The Bank of England has left the base rate alone again, whilst they have been given new powers by the Treasury to control what banks lend on mortgages.

The focus on controlling irresponsible lending is apparently less about increasing rates in the short term, and more about controlling the mortgage lending policy of the banks. The announcement has come following a Treasury review about handing control over the UK mortgage and housing market to the Bank of England’s Financial Policy Committee.

The Treasury decided to start implementing ‘loan to income’ caps in October last year on the Government owned banks like RBS and the Lloyds Banking Group. Other lenders not subject to public ownership, like Barclays and Santander, quickly followed suit. The caps meant that no more than 15% of a bank’s lending can exceed 4.5 times a borrower’s income.

Why would this be a problem for contractors then? Andy McBride, Business Development Director commented on the impact.

“The cap on lending has already affected the maximum mortgage you can obtain with most lenders. For contractors this can be a massive issue if the bank defines their income in the wrong way. For example, many contractors draw a maximum of £40-45,000 in taxable earnings from your gross contract income. If these are used to determine lending and the affordability of this, the loan size most lenders will return will not exceed £200,000. The impact of this would be serious restrictions on where you can afford to buy, unless you can magic up a large deposit.”

McBride’s comments would mean that the average property price in London and the South East would be out of reach for most contractors if lenders used taxable drawings to define income. McBride goes on to comment that the solution was already in place, but many had to go through the pain of a declined application before they found it.

“The advent of the Mortgage Market Review has meant that lenders use less of the provable income anyway, as some has to be set aside to manage lifestyles of borrowers. That, combined with these caps that will now be enforced more strictly, mean that the income must maximise via the gross contract earnings, or there is a high chance of a shortfall in borrowing, or a declined application.

“Using contract-based underwriting is fast becoming the only way for a contractor or freelancer to afford to buy in areas where property prices have accelerated in recent years.”

Article By:Taj Kang, Business Development Director at Contractor Mortgages Made Easy

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