In recent years, there’s been a revolution in the way we work in the UK. Individuals’ mindsets have changed, challenging the 9-5. Independent professionals are incorporating their own companies. They’re building a unique brand of expertise in their field.
And how the economic recovery needed these entrepreneurs. It was this rise in self-employment that supported all UK labour market figures.
Many independent professionals striking out on their own did so on a contract-to-contract basis. To streamline their businesses, most used limited company payment structures.
Why go to all that trouble?
Simple. Going limited enabled them to earn big bucks and work in a tax efficient way. And it worked.
But did contractors expect the restrictions on mortgage lending their newfound status invites? You’d think, perhaps not.
And that’s the thanks you get
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, here.
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 new flexible work force? How have lenders tried 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 a contractor mortgage, 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 of those lenders have seen the opportunity to appeal to contractors. But at High Street or call centre level, they’ve not yet filtered this opportunity down.
So why can’t an average mortgage broker outside a bank help? As of yet, most don’t have the expertise to place a contractor with an appropriate lender.
So even though lenders are recognising contractors, little’s changed at High Street level. You still need a contractor mortgage broker to get mortgages using gross contract earnings.
How did contractors get mortgages before the credit crunch?
After the housing bubble burst, the FCA banned self-cert mortgages. They were the majority of lenders’ go-to home loan for independent traders. 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 growth? With what have banks like HSBC, First Direct, Lloyds, TSB and Santander replaced self-cert?
Mortgages that use accounts to calculate affordability
Most lenders offer some type of self-employed mortgage. That type of mortgage deal uses accounts, 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. This sum will then form the basis of their assessment criteria. Roughly, it equates to a permie’s ‘take home’ pay.
Advisors have to do it this way. It’s how they make a contractor’s income fit into their affordability calculation.
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. Such 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.
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 hold onto the majority of their income. And between you and your accountant, you’ve done a great job.
But what do bank staff see when they compare a contractor’s day rate with their personal account? A huge gulf that they cannot explain, nor use 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 even get a look-in. The bank’s offer will fall short of what you want to borrow, and by some way.
You may be beginning to think that High Street contractor mortgages don’t exist. For the majority of banks with a High Street, you’d be right.
But there’s a plethora of lenders who’ll go through a broker to get a contractor a mortgage. Here’s why.
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?
So, here’s another question:
how does a contractor gain access to someone who’ll understand their payment structure?
Please, if you’d be so kind, allow us to introduce: the specialist mortgage broker.
Specialist mortgage brokers are a contractor’s key to accessing the property ladder. The vast majority only specialise in getting mortgages for independent professionals.
It’s imperative they do. But that effort makes it a win-win situation for both the contractor and the underwriter.
Talking to underwriters in a language they understand
The broker is, if you like, the interpreter.
In some instances, they’ve helped the mortgage lender understand the way contractors pay themselves. Based on that understanding, the lender’s been able to develop a bespoke contractor policy.
They also understand contractors. It doesn’t matter if they use an umbrella company or retain a unique limited company identity. A contractor mortgage specialist understands their world.
A contractor will give the broker what they need to kick-start the mortgage process. That’s often:
- 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 their mortgage offer.
So, no: there’s no ‘one-size-fits-all’ method of working out a contractor’s 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 many. 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.
Freelancer Financials, 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 that you contract. It’s that High Street lenders use affordability calculations that don’t optimise your payment structure.
Don’t get down about your situation if the High Street’s let you down. There is a better way of getting mortgages for contractors. And, yes: you can take that to the bank specialist mortgage broker.
Author: John Yerou
John Yerou is the owner and founder of Self Employed Mortgages; a trading style & trade mark of the award winning Mortgage Quest Ltd. One of the most recognised names in providing mortgages for Self-Employed professionals across the UK.
In 2004 John began his career in Financial Services as an independent mortgage adviser and broker. John has been instrumental in negotiating bespoke underwriting for contractors with high street lenders.
His presence in the industry as a go-to expert is growing by the day and he is regularly cited and writes in publications both locally and nationally.