What took Halifax so long to offer non-IT contractors mortgages?
Posted by John Yerou
on September 11th, 2014 16:39pm in
Last Updated on November 25th, 2019 18:00pm.
Halifax was the first High Street lender to offer IT Contractors mortgages. Yet up until 2013, the bank’s underwriters recognised no other contracting sector. If you weren’t an Information Technology professional, you didn’t qualify for contract-based underwriting.
We’re happy to say that’s changed. Halifax now offers mortgages to contractors outside of IT. But it’s taken a long time for them to remove that barrier.To date, Halifax remains the only one of the big four to offer a bespoke range of mortgages for contractors. And it’s great that they’ve dropped skill set restrictions, even if there are limitations.
True, they and other lenders offer self-employed mortgages, but they’re not the same. Self-employed mortgages tend to use post-tax income as the basis of affordability.
Halifax contractor mortgages use day rates, not accounts. As a limited company contractor, your accountant will claim certain tax reliefs. Such tax planning measures often render accounts useless for obtaining a mortgage.
The big question is, why did it take so long after servicing the IT crowd for Halifax to broaden its horizons?
There are several viable answers, each of which we’ll seek to address below.
The apple of the lenders’ eye
If you’ve ever had to outsource an IT professional, you’ll know they’re not cheap. As the ‘Internet of Things’ evolves around us, demand for their services will only grow. As will, one would suggest, their contracting rate.
Nothing pushes up the cost of a product or service like scarcity of supply.
Given these circumstances, you’d think all lenders class IT contractors as low risk. They don’t.
But the Halifax is one of several genuine contractor-friendly lenders that do. Does this mean contractor mortgage lending is becoming mainstream? We’re still a long way off from that day.
When ‘insider trading’ is a good thing
Like many corporations with intricate IT infrastructures, Halifax does its fair share of outsourcing. Yes, it has its own department to maintain the systems. But outsourced specialists dream, design and create those frameworks.
When you think how fast-paced IT moves in general, this makes absolute sense. Just as we get comfortable with one aspect, technology evolves to another plain.
If your IT department is working on your latest project, how’s it going to keep pace with all the changes, too?
This insight into and understanding of the real virtual world gave Halifax a real edge. It placed the bank at the forefront of IT contractor mortgage lending:
- they knew that workers in the sector held safe tenures, which meant…
- …that their underwriting team could isolate specifics in a contract that justified mortgage affordability.
Drum roll – let’s hear it for the credit crunch
Like any personal finance sector, competition challenges those perceived to have cornered a market.
Not long after Halifax launched its contractor lending policy, the world’s economic fortunes nosedived. The credit crunch hit us and financial institutions found themselves under the public spotlight.
With mortgages the largest financial transaction most people ever undertake, banks took centre stage. Responsible Lending ensued, but as the global economy recovered, the UK home-buying market flat-lined.
We had pushed Halifax to move beyond the IT sector in the past. But during this flux, we took the decision to let sleeping dogs lie.
Yes, we could have pushed harder. But the real fear was that the bank may reconsider the risk category into which it had placed IT contractors. We couldn’t risk isolating the profession that had been contractor mortgages’ catalyst.
All eyes fell upon the big four lenders
The banks took their public flogging and dusted themselves off. Responsible Lending and the later Mortgage Market Review laid out new, tighter lending criteria.
Since then, the FCA has hinted that banks’ reactions to those guidelines went too far. Signs of those knee-jerk reactions haven’t disappeared, even to this day. There are restrictions preventing the growth of the housing economy that need not be in place.
What the FCA seems to have forgotten is what conditions were like for banks back then. HBOS is a prime example. They emerged from the economic disaster with new owners in Lloyds Banking Group. Few High Street banks escaped unscathed.
On top of this, the FSA’s days were also numbered. Any wrong move banks made were instant headline news. The media and the public were unforgiving and unsympathetic.
As one of the big four, the Halifax must have felt helpless. How that’s changed today.
Other lenders wanted a piece of the action – and how!
Seizing the initiative, other mortgage lenders looked at the IT contracting sector. They too wanted a piece of that pie and drew up their own contractor lending policies.
Moreover, they moved the goalposts whilst Halifax was partaking in its half-time orange. Don’t forget, there are many specialist niches in the UK mortgage market.
Some lenders already dealt in bespoke mortgage lending criteria. For them, the jump to contracting was small.
