Since the FSA banning of "self-cert mortgages" along with increased tightening of lending policy for self-employed workers, many contractors are left wondering what to do about getting a mortgage.
Self-cert mortgages were often labeled by many as "liar loans" because they permitted self-employed borrowers to state their earnings without having to provide any proof of their their income. These types of schemes were aimed to help workers such as the self-employed,
and contractors whose incomes were not regular, but they were seen by many as hugely controversial. Often, people would exaggerate their income in order to meet the affordability calculation required for their loan. The FSA put a stop to Self-Cert mortgages shortly after the financial crisis in 2008.
Many contractors at the time felt that they would be excluded from the property market as consequence of self-cert mortgages being removed. Or even worse, those with mortgages would remain stuck on the standard variable rate (SVR) as they would not be able to remortgage. Some contractors went back to permanent employment just to enable them to get a mortgage.
Firstly, we would like to dismiss the rumors that Contractors who operate through a limited company will be affected by these changes. Those contractors that did take the self-cert route were badly advised by mortgage brokers or lenders with no experience of dealing with contractors.
The main reason why contractors are taken down this route for a mortgage is that most mortgage brokers and lenders struggle to understand the trading structures and payment mechanisms that contractors use. When a contractor walks into a high street bank and tells them that they run their own limited company, they typically get asked to produce accounts for the past 2-3 years. That’s fine for a contractor that’s drawing most of their income in salary and dividend drawings. However, for tax reasons many contractors draw a minimum salary and also limit dividend drawings to avoid higher rate tax. Although this is perfectly reasonable tax planning strategy, it also has the unintended consequence of reducing the amount that contractors are eligible to borrow under the standard criteria used by most lenders.
So what are the options available to Contractors seeking a mortgage? We’ve already discussed the self-employed route, which involves being assessed on 3 years accounts, which is a struggle for most contractors. The other option is applying for a contractor mortgage through mortgage specialist. Mortgage specialists providing financial services to contractors have managed to persuade a number of high street lenders to simplify their underwriting criteria with regards to what qualifies as relevant earnings for contractors.
There are now high street lenders providing contractor mortgages based on assessing contract annual earnings alone. The mortgage loan can be as much as 4.5 times your annualized contract rate. This means that a contractor earning £450/day can potentially borrow £486,000.
Contractor mortgage specialist will work with contractors to package all the documentation required by the underwriters to show that you have ongoing contracts at a good rate of pay.
Some of the documentation that required by the mortgage brokers will include a copy of your latest contract, CV, bank statements and proof of ID.
Once all the documentation has been packaged by the mortgage adviser, they will be sent directly to the key senior underwriters who are familiar with “contractor based underwriting.
There are a now a number of high street lenders that will provide mortgages for contractors working in the following professions: IT, Finance, Engineering, Marketing, Oil & Gas, Medical and Managing Consultants.
