If you’re experienced in securing mortgages for contractors, this conversation gives you nightmares. It goes something like this:
“Yeah, I wonder if you can help? I’m a contractor and HSBC were dealing with my mortgage application…”
You steel yourself for the worst. In fact, you can almost fill in the blanks yourself:
“They took down the details of my contract…
“…adviser gave me a decision in principle…
“…I put an offer in on a house…
“…now they tell me they’ve rejected my application…
“…underwriter says it’s “out of criteria”; what does that mean?
“Help! What do I do now?”
This is a sad, but true, reflection of what passes on the High Street as a service.
Many lenders are quick to advertise that they deal with contractors. They’re just as swift in offering an “Agreement in Principle”.
But the truth is, most lenders don’t have bespoke products for contractors. And a decision or agreement in principle isn’t the same as a firm mortgage offer.
Many contractors only find out these subtle nuances too late, both to their detriment.
Before committing to the sale, get a firm mortgage offer
What’s annoying about the whole scenario is this. HSBC won’t announce that they’ve rejected an application until the 11th hour.
Even more infuriating is the lender’s eagerness to issue an “Agreement in Principle”. They shouldn’t do that without checking the underwriting criteria they need for contractors. Often, their lending model falls short, leaving the contractor high and dry.
Don’t get me wrong, I’ve not written this article to besmirch the name of HSBC. Or the name of any other lenders offering mortgage for contractors, for that matter.
Rather, I want to highlight why High Street lenders fail contractors time and again. Moreover, what you need to do to avoid the same trap into which so many contractors before you have fallen.
Beware, the trappings of the Search Results
Our tale of woe begins when a contractor Googles “best low rate mortgage deals”. Or something along those lines.
The search results will contain recognisable lenders such as HSBC, First Direct and ING. There’ll no doubt be a whole host of mortgage comparison websites in the results, too.
Unbeknown to said contractor, the vast majority of mortgage products displayed are useless. But they won’t find out until they’ve committed at both an emotional and financial level.
Let’s end this frustration right now. It will help your search for mortgage funding if you’re aware of:
- why most High Street mortgage lenders can leave contractors out of pocket;
- what you can do to secure a competitive mortgage rate based on your contract!
Falling foul at the final hurdle
Many clients call us after a lender has issued the Agreement in Principle, but failed to complete. The reason the application failed? The underwriter rejected it because it was ‘out of criteria’.
There are several possible points at which your application fell down.
Yes, your in-branch adviser may have grasped the concept of what you do. They may even have understood how you’re paid, to an extent.
But what they don’t know is how to present your information to their underwriters.
How can that be the case? These advisors approve mortgages all the time
Why does that make a difference? You’ll struggle to find this type of bespoke service in your local branch.
Instead, your advisor will work with the bank’s standard model, which won’t work for you. On that basis, your application may have failed if the advisor:
- recommended a self-employed mortgage for you (based on accounts);
- became wary of the short-term nature of your contract;
- documented only your take-home pay, not your contract rate;
- didn’t factor in your tax-planning strategy, including retained company profits.
These are typical oversights when lenders don’t have a policy for limited company contractors.
It’s not a definitive list. There are countless other reasons why the underwriter has rejected your application.
But what it boils down to is this. Most High Street banks are 1-Dimensional when assessing what qualifies as earnings.
As a tax-savvy contractor, your net pay won’t cut the mustard for their lending criteria. With most lenders showing unwarranted bias to permies, your task doesn’t get any easier.
But take heart! There is a way to get a mortgage based on your contract, and not on some antiquated view of affordability.
Choose a specialist broker who understands contracting
Most people are unaware that contractor mortgages exist at all. Why? Because searching without using the term contractor will only show mortgages tailored to ‘permies’.
To be fair, the contractor mortgage market is much smaller by comparison. It is growing in tandem with the UK’s expanding self-employed workforce.
But finding a knowledgeable broker is tough unless you know what you’re looking for. Even after Googling yourself into a straitjacket, generic search terms will get you nowhere.
Yet a select few specialist brokers have been processing contractor’s applications for years.
What’s the key to their success when all others have failed?
Specialist brokers will package your application so that it appeals to underwriters. Getting underwriters on side is the first big step, which we can’t emphasise enough.
Also, most successful brokers are those not tied to just one lender. Your best bet is with an unaffiliated broker, one who can provide a genuine “whole of market” service.
What does “whole of market” mean?
It means they have the freedom to advise you on all suitable mortgage products from all lenders!
They’ll be able to help you navigate beyond the gatekeepers in branch and at call centres. Your application will go straight to senior underwriters, often with whom relationships already exist.
This route is also the swiftest. There are no accounts. Continual employment with the same employer isn’t a factor either. All this ensures that applications go through hassle-free and on time.
What about mortgages based on my self-employed status?
The majority of High Street lenders ask to see at least 2-3 years accounts. This is so they can assess your affordability based on dividend drawings. For contractors who draw large dividends through their limited company, that’s often good enough.
But drawing large dividends isn’t how most contractors operate. They keep dividend drawings low for tax purposes, a fact that bypasses in-branch advisors.
Low salary and dividends is the norm for a limited company contractor. Great strategy for tax-planning, but it doesn’t help them when applying for a mortgage.
That’s not to say that all High Street lenders are so dismissive. Some offer types of contractor mortgages and made them easy to access, by comparison.
NatWest, Coventry Building Society, Virgin Money and Clydesdale Bank spring to mind. These lenders all include retained profits in their affordability assessment in some way.
But getting them to appraise your affordability based on your contract rate might be a bridge too far.
And if I’ve got less than one year’s accounts?
Contractors with less than one year’s accounts won’t have access to the self-employed route. Period. But that doesn’t mean to say that they can’t get a mortgage. Far from it.
By approaching a specialist mortgage broker, they too can access contract-based underwriting. In that respect, there’s little disadvantage compared to professionals who’ve been contracting for years.
Even then, knowing where and how to look for a broker who can make the most of your contract is paramount. Leaving it to the search engines or the High Street can be fruitless, futile and frustrating.
Why not put your Smartphone down and let us compare contractor mortgages for you? We don’t use Google, we use noodle. Let us take over your search before your noodle goes to pot.
Author: John Yerou
John Yerou is the owner and founder of Freelancer Financials; a trading style & trade mark of the award winning Mortgage Quest Ltd. One of the most recognised names in providing mortgages for contractors and freelancers across the UK.
In 2004 John began his career in Financial Services as an independent mortgage adviser and broker. John has been instrumental in negotiating bespoke underwriting for contractors with high street lenders.
His presence in the industry as a go-to expert is growing by the day and he is regularly cited and writes in publications both locally and nationally.