Contractors and freelancers often face a difficult time securing mortgages for a number of different reasons. This can turn what should be a relatively simple process into a minefield of confusion, especially in today’s lending climate with most Banks and Building Societies reluctant to lend and self certification mortgages being a thing of the past.
Ben Rogers a Senior Mortgage and Protection Consultant from Power Mortgages Ltd (http://www.powermortgages.co.uk), a mortgage and protection brokerage who specialise in helping Contractors and Freelancers explains how a Contractor mortgage works.
The reasons Contractors and Freelancers struggle to obtain mortgage funding broadly fall into two main categories, the first being the inability to prove all of their income, and the second surrounding the fact that there is an end date on the contract and as such the lender questions how mortgage payments would be maintained past this end date.
More often than not, as a Contractor or Freelancer you will be remunerated via your own Limited Company or via an Umbrella Company. Each route has its own issues which are as follows:
If you have taken this route, then chances are you will own more than 25% of the shares of the Limited Company (often 50% with a partner or even 100% outright). Most lenders criteria state if you own more than 25% of the shares of the company you are employed by then they will assess you as being self-employed. To satisfy their proof of income requirements on this basis you will need to provide in most instances 2 or 3 years of Limited Company trading accounts which leaves a lot of Contractors stuck already if their Limited Company was incorporated less than 3 years ago.
Even if you had the 2 or 3 years trading accounts the lenders would only define your income as your salary and dividend draw looking at the average figure over the 2 or 3 year period. Therefore, any expenses, pension contributions or profit you have retained within the Limited Company will be ignored potentially throttling the amount you are able to borrow. Likewise if your contract rate has increased and your figures for the most recent year are higher, they will be averaged down if previous years figures are less. You may have also taken time out or taken an employed position for a while, which will affect the figures your Limited Company shows at the year end all of which will mean your borrowing ability will be affected.
Most lenders do not really understand the role of Umbrella Companies and often see them as employment agencies of sort. This can lead to the lender classing you as a temporary worker and as such you fall out of their lending criteria. Even if this is not the case, Umbrella Companies often remunerate their clients in a number of tax beneficial ways such as trust or loan payments, holiday pay, expenses, commission, over time and bonuses. Whilst beneficial to your net pay this often hinders your potential maximum mortgage borrowing with lenders only using 100% of income which is taxable (ruling out the trusts/loan payments and expenses) or often using only 50% of what they deem is ‘non guaranteed’ income (holiday pay, commission, bonuses).
Some lenders understand that Contractors and Freelancers are not the risk that they have historically deemed them to be and have catered for them in their own unique way as part of their lending criteria.
This enables you to use your contract as your proof of income annualising your daily or hourly rate and using this figure as your earnings, negating the need to reference the Limited Company accounts or Umbrella Company payslips or tax returns. To enquire about how much you can borrow based upon your contract rate, head to http://www.powermortgages.co.uk/contact.html
By providing your contract as your proof of income this will obviously highlight the end date on the contract to the lender which leads to the second issue of proving that you have the ability to service the mortgage throughout the whole of the mortgage term. To get around this point lenders have agreed to take a common sense approach and look at your experience and skill set as a Contractor or Freelancer. A copy of your CV is normally required which can demonstrate your previous experience within the industry both on a contracting and permy basis as well as highlight your niche skills which make you desirable to potential end clients and employers. This will provide the lender with reasonable confidence that should your current contract not renew you would be able to secure a new contract or permy role on a similar income thus being able to maintain the mortgage payments.
Many non-specialist Mortgage Advisors do not have the detailed understanding of the ‘Contractor/Freelancer friendly’ lenders’ criteria. They will also not have a high level of contacts built up with lenders to get cases reviewed by the Underwriters if they do not quite meet standard criteria. By using a Contractor/Freelancer specialist like Power Mortgages (http://www.powermortgages.co.uk) you can maximise your chances of obtaining the best mortgage for your needs and circumstances and minimise the chances of facing a declined application.
To find out how much you can borrow, get illustrations based upon your own personal circumstances or obtain an agreement in principle please contact Power Mortgages on 02380 633415 or email firstname.lastname@example.org: you can also find out more and apply for a specialist Mortgage Advisor to contact you through their website www.powermortgages.co.uk
Power Mortgages Limited is an Appointed Representative of Personal Touch Financial Services Limited which is authorised and regulated by the Financial Services Authority.
Power Mortgages normally charge a fee for mortgage advice upon completion. The amount will depend on your circumstances, but a typical fee would be around £499.
(NB: YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.)