Over the last few years contractors setting out to find themselves a mortgage had to brace themselves for long and tedious debates with their bank manager as to why they were a good investment and why they should not be shunted over to higher interest self-certification mortgages. Invariably their bank manager would not be convinced and the contractor would end up with a far worse deal than the average person on the high street despite the fact they probably earned more than them. Nowadays however, things have significantly improved. Over the last few years the banks (well some of them anyway) have slowly woken up to the fact that contractors are actually some of the best earning and most reliable customers they will take on and that despite the fact that contracts start and stop, most contractors are almost continuously in work and at higher rates than their salaried counterparts. It is this realisation that has inevitably led to the banks and other financial institutions developing bespoke underwriting and alternative criteria in order to permit contractors to be eligible for the same mortgages and mortgage rates as everyone else.
Contractor Mortgages are based on the following
- annualised rates of income,
- their length of time working in the same profession and as a contractor and
- on contracts they have in place and lined up in the future, some banks now offer top prime-rate mortgages to contractors.
That’s not to say all the banks are falling over themselves to win contractors’ business. Some of the big banks such as HSBC do offer contractor-type mortgages but they don’t make them easy to get. Other institutions that used to offer mortgages for contractors have dropped out of the market. For example Woolwich were one of the few institutions offering contractor mortgages as long ago as 2000 and credit where it is due, were the first to market mortgages in which the contractor’s value was assessed rather than the usual salary multiples. Sadly they stopped this product in 2007 in the middle of the credit crunch and have not returned to it. Other banks to offer contractor style mortgage criteria in the early days were Santander, Northern Rock and Cheltenham and Gloucester, all of whom have stopped offering such products (with Northern Rock no longer offering any products at all!)
Thankfully, a number of new products have come onto the market in the last couple of years, some of which are very good and well worth considering. Some companies such as Virgin Money (who bought up Northern Rock) or Chelsea Building Society offer contractor mortgages but applicants must satisfy stricter criteria. For example, to qualify for a Chelsea Building Society contractor mortgage (and to calculate income on their annual contract value) a contractor must be an IT contractor and must have at least 12 months left on their current contract. If the contractor is working under a Limited Company arrangement then they need income verification for the previous two years and a projection from an accountant as to the year ahead.
Also worth noting are Skipton Building Society (one of the UK’s oldest mutual building societies) who offer a number of different niche products which might be of interest to contractors. These could not be described as ‘contractor-friendly like some of the contractor mortgages to be discussed below, but they are still worth a look. For a Skipton contractor mortgage the applicant must have been working as a contractor for at least two years and must have a minimum of 6 months on their current contract (with less than half unexpired at the point of mortgage application).
When it comes to more specifically contractor-friendly mortgages there are two or three companies worth considering. The first is the Saffron Building Society who have just recently opened up mortgages to contractor-friendly underwriting, launching contractor-specific products in March 2013. These are not available directly in the Building Society – rather they must be arranged through mortgage brokers. They are flexible in that they do not only apply to IT contractors but across all sectors and the contractor must be able to show proof of contracting history across a minimum period of just 6 months. They must also show a contract with an unexpired term of more than six months and their income can be calculated on an annualised multiple of their daily rate. They do have one flaw however, which is their rates can be a little higher than other lenders in this sector. One alternative is to try Furness Building Society, a smaller institution based in Cumbria (but now open to all of the UK) who have just opened up their underwriting to contractors. They will assess applicants in two different ways. Either through the traditional route of two years trading accounts which assess the applicant based on the net profit of the Limited Company (as opposed to the less flexible salary and dividend draw of other lenders) or on annual contract value. To qualify for the annual contract value there must be six months left on their current contract or they must have a history of contracting of 6 months without any gaps. They also want to see a detailed contracting history over the previous two years with no significant gaps.
Finally, there are currently two companies who are truly leading the charge when it comes to contractor mortgages and they are Clydesdale Bank and The Halifax. These two have been offering decent contractor mortgages for many years and continue to offer mortgages which use criteria based on contract value rather than monthly salary and which look at annualised salary, contracts in hand and contracts in the future (as well as all kinds of other flexible criteria). Both also open their mortgages up to contractors across many sectors. Clydesdale accept contractors in the following sectors for mortgages: IT, Engineering (subject to a minimum rate of £75,000 per annum based on 46 weeks of employment), Banking (on provision of two years minimum history of contracting and a £75,000 minimum contract rate based upon 46 weeks of employment), Accountancy, Oil and Gas, Solicitors, Compliance Professionals and Actuaries. They assess affordability of contractors who have been self-employed for two years or more by either looking at their average weekly rates or by multiplying their current contract rate by 46. They are willing to accept applications from contractors who have had gaps of up to six weeks between contracts and they are also able to accept applications from contractors who have less than two years experience (with some conditions).
Similarly, Halifax are able to accept mortgage applications from Agency Workers, Fixed or Short Term Contracts and Sub Contractors across all kinds of sectors provided that the applicant has continuous employment of 12 months+ and has more than 6 months remaining on their contract. Alternatively the contractor should at least be able to show two years continuous service in the same kind of employment. Halifax will treat applicants as self-employed if they are paying their own tax or sub-contracting to more than one company. Additionally, if the applicant is an IT Contractor or a Contractor who earns more than £500 per day then the gross valuation of the contract will be sufficient evidence of income (whether employed or self-employed). The Halifax were the first bank to offer this deal to IT contractors and to accept this multiple of their day rate without any need to show proof of historical income. More recently they also became the first institution to offer it to contractors not working in IT. This is a particularly impressive deal from Halifax as many other lenders who are offering the same deal require two years of records to prove income. The deal offered by Halifax means contractors could even sign up to a mortgage just after starting their first contract. Additionally, they have now extended this further and will look at offering the same deal to contractors and freelancers who work in all fields and who have a day rate in excess of £300.
The mortgage market changes regularly, but if you’re looking for a contractor friendly mortgage these banks are a good place to start. Best of all, our CeMap qualified financial advisors have contacts with the underwriters at most of these banks and can present a contractor’s individual situation before a formal application is submitted. This bespoke underwriting enables us to agree lending criteria and conditions upfront, avoiding any of the drawbacks which contractors might face in approaching the bank directly.
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