The way we all work has changed dramatically over the past few years and in today’s economic climate it has been interesting to see the changing work patterns of many of our clients over the past couple of years.
There seems to be an increasing number of applicants who now work on a “non-standard” basis, (whatever “standard” means these days), whereby a permanent PAYE position gives way to either a self-employed, freelance or contractor basis.
Whereas it used to be the preserve of those in the IT specialist or media who work on various short-term contracts, now we are seeing a growing number of industries, from medical to finance to graphic design, taking this option.
For many, it is a precursor to full self-employment and setting up a limited company, whilst for others, it is simply an easier and more profitable way of working.
The issues for these growing number of contractors is that mortgage providers have struggled both to understand these working patterns and to offer mortgage loans to those who may not yet have 3 years accounts, or only have a defined contract period.
Lenders attitudes to contractors
Many contractors may have approached a number of high street lenders and met with the same response, “Sorry you do not meet our policy”. With an awful lot of lenders, it is as simple as that – either you tick all of their boxes or they are not interested. Unfortunately for most UK lenders a short-term contract, although potentially financially rewarding, just does not give them the long-term confidence that a permanent contract does.
This can be extremely frustrating, especially if you are keen to wrap up the deal that will get your hands on the keys to your dream home. Arguably, working on this basis with a level of flexibility and freedom can be just as secure, if not more so, than working on an employed basis, especially when redundancies seem commonplace.
For a contractor or freelancer on a fixed term contract, lenders do not have the luxury of being able to assess guaranteed employment and income in order to determine lending options.
They, therefore, need to make themselves comfortable that the income currently being received is going to continue. In order to do so, they will want to assess the experience of the applicant in the given industry, the history of contracting, the length of the current contract and the likelihood of it being renewed.
Lenders offering mortgages to contractors will each have their own criteria in line with this and that is where it can get quite complex.
The ‘Gold Standard’ Contractor in a lender’s eyes will have a lengthy history in the given industry along with at least a 2-year history working on fixed short-term contracts. They will want to have seen this contract renewed previously, whether this has been on a 3, 6 or 12-month rolling basis and at least 6 – 12 months remaining on the existing contract.
Once they have comfort that this criteria has been satisfied they will then look to assess the lending amounts available. A typical approach to lending multiples is to look at the daily rate, not including VAT, multiply this by 5 to give a weekly rate and then multiply this weekly rate by between 46 and 48 to allow for small gaps in employment and breaks for holidays. This will provide a lender with the ‘targetable’ annual income of a contractor and they can look to multiply this, after taking into account any monthly commitments, by anywhere between 3.5 and 5 times to give the maximum lending amount available dependent on each lender’s criteria.
Even then the above guidelines were often only reserved for IT Contractors and certain professionals including Doctors and Solicitors. Fortunately, lenders today are wiser to the ever-changing economy and the types of employment structures offered by large companies. This has seen them open up to far more contractors in industries including banking, oil and gas and media.
First Time Contractors are now considered by certain lenders. Lenders would require a minimum of 6 months remaining on a contract with at least a 2 year history in the same line of work, be that on a full time employed basis or otherwise.
Lower lending multiples might apply although there are more options available to certain professions and those on a daily rate of £312.50 plus.
Self-Employed mortgages are an alternative option for experienced contractors working on a gross pay basis. Lenders are able to take comfort in continuing income by assessing the most recent 2-3 years business accounts and averaging the income accordingly.
When assessing Self-Employed income lenders will fall into two categories: those that take only the Net Profit Before Tax figure and those that will look to take the Directors Remuneration/Salary and Dividends into account. A good broker can review business accounts and advise of the leading options and lending limits available from such lenders.
The good news is that Coreco have proactively built up relationships with lenders who are able to understand this type of borrower and can assist in providing finance using a blank sheet of paper approach rather than the tick-box mentality that many lenders follow. We take a more pragmatic approach to actually understand you’re individual circumstances and what made your choice of employment so attractive in the first place.
We know which lenders will take the time to listen to your circumstances and provide reasons why they can lend to you, rather than excuses why not to.
We have worked tirelessly to build long established relationships with the very best lenders in the market. As a professional mortgage adviser we are not limited to a short panel of mortgage lenders like some other advisers. We have access to them all, whether that is on the High Street, broker only providers or Private Banking facilities for larger loans.
These specialist lenders will consider the combined salary and dividends you are drawing from your business, or work off a calculation of your day rate, that can suddenly mean that mortgage affordability is no longer an issue.
Knowing the lenders that will take the time to listen to your circumstances and provide reasons why they can lend to you, not just why they cannot, is a major step in the right direction. By highlighting this growing trend, we hope that more lenders will look to understand and ultimately lend to this sector of the market.
All this means that you can take comfort in the knowledge that no stone will be left unturned in finding you the right mortgage, in the right structure and at the right price for you. We take our time to ensure you have the necessary finance as well as protection in place to see off any eventuality.
If you are finding it difficult to find the money for that dream home, then worry no longer. We have the expertise to turn that dream into your reality.