For people who have been contracting for a long time this question will not come as a surprise. The fact is that contractors have long since realised that banks and other financial institutions can be somewhat ‘reluctant’ when it comes to lending money to the self-employed or those who work freelance. With all the manifold advantages of the contracting lifestyle, difficulty getting a mortgage is the number one disadvantage that most contractors will cite when looking at the downsides of their job. And if things were tough in the 90’s and early 00’s, they became even tougher still after the credit crisis in 2008 when most financial institutions were forced to pull in their horns and toughen up their lending criteria considerably. This had a particularly harsh effect on those people applying for mortgages that were anything other than standard – and therefore affected contractors significantly.
Employed or Self Employed?
Consequently contractors have for a long time found themselves confronted with two types of lending criteria – employed and self-employed – and if they did not fit either of these two models they would inevitably be turned down for their mortgage. Although most contractors were ‘self-employed’ many would also be maximising their income through tax-efficient payment schemes and umbrella companies. For a lender these schemes are too confusing for their underwriting departments and consequently those underwriters would simply slot the contractor into one or other model and ignore any additional payment streams which did not fit in that model. So, a contractor using an umbrella company would be seen to be ‘employed’ by the mortgage company and therefore their income would be judged on pay slips alone. Other earnings and expenses would not be taken into account when it came to calculating if they earned enough for a mortgage. Worse still, banks would also look at a contractor’s income and question the potential longevity of it. Underwriters would typically see that contracts, no matter how well-paid or regular, came with end dates and they would take this as meaning that the applicant has the potential to not be able to keep up their repayments for the full term of the mortgage. This also would result in the refusal of the mortgage application.
These dual issues of incorrect assessment of income and false assumption about income longevity have led to a large number of contractors being turned down for mortgages or offered mortgages at much worse rates for much lower amounts. But thankfully nowadays it does not mean the end of the road for determined and savvy contractors. There have been some changes over the last few years and it is now possible to avoid all of this, or move on if it happens to you, and find yourself a genuinely good mortgage deal.
Presenting Your Income Correctly
How? Let’s assume you are a contractor who has applied for a mortgage through the traditional route and been turned down (although the following also applies if you are applying for the first time). Lets also assume that you fit in with one of the scenarios mentioned above, either as a contractor drawing salaried income and dividends from a limited company or as an employee of an umbrella company, both of which will cause problems at any high street bank or financial institution as they will require the production of document HMRC SA302 – which simply lists personal tax paid in the financial year. Such a route is far too simple and ill suits the contracting payment style. Instead, it is far better to present your income to the mortgage underwriters in the correct way which will show them that you not an employee nor a company director, rather that you are a well-paid professional contractor and that you require a bespoke underwriting that will be of benefit both to you and to their bank.
‘Easier said than done’ you may be thinking. Certainly it is not something you can do easily and even if you could there is no guarantee they would listen to you. Instead, you need to find yourself mortgage brokers who specialise in precisely this sort of exchange and who are fluent in contractor payment models and contractor mortgage risk assessment. These will be brokers who do nothing but organise mortgages for contractors and who have managed thousands of these types of mortgage before you rock up at their door. They will know every contractor mortgage on the market (and thankfully over the last three or four years a number of specialist contractor products have been released) and will understand all of the vagaries of tax legislation that affect contractors and the tax efficient schemes they employ. More importantly still, they will have a direct line to the underwriters of contractor products themselves and be able to talk to them ahead of your application to find out exactly what they are looking for and how they want it presented. This will ensure that you don’t get turned down again and receive further black marks against your credit score. It also means that in presenting your application they will highlight all of your income streams, your professional standing, the likelihood of you finding further contracts at the end of your current one and your niche professional skills that mean you are always likely to find work. They will, in short, prove to the lender your affordability and reliability and the bank, having dealt with them before, will feel comfortable in their assessment.
So, if you have been turned down, or are worried that you will be, don’t despair – there is a better way to apply for a mortgage as a contractor, one that is relatively painless and will offer you the same opportunities, the same rates and the same deals as salaried workers.[/vc_column_text][/vc_column][/vc_row]