There were a couple of companies that carved out a niche in the market for a number of years – the ones who have been with contractors right from the beginning. Woolwich, for example, took the leap and marketed mortgages to contractors as far back as 2000. They were the first company to offer a mortgage based on the contractor value rather than the classical salary structure and many contractors took advantage of this. Unfortunately, this product stopped in 2007 with the advent of the credit crunch and is no longer offered. Similar products were brought to market by Cheltenham and Gloucester, Northern Rock and Santander but they also were closed down with the tightening of belts around 2008.
Banks covered in this article
However, a new wave of products has been launched in the last couple of years and thankfully these appear to be here to stay. Virgin Money, who took over Northern Rock have once again entered the contractor market with a contractor mortgage, as have Investec Mortgages, Saffron Building Society and a couple of other regional lenders. But the two companies leading the contractor mortgage charge are Clydesdale Bank and the Halifax. These two still offer mortgages for contractors which use criteria based on contract value rather than monthly salary and which look at annualised salary, contracts in hand and contracts in the future and all kinds of other flexible criteria.
Clydesdale Bank are one of the few lenders who did not turn their back on contractors post-credit crunch and who have put together a flexible and contractor-oriented mortgage that understands how contractors’ finances work. Whilst other lenders have decided to avoid anything even remotely ‘different’ or ‘flexible’ when it comes to eligibility, Clydesdale have gone the other way with contractors, perhaps recognising the importance of this reliable and growing sector of employment. Whilst other lenders insist on the monolithic salary / multiples model, Clydesdale use a little more pragmatism and sense when working out who can afford a mortgage. Taking into account a broader overview of the contractor’s finances they will look at things like overall annualised salary, affordability, contracts in hand and contracts lined up for the future along with the full daily rate that a contractor charges. They also understand company structures such as Umbrella Companies and appreciate that contractors might decide not to withdraw all of their income in the standard way in order to be more tax efficient and that this should not prohibit them from accessing the prime rate mortgages seen on the high street.
Clydesdale Bank will accept contractors in the following sectors for contractor mortgages:
- Engineering (subject to a minimum rate of £75,000 per annum based on 46 weeks of employment).
- Banking (on provision of two years minimum history of contracting and a £75,000 minimum contract rate based upon 46 weeks of employment).
- Oil and Gas
- Compliance Professionals
When it comes to calculating income there are a number of factors they are looking for. Firstly, in terms of assessing affordability when assessing applicants who have been self-employed for two years+ (in which time they must have had their contract renewed at least one time) they will look at the contractor’s average weekly rate throughout the previous and/or current contract multiplied by 46. If any contracts were less than 35 hours per week then the income from those would be calculated pro rata. (They will not however, accept offshore income structures). Secondly, they will require documentary evidence in the form of copies of the contractor’s current contract as well as any previous contracts from the last two years. If a contract has since been renewed by the same employer, they will need to see both the original contract the renewal contract containing the rates and the length of the contract.
Clydesdale Bank will accept mortgage applications from contractors who have had a gap of up to six weeks between contracts. However, if there are any gaps longer than 6 weeks the mortgage would be offered based on a self-employed calculation.
For those contractors who have less than two years contracting experience there are still options for a mortgage but they are slightly different. Clydesdale are able to accept applications from contractors with under two years experience but the Loan to Value Ratio can only be up to a maximum of 70%. In addition, the previous employment before the contracting period must have been in the same field and their income will be calculated according to the average of their current weekly contract rate x 46 and their last year’s employment income on their p60.
Here at Contractor Guides our partner consultants work directly with Clydesdale’s senior underwriters and will be able to work through a contractor’s application before applying. This involves assessing their current contract as well as going through their cv, contracting history, future contracts and employment potential to establish their borrowing potential. They can also talk to the underwriters before applying and find out what conditions would be required in order to get the full mortgage offer. This is useful not only in helping the smooth flow of getting the desired mortgage but also in preventing failed applications making a dent in a contractor’s credit file.
If you want to start your search for a contractor mortgage with one of the larger banks then Halifax has to be your first stop. They are the UK’s largest mortgage lender and they have been providing mortgages for contractors for far longer than any other bank. Indeed it is worth giving them a look just on the basis that they have consistently supported contractors when few other lenders would bother. This was also true throughout the credit crisis. Whilst other contractor mortgage providers drew in their horns and shut down any mortgages that might be considered ‘risky’ or even vaguely ‘flexible’ Halifax went in the other direction. Since the credit crisis the Halifax has actually been providing even better contractor-oriented mortgages.
The main reason they work so well with contractors is that they have developed specific lending criteria to keep pace with changes in the way people work. This means that contractors are finding applying for a mortgage much less stressful and much more in tune with the way they earn their money. Halifax are willing to look at things like gross contract value rather than requesting the applicant’s trading accounts and are sometimes even willing to assess contractors based on their first trading year. They list the following criteria for mortgage applications from contractors:
Mortgage applications will be considered from Agency Workers, Fixed or Short Term Contracts and Sub Contractors provided that the customer has continuous employment of 12 months+ and has more than 6 months remaining on the contract. Alternatively the customer should be able to show two years continuous service in the same kind of employment.
Customers will be treated as self-employed if they are paying their own tax or sub-contracting to more than one company.
If applicant is an IT Contractor or a Contractor who earns more than £500 per day then the gross valuation of the contract will be sufficient evidence of income (whether employed or self-employed).
Halifax were the first bank to offer contractors a multiple of their day rate as the basis of their mortgage proof of income (with no additional requirement to prove their historical income) and more especially, to offer such a deal to contractors not working in IT. This is a particularly impressive deal from Halifax as many other lenders are offering the same deal but require two years of records to prove income. The deal offered by Halifax on the other hand means contractors could even sign up to a mortgage after starting their first contract. Additionally, they have now extended this further and will look at offering the same deal to contractors and freelancers who work in all fields and who have a day rate in excess of £300.
The Head of Sales at Halifax Intermediaries, Ian Wilson said of their policy
“We are pleased to be able to extend our existing IT Contractor policy. This is a natural step forward in supporting self employed customers in their aspirations to get on the property ladder. We hope that in widening our policy we will be able to help more customers benefit from our range of products and services.”
Finally, it is also worth mentioning Halifax’s current Help to Buy Mortgage scheme which offers a government backed 95% mortgage to anyone (including contractors). As with all Help to Buy Schemes the property must be over two years old and up to £600,000 in value. These mortgages are contractor-friendly and contractors (including non-IT contractors) can borrow up to the full 95% LTV based on their annualised contract rate. The interest rates on the loan are currently set at a very competitive 5.19%.