Lending criteria in the UK has not kept pace with the changes in the labour markets.
Lenders traditional income criteria
Lenders have a tendency to pigeon hole people. In simple terms, they view individuals as employed or self-employed.
- When assessing employed individuals for funding, lenders will access PAYE to establish what can be borrowed. Some lenders may take into consideration a percentage of additional income such as guaranteed overtime. They will require salary statements to verify the income.
- When assessing self-employed individuals for funding, lenders will look to verify income via accounts, and will either look at salary plus dividend or net profit. They will require evidence of two to three years of accounts.
The issue for contractors
Using traditional criteria for contractors in many cases does not fit.
For those of you using umbrella companies, many of your expenses are not included in your income calculation and therefore can lead to a shortfall in what you can borrow.
For those of you using limited companies, or acting as sole traders, again the same situation arises if you retain monies within your company. With the added requirement of two to three years accounts, problems may be caused if you do not have this information available.
We have worked vigorously for a number of years to influence lenders about contractors. Our main issue has been that you are not considered an employee in the traditional sense, and if you are a sole trader or a limited company you do not run a business with huge overheads. This has led to bespoke underwriting criteria for contractors. In essence we can annualise your contract rate and utilise this as an income figure for mortgage funding.