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Ever since self-certified mortgages were banned at the start of the credit crunch, contractors have been trying to obtain a straightforward route to mortgage funding.
It’s worth noting that it’s easy to get an application wrong if you do it yourself. Surely you just go into Google and type “cheapest mortgage rate”, and apply for a mortgage via an increasing number of price comparison websites? If you don’t compare by rate, how are you supposed to compare deals? Like most of our clients, these questions are sensible and logical. The problem is that mortgage lenders are not, particularly when assessing contractors as a potential risk. Let me explain…
When approaching a bank, you have to neatly fit into one of their categories. There’s “Employed” or “Self-Employed”. A limited company director is self-employed, and the umbrella company would be employed. Anyone using one of many creative offshore mechanisms is at the mercy of the bank as to which category they fall into. So, what’s the problem if we know this will be the approach from banks? Surely we just prepare our payslips or trading accounts accordingly right? Wrong.
There are sub-categories, and more detailed criteria, and assumptions regarding taxable income, and that’s the tip of a complicated iceberg with one lender. Different lenders have different views on risk. The underwriting flowchart would be long and complicated so I won’t bore you with the intricacies of different lending policies. Unless you are a permanent employee, or self-employed under your own name with a long track record and history of paying maximum tax, lenders can usually find a reason to say “No”. The “No” usually presents itself as a request for further information. Examples would be, “Please supply your last two P60s”, or “Please supply latest 3 years SA302s”. This begs a few questions.
Why would I have gone contracting if my previous (much lower) employed earnings will form part of the income assessment? Surely the point of contracting is more income and increased affordability for a contractor mortgage application! What are you supposed to do when you’re asked for an SA302? What the heck is an SA302 anyway?!
Sound familiar? Hopefully not, or you are one of many who have to get it right next time round after a declined mortgage application. So we know what a frustrating and unsuccessful mortgage application looks like for a contractor, let’s look at a successful scenario.
It starts with appointing a firm that knows the contractor mortgage landscape. Forget going directly to a bank unless you have a nice tidy scenario they will understand. To put this plainly, most contractors will have to be drawing a lot of income from their limited company as salary and dividends. This is exactly what an HMRC SA302 shows – personal tax paid in a given financial year. For those of you who use an umbrella mechanism, you will get the same request for SA302s. This request is the death knell for your mortgage application as a contractor. The right firm will avoid the need for providing irrelevant HMRC documents by presenting the case in the correct manner – as a professional contractor who is eligible for bespoke underwriting for contractor mortgages rather than a limited company director or employee.
Getting the banks to understand the risk profile of a contractor is not something you can go into a bank and demand. Heightened understanding and more relevant risk assessment for contractors comes via ongoing negotiation and presentation of large volumes of contractor mortgage applications over a sustained period of time. Developments in tax legislation and the resulting complexity of certain umbrella mechanisms means this dialogue has to continue. That’s where the Contractor Mortgage broker comes in.
When presented by a Contractor Mortgage broker, banks understand the typical contractor client scenario in a different manner. They understand the niche skills of the potential borrower that allow a steady flow of contract income with minimal enforced periods out of work. They understand the calibre of end client requiring the services of such a person. They understand that historic lending arranged by a Contractor Mortgage Broker has a very low default rate. They know verification of affordability has been carried out diligently. The banks like working with this type of broker as a result of all of these points, and it means the Contractor stands to benefit from this familiarity.
When looking at contractor mortgages it is also important to note that not all lenders offer specific contractor mortgages and many still take the conventional route in assessing your income.
So, coming back to the question at the top, the answer is “Speak with a Contractor Mortgage specialist”. You probably gathered that by now.