Posted by John Yerou
on May 21st, 2015 05:35am in
Last Updated on August 13th, 2019 15:30pm.
Estimated Reading Time: 4 minutes
Just when you thought discrimination was a thing of the past, you happen upon your High Street bank looking for a mortgage. You present your credentials as a contractor. The adviser’s eyes ignite when they see your day rate.
It’s a familiar tale. That light soon fades when they see the equivalent of your ‘take home’. You see it flicker out, their demeanour deflates and you both know you’re wasting your time.
But you’ve done what every other contractor since Adam has told you to do. Hired an accountant, maximised your earnings and are so tax-efficient HMRC wants to give you a refund. So what’s gone wrong?
Some financiers are more equal than others
It’s far beyond an in-branch advisor’s understanding to work out where all the money you earn goes. The meeting that started out raising a toast to your mortgage ends up just that, toast.
It’s this attitude that prolonged the agony (and high interest rates) of the self-cert mortgage. It was the High Street’s answer to every self-employed application.
If you didn’t have a P60 back then, it didn’t matter. Or even if you did but wanted a bigger mortgage, again, no problem. Self-certify your earnings, no credit-check and ker-ching! “Where do we send the funds, sir?”
Then, the credit crunch happened, as did the later recession(s). The Mortgage Market Review, penned by the now defunct FSA, investigated every nook and cranny of lending.
The self-cert mortgage was a fatality long before the FCA‘s recommendations became law in April 2014. In truth, it didn’t survive much beyond economic meltdown in 2008. No surprise given the ambiguity prospective borrowers could throw at lenders.
The High Street lending model became PAYE-centric. Self-employed mortgages defaulted back to two- to three-years of accounts minimum. Approach mainstream lenders on the High Street and you’d think contractor mortgages as mythical as the moon landing.
The spanner in the works: the High Street Attitude
There’s little defence mainstream lenders can mount for not catering for independent professionals. They’ve had plenty of time to put a contractor-centric mortgage product in place. But most haven’t and stick to pigeon-holing anyone who’s not full-time employed.
There are High Street lenders who offer bespoke contractor mortgages. But the underwriters who understand the applications live in a walled garden.
That garden, it’s a long way from your local branch. The staff you’ll most likely meet on the High Street don’t have a clue.
That’s no slight against the in-branch advisers, per se. They’re trained to industry standards, uphold regulations and offer products within their remit.
They may even sell you a self-employed mortgage as the best fit for you from their portfolio. But therein lies the problem: the best fit for your payment structure doesn’t exist within that portfolio.
It’s in that walled garden, out of sight and out of mind to those in-branch IFAs.
What are a contractor’s relevant earnings for lending purposes?
Your application falls down in two main parts:
- the short-term nature of your contract;
- recognising your true, real-world worth.
Given the potential amount you want to borrow, the banks want security. They want to see time-served work history. They don’t want to see that you’ll be out of contract in four, five or six months.
They also want to see a lot of disposable income. As a tax-conscious individual, you keep your salary and dividend drawings low. When the adviser sees a lack of disposable income, they’ll likely reduce your potential borrowing.
So what’s the answer to your affordability conundrum?
Lenders began implementing ‘Responsible Lending’ in April 2014. To. The. Letter. In truth, contractors’ problems go back a lot further than that.
Self-cert may have provided a quick fix solution for both parties, contractor and lender. The former earned enough to pay the higher interest rate and was just glad of a mortgage. The latter party did all that legislation required of them, and earned a healthy commission. Everybody happy.
Ignorance is bliss, so they say. Self-cert mortgages were a cracking example of that happy oblivion.
But we didn’t want to bury our heads in the sand. Instead, we’ve used contract-based underwriting for a decade or more. It’s the only way to assess a contractor’s true mortgage affordability. Period!
Not all lenders accept the concept. Most of those that do won’t offer them through branch. Contractor mortgages remain a specialist product, as those working this way are skilled professionals. Most run a business as well as offer a service; they’re not your run-of-the-mill employee.
In truth, most lenders prefer a third party to vet applicants. It means the bank doesn’t have to train its staff to become accountants. It means that when the application arrives, all the necessary information is crystal clear.
Moreover, we’ve thrashed out the details to suit both underwriters and contractors. As such, we’ve gained the bank’s trust. If we didn’t think an applicant was mortgageworthy, the application wouldn’t be on their desk to approve.
That’s how close we are to contractor-friendly lenders. Even the High Street ones who won’t give you the time of day in-branch. In this instance, it’s both what and whom you know that will make your application successful.
What documentation do I need to apply?
Step 1 is to find a specialist mortgage broker. The first thing a good one will do is talk to you, about your contract, your business, your history. With that info, they’ll find the most suitable mortgage for your contractor payment structure.
If you run a limited company, Step 2 is straightforward enough. You’ll need:
- a copy of your current contract;
- (with a confirmed extension if it’s close to its expiry date);
- your CV;
- three months’ bank statements;
- formal ID.
It’s a little different if you’re brand new to contracting or working through an umbrella/agency.
You can get a mortgage from the very first day of your first contract through a limited company. But you will need to prove your work history in the industry in which you’ll now be contracting.
If you’re working through an Umbrella, your payslips will only serve to confuse lenders further. As such, there’s no ‘one size fits all’ policy for umbrella employees. Or agency workers, for that matter.
Your success will depend upon your unique circumstances. That’s why it’s so important the broker gets to know both you and what makes you tick.
As with all contractors, presenting your application so that underwriters don’t have to think about it is key. Whichever way you manage your contractor income, we have a mortgage solution for you.
If you’re considering buying a home or remortgaging, it’s time to check out how much you can borrow. We have a bespoke contractor mortgage calculator, here on site.
It’s simple to use, but we also walk through how we get to our guideline figure. When you’re ready to get a firm mortgage offer for a decision in principle, it’s time to get in touch.
Sorting out mortgages for contractors, we excel at. Psychic? We’re working on. Good luck and happy house hunting!
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.