With Halifax immobilised, there was no shortage of help from the mortgage broker community. Smaller mutuals soon began to enjoy the success that was once the sole provenance of Halifax.
Lenders like Clydesdale and Virgin Money (formerly Northern Rock) made headway into the market. The problem for Halifax was that the new competition didn’t only focus on the IT sector.
Many of the lenders encroaching on the market removed the barrier of specific professions. Instead, they used a contractor’s day rate as the main criterion.
More recently, lenders like Kensington have gone all in. They don’t even demand a minimum day rate, let alone a specialist contracting skill. Instead, they appraise each mortgage application on its merits and on a manual basis.
Other recent entrants have followed suit. New contractor-friendly lenders that place no restriction on minimum day rate or specific profession include:
- Metro Bank;
- Leeds Building Society;
- Bucks Building Society.
So, when did Halifax contractor mortgages become available to all?
In May 2013, Halifax announced that it was opening its doors to contractors beyond the IT sector. Contractors from all walks met the news with joy. Think Lord Flashheart and a hearty, Hooray!, and you’re on the right lines.
But let’s get one thing straight. Halifax isn’t the answer for every contractor looking for a mortgage. Their criteria suggests they’re not going to compete against lenders with no restrictions.
The reason? Once bitten, twice shy.
The bank remains one of the big four banks. If it doesn’t adopt ‘super responsible’ criteria, people will point fingers. Yes, even if the FCA’s advice is to the contrary.
What are the Halifax contractor mortgage lending criteria?
We’ve written a transparent guide that has the complete Halifax contractor lending criteria. There you’ll find what we as mortgage brokers need from you to approach the bank.
Here’s an overview of those points and a few common questions.
What’s the minimum day rate to qualify for a Halifax mortgage?
If you’re an IT contractor, there is no minimum income. Outside of IT, you must earn at least £312.50/day.
What documentation do I need?
For most contractors, we only ask for four types of document:
- signed copy of your contract*;
- up to date CV**;
- proof of ID (passport, utility bill, etc);
- 3-months bank statements.
* if your contract has less than 4-6 weeks to run, you will need evidence of an extension.
** if you’re new to contracting, your CV must show 2 years’ continued employment in your chosen profession.
What’s the most I can borrow?
How much you can borrow will depend upon your contract rate. There may be other factors, too; in our experience, no two contractors are the same.
But this is the generic way we work out a guide to how much contractors can borrow using their daily rate:
Day Rate x 5 (days per week) x 48 (weeks per year) x 4.5 (affordability factor).
So if you’re a contractor earning £400/day, this would be how much you could borrow:
- £400 x 5 = £2,000 (per week);
- £2,000 x 48 = £96,000 (your ‘annualised’ contract rate);
- £96,000 x 4.5 = £432,000.
So, in a standard mortgage scenario, a contractor earning £400/day could borrow £432,000. Now that’s surprised you, hasn’t it? And it gets better…
How long does a Halifax mortgage application take?
The whole contractor mortgage process often only takes 3-4 weeks to complete. That’s because there’s so little paperwork involved, unlike on the High Street.
We work with their underwriters direct and know how to package your application. The way we do it ensures that they see what you’re worth, not a theoretic ‘take home’ income.
By removing the barrier of IT workers only, Halifax has increased its scope. Now, independent professionals working in Oil and Gas and consultancy, amongst others, have options.
What’s the minimum deposit I need?
There are many myths that suggest contractors need a bigger deposit than employees. That’s just not so and stems from the days of the ‘self-cert’ mortgage.
Indeed, contractors can get on the property ladder with as little as 5% deposit. The Halifax offers the government’s Help-to-Buy mortgage guarantee scheme.
The monthly payments are a little higher compared to other mortgages. But for those with little to put down, it’s a great way to buy a home.
If you can stretch to a bigger deposit, even better. Competitive mortgage rates start with 90% LTV mortgages (10% deposit). They get even more competitive the more you put down for security.
All that said, IT contractors remain the yardstick
Halifax’s slow take up of the whole market has let other lenders in. Today, you’ll find a slew of genuine contractor-friendly lenders.
Even so, it’s the IT set that have the most options. The burgeoning market and more companies venturing into the cloud have assured their future.
For example, we continue to approach new lenders to recognise the contracting sector. Even then, it’s always IT professionals whom we use as the yardstick. Theirs is a true example of contracting making mortgages affordable. Even if their accounts say otherwise at first glance. :)
Once a lender understands