ANY professional contractor can now apply for mortgages using their contract rate* with Halifax. This is an unprecedented strategic move by the UK’s largest lender.
Before this update, Halifax only entertained contractors working in the IT sector. Now, the bank has smashed barriers to entry by offering mortgages to freelancers in any niche.
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.
Many independent professionals have fought tooth and nail to get mortgages up until now. And at last, their work has its reward. Gone are the blinkered affordability calculations and the biased restrictions!
Why is the new Halifax attitude good news?
Britain today has a huge number of self-employed contractors and freelancers. Whilst those in IT make up a sizeable percentage, other sectors are growing too. In both demand and confidence.
For non IT contractors, Halifax’s new openness presents a significant opportunity.
It means the bank will no longer assess affordability using salary and dividend drawings. They will use your annualised contract rate, no matter what your industry!*
Why has the lender changed its outlook? It’s accepted that most limited company contractors draw a low salary and minimise dividends. This is by far the most tax-efficient payment structure to optimise earnings legitimately.
Herein lies the rub. As savvy as this method is, it decimates your mortgage affordability in most lenders’ eyes.
Low earnings reduce the amount lenders are prepared to forward you for a mortgage. By calculating affordability using contract rates* instead, Halifax has changed the game.
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’ uninterrupted self-employed trading history. Halifax, conversely, will now accept freelancers from their very first contract.
What’s more, non-IT contractors no longer need to provide at least one year’s accounts. This benefits new limited company contractors who’d otherwise struggle to provide such copious information.
How much can I borrow?*
We’ll not pull punches, here. The minimum earning threshold, compared to PAYE “permies”, is on the high side.
If you’re on a low-paying, part-time contract you’ll not qualify for a Halifax mortgage. Same goes if you’re declaring earnings to remain within lower personal tax allowance parameters. Not for a mortgage in your own rite, at least.
You need to be on a pre-tax daily contract rate of at least £312.50 or earning at least £75,000 a year to apply.
Work out if your earnings qualify for a Halifax self-employed mortgage
Halifax bases its upper threshold 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 × 5 [days] = £2,375 per week;
- they work the full 48 weeks per year allowed for the calculation:
- £2,375 × 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 × 5 [affordability multiplier] = £570,000;
- thus, the maximum a contractor earning £475/day can borrow from the Halifax is £570,000!
Upon acceptance, the contractor can put this money to either a new property or a remortgage. But please remember, the more you borrow, the higher the deposit you’ll need to find.
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.
Why it’s critical to speak with a contractor mortgage specialist
So, great! Contractor mortgages have at last made it to one of the ‘big four’ banks. But please appreciate, this type of mortgage remains a specialist product.
Before approaching Halifax directly, we’d strongly advise you talk to a mortgage specialist. Not all the bank’s in-branch or call centre staff will identify you as relevant for this product!
Neither is it worth risking approaching a standard mortgage broker to process your application. There are many reasons, but here’s the main one.
Generic advisors won’t have the knowledge or experience in securing mortgages for contractors. Halifax staff and underwriters need you to show all and only the correct paperwork. A specialist broker or advisor will know exactly what they’re looking for!
To finish, a tip that’s worth remembering for any type of finance you’re looking to borrow. Multiple credit searches leave footprints for interested parties to see on your credit history.
Too many searches will seriously undermine your score and credibility. Recent failed searches will thus damage your chances of securing that Halifax contractor mortgage. Please, use a broker who understands the way you work and what’s relevant to your application.
*Whilst mortgage lenders recover from lockdown, they change lending criteria daily.
They’re not doing this for the self-employed alone. Rather, all lenders are factoring new risks and forecasts for all borrowers.
To be 100% certain of what you can borrow, talk to a mortgage advisor/broker. They deal with banks day in day out. They will have a better idea what the current mortgage market status is.
Your mortgage has too much riding on it to take a gamble. Don’t risk it for the sake of a phone call!
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.