Knowing where you stand with Chelsea Building Society is somewhat unclear. It hadn’t used to be that way. But, as a contractor today, the building society’s lending criteria is far from straightforward.
As for the Chelsea brand itself, that’s also been difficult to pinpoint since the credit crunch.
The reason for writing at all about Chelsea Building Society is to forewarn contractors. The only time we ever come into contact with them is by way of complaint. Here’s our overview of why .
To contractors – or any self-employee – time is their most precious commodity. That, and that skill set that’s seen them strike out on their own in the first place.
The contractor’s mortgage application goes into a void. It gets to an underwriter’s desk from the sales agent and there it sits.
The reason? The Chelsea doesn’t offer contract-based underwriting. And contract-based underwriting is how contractor-friendly lenders work out contractors’ true affordability.
One can only guess at the reasons why Chelsea operates in this manner. Perhaps the advisors don’t like saying no. Understandable, to a point. But by leading contractors on, they’re doing perhaps more damage than they realise.
How they appraise self-employed workers’ affordability may also hint at why they fail contractors. Using salary and dividends for contractors’ affordability doesn’t work
A contractor’s profitability resides within their limited company. Contractors draw low salary and take dividends to maximise tax breaks afforded to limited companies.
That on its own makes Chelsea mortgages unreflective of a contractor’s affordability. At no point do Chelsea ‘contractor mortgages’ use net profits. Gross contract income never enters the equation.
That leaves SA302s only. By relying on those alone, a lender will never grasp how much a contractor can afford to borrow.
Don’t get me wrong. A contractor could, in theory, get a mortgage with Chelsea Building Society. But the offer would in no way reflect what said contractor could afford.
That’s because Chelsea’s underwriters only use the last two years’ tax returns. That figure’s derived from salary and dividends, which we know contractors keep low.
The underwriters then have an option to ask for an accountant’s projection for the next year. In the end, a contractor’s asked to submit three years’ accounts evidencing salary & dividend drawings to Chelsea.
Knowing how tax-planning works, that won’t even equate to one year’s gross income. But a contractor-friendly lender uses one year’s annualised gross contract rate as income.
This insightful approach avails contractors of funds that better reflect their income. Not some post-tax salary that works for permies, but not limited company directors.
Perhaps Roman Abramovich should have bought the Building Society, not the football club. Chelsea (the football club) have been amongst the big four clubs in top flight football for a while, now.
It’s a similar story with Chelsea, the building society. When it merged with The Yorkshire, they became the fourth biggest building society in the UK.
That was in 2010, when the mutual had a great presence in the south, predominantly in the capital.
Perhaps the jettisoning of £41M of “potentially fraudulent loans” in 2009 necessitated that merger. That huge write-off was mainly Buy-to-Let mortgages underwritten before the housing bubble burst.
Then in 2016, Chelsea disappeared off the High Street altogether. Seven of its 35 branches closed, the remainder rebranded as The Yorkshire Building Society.
Today, Chelsea Building Society is still going. But its service is only an online one or accessible by call-centre.
We know from experience that this approach isn’t what time-conscious contractors want! You want a constant contact to take you through the mortgage process, start to finish.
On that basis, Chelsea’s isn’t a service we’d recommend for contractors.
Now, I know for a fact that some of you hanker after the good old days of the self-cert mortgage. Before the FCA banned that type of loan, Chelsea was a force to reckon with in that field.
But, in all fairness, the interest rates associated with self-cert weren’t that great. And post-credit crunch, Chelsea mortgage rates aren’t up to much, either. Especially considering the hoops you have to jump through to get at them.
Now here’s a thought. What if the Chelsea adopted the simpler contract-based underwriting method?
Perhaps then they’d afford to drop their variable and fixed interest rates for contractors.
No. More chance of Abramovich answering your enquiry in a call centre, I guess.
In all seriousness, contractors have much better options when looking for a competitive mortgage. Don’t waste your time, either down the King’s Road or online. Getting a competitive Chelsea mortgage is a bridge too far.
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.