with the introduction of the “Responsible Lending” initiative.
The Problem Banning Self-Cert Left For The Self-Employed
The Financial Conduct Authority (the FSA, as was) has, in effect, banned these schemes. Lenders have thus consigned them to the scrap heap in an effort to promote what’s now accepted as more prudent lending.
But the decision to withdraw self-cert has left small business owners and contractors with a problem. Many independent professionals have had to put plans of owning a home on ice. Especially those who were looking to remortgage upon reaching the end of their initial low interest rate.
Their affordability is now subject to traditional income assessment criteria. For most self-employed, that means providing two to three years’ accounts.
As we’ve already mentioned, your contract may mean nothing on the High Street. You’ll be subject to the same criteria as all self-employed people.
Contractors: your difference has earned you a lifeline
For freelancers working on short-term contracts, there remains a small group of contractor-friendly lenders. Rather than run with the crowd, they implement a common sense approach to assessing your earnings.
Since the credit crunch, we’ve worked hard to build relationships with their underwriters. It’s taken time and patience. But, together, we’ve helped to simplify the mortgage process for contractors.
Moreover, we’ve clarified what qualifies as relevant earnings for lending purposes for them. We’ve made sure that your contract rate is prominent in their affordability calculations.
Other than that, there’s not much more you need to prove your affordability. Again, this is fact, despite what in-branch advisors tell you.
What Your Application Needs To Show (And What It Doesn’t!)
The key to your application’s success with contractor-friendly lenders lies in its packaging. Underwriters are busy people. They only want to see what’s necessary to approve your mortgage.
Making sure your application gets to the appropriate decision makers is, thus, paramount.
What you don’t want is for unqualified staff in branch networks to get a hold of it. Branch staff—even at contractor-friendly lenders—may be unaware of their contractor policy.
A specialist contractor mortgage broker, however, will make these bespoke schemes available to you.
How much can I borrow against my contract rate?
Contractors can work out how much they can borrow on a multiple of their gross contract rate alone.
Lenders use 4½ to 5 times* the annualised total of an applicant’s current contract rate to determine how much they can borrow.
These are the typical multipliers lenders use, but we must stress, they’re for guidance only. The only way to get a definitive figure is to make a firm mortgage enquiry.
Whatever myths you may have heard about higher deposits and interest rates, ignore those too. You can access exactly the same High Street interest rates as ‘permies’, sometimes even better. Contractors need no longer suffer a disadvantage or penalty because of the way they work.
In fact, some lenders are now beginning to offer exclusive interest rates for contractors. Talk about a turn around in fortunes. In a small corner of the mortgage market, the forecast is looking exceedingly bright.
*Whilst lenders figure out post-COVID-19 criteria, this figure may drop. Nationwide, for example, has slashed their ‘multiplier’ in half. Always get a ‘Decision in Principle’ before you take action!
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.