ANY professional contractor can now apply for a mortgage based on their daily contract rate* through The Halifax.
Before this strategic move by the UK’s largest lender, only contractors working in the IT sector would be entertained. Now, Halifax has lowered the barrier to entry by offering freelancers mortgages in any niche based on their contract rate.
We cannot stress enough what a turn in the tide this change in policy represents. Not only for the lender, but also for self-employed people who’ve genuinely struggled to get mortgages up to this point because of blinkered affordability calculations.
Why is the new Halifax attitude good news?
Britain today has a higher number of self-employed contractors and freelancers than ever before. Whilst those in IT make up a sizeable percentage, other sectors are growing too. In demand and confidence.
For non IT contractors, the change means they’ll no longer be assessed using a multiple of their salary and dividend drawings. This is the real change!
Why? Most limited company contractors choose to draw a low salary and minimise dividends. This is by far the most tax-efficient way of operating. To optimise earnings legitimately, this payment method is the way to go.
However, as intelligent as paying yourself low salary/dividends is for tax planning, it severely decreases your mortgage affordability in a lender’s eyes.
Low earnings will reduce the amount lenders are prepared to forward you for a mortgage. By calculating a freelancer’s affordability based on their contract rate*, the Halifax has changed the game entirely.
What if I’ve little history as a contractor?
The change of policy is especially good news for contractors just starting out. Many other lenders demand at least two years of uninterrupted self-employed trading history. Halifax, on the other hand, will now accept freelancers from their very first contract.
Furthermore, non IT contractors will no longer be saddled with the burden of having to provide a minimum of one year’s worth of accounts. This opens the door for new limited company contractors who may otherwise struggle to provide such copious information.
How much can I borrow?*
We’ll not pull punches. The minimum earning threshold, compared to “permies“, is on the high side.
If you’re on a low-paying, part-time contract or are declaring earnings to remain within lower personal tax allowance parameters, you’ll not qualify. Not for a mortgage in your own rite, at least.
You need to be on a minimum pre-tax daily contract rate of £312.50 or earning at least £75,000 a year to apply.
Work out if your earnings qualify for a Halifax self-employed mortgage
The Halifax upper threshold is based on 5 times your annual contract rate. To work out how much you can borrow, simply:
- take your daily contract rate;
- multiply it by the number of days you work each week;
- multiply that total by 48 (weeks worked per year);
- multiply that figure, your annual contract rate, by five.
This will give you a rough indication of the amount you can borrow. Here’s a working example for a contractor with a day rate of £475:
- a contractor earns £475 per day;
- they work five days per week:
- £475 x 5 [days] = £2,375 per week;
- they work the full 48 weeks per year allowed for the calculation:
- £2,375 x 48 [weeks] = £114,000 per annum;
- the upper limit of their affordability, the maximum they can borrow, is five times their annual rate:
- £114,000 x 5 [affordability multiplier] = £570,000;
- the maximum a contractor earning £475/day can borrow from the Halifax is £570,000!
This money can be spent on either a new property or a remortgage. But please remember, the more you borrow, the higher the deposit will be.
For example, a 10% deposit on a £240,000 home will be £24,000. A similar 10% deposit on the £570,000 mortgage in the example would set your back £57,000.
Speak with a mortgage specialist
Please appreciate that contractor mortgages, although now available from one of the big four banks, are still specialist products. Before approaching them directly, it’s strongly advisable to speak with a mortgage specialist first.
It’s not worth risking approaching a standard mortgage broker to process your application. There are many reasons, but here are the main ones.
They won’t have the knowledge or experience in securing mortgages for contractors. In addition, Halifax staff and underwriters will appreciate it more if you present all and only the correct paperwork.
And lastly, a tip that’s worth remembering for any type of finance you’re looking to borrow. Multiple credit searches leave footprints for all to see on your credit history. Too many searches will seriously undermine your score, thus your chances of securing that Halifax contractor mortgage.
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.