Posted by John Yerou
on February 16th, 2015 14:15pm in
Last Updated on December 23rd, 2018 17:02pm.
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After the credit crunch, the ensuing financial climate made it hard to get a mortgage. The banks that took the blame for the economic meltdown tightened their belts.
In a way, they had to. Lenders had to prove that they’d learned a lesson. They had to show a global audience that they’d become more responsible.
But this stance caused its own problem. Lenders would only approve mortgages for borrowers that matched a perfect borrower profile. Many wouldbe homeowners fell short of that target, causing the housing market to suffer.
Despite ongoing government pressure, lenders still didn’t buckle. Only applicants with high salaries, perfect credit files and hefty deposits qualified for mortgages.
Anyone with a specialist borrowing need had no chance. Buy-to-let, self-employed and contractor mortgages became almost taboo.
Defining the new specialist mortgage
There is evidence of a type of contractor mortgage coming to the fore in the early 21st century. The housing boom fostered this need: new lending criteria for a new age. But the subsequent credit crunch shelved those prototype mortgages. It’s been much that way until only recently.
Since 2014, opinions have begun to change. Optimism has returned to the housing market. Plus, the self-employed now constitute an unprecedented percentage of the labour market.
In tandem, types and availability of specialist mortgages on the market have increased. Halifax got the ball rolling launching their own contractor oriented mortgages. Early adopters like Clydesdale Bank and Virgin Money followed suit.
They offered a mortgage that considered applicants outside the monthly salary/high deposit pattern. Their underwriters could thus base an affordability decision on a much wider template.
As such, more independent professionals found themselves – at last – creditworthy. Contractors found mortgage solutions tailored to their way of working. Lenders were willing to provide mortgages to buy-to-let freelancers and the self-employed.
Why Are Contractor Mortgages Necessary?
Contractor mortgages are necessary because more people are changing how they work. They’re going into business for themselves as small business owners, freelancers or contractors.
When these workers need a mortgage, standard criteria for mortgage approval no longer fit. That’s despite many (if not most) contractors earning more than their salaried counterpart. The market needed mortgages that optimised limited company income, not punished it.
UK Umbrella Contractors
This is especially true of contractors using umbrella payment structures, even moreso today. Most public sector contractors now use umbrella companies to facilitate payments.
These are workers who are both employed and self-employed, so fall into a grey area. Their umbrella company will issue them payslips, which is great in theory. But they only confuse ill-educated advisors, creating more havoc than headway. That’s because umbrella payslips aren’t the same as lender-preferred permanent employee payslips.
A specialist contractor mortgage broker will be able to break down umbrella pay. This highlights relevant elements for underwriters, giving the contractor more chance of success.
What Exactly Does the Term ‘Contractor Mortgage’ Mean?
A contractor mortgage is, as one would expect, a mortgage geared towards contractors. And, yes: it may require specialist brokers and underwriters. But it’s still a standard, ‘prime’ rate mortgage.
To assess a contractor applicant, the specialist lender/broker will look at many elements:
- how many years the contractor has been working contracts;
- retained profits of the applicant;
- the (day) rate they charge for a contract;
- the duration of the contract they’re working at time of application;
- and sometimes, the contracts they have lined up for the months ahead;
- the usual credit status, proof of ID and bank statement checks.
Are They So Different from Normal Mortgages?
It used to be that contractor mortgages fell into the self-certification category. Contractors and freelancers could only apply for self-cert products. Not any longer (Hallelujah! And so say all of us!).
Lenders built self-cert upon much higher interest rates and a monolithic style. They were unfair and punitive mortgage loans, but nonetheless accessible. But high-earning contractors deemed higher interest a fair pay off against little income evidence.
The good news was that the FCA, in effect, banned self-certification mortgages. Those loans were amongst the first victims of the responsible lending guidelines upheaval.
Now contractors can access mortgages that are all but identical to those on the High Street. Albeit that they must satisfy a wider set of eligibility requirements.
Who Can Apply for a Contractor Mortgage?
No specific regulations exist that limit contractor mortgages to a specific class of worker. Those lenders who offer bespoke mortgages for contractors develop their own lending criteria. Those criteria will match the brand ethos and the lender’s attitude to risk.
Today, you can find whole ranges of product tailored to different employment styles. The variation offers a surprising number of different contractor-friendly mortgages. As more lenders come on board, the comparison to the barren market a few years ago is striking.
The Halifax Took Control: A New Chapter Began!
When Halifax launched its range, only IT contractors could apply. Today, they welcome all contractors, regardless of industry. Although, those outside the IT sector must surpass a day rate threshold.
Other lenders have stepped in for those who don’t meet Halifax’s high expectations. That said, many of these other lenders do go through specialist brokers.
This intermediary-only route makes sense. Specialist brokers can highlight the strengths of a contractor’s application as they know contracting. The specialist lender’s underwriter can then approve the complete vetted package.
This method has opened up the floor to almost all limited company freelancers and contractors. Those with imperfect credit or first time buyers can now get onto the property ladder. As can those who’ve not been contracting long and so have limited accounts.
Do Contractor Mortgages Cost More?
There is no good reason why contractors should incur greater costs than other applicants. Interest rates should float around the same as a standard high street mortgage.
The only difference may be the cost of the broker who sets it up for you. As a contractor, it’s important you find a good one. So shop around when choosing an IFA or broker. Make sure that they are FCA registered.
Find out the cost of their fees and any built in percentages up front. Get a price for the total cost of them securing your mortgage for you. The one thing you could use the High Street for is to compare interest rates and charges.
If you forego such a broker, you’ll often get an uneducated advisor in branch. They will pigeonhole you as self-employed, thus offer you a self-employed mortgage. This is not the same as a contractor mortgage and will often end in rejection.
Impairments like mortgage or loan rejection will affect your credit file. In turn, they can affect the type of mortgage loan you would otherwise have secured. If that transpires, then, yes: your mortgage rate will reflect your credit status.
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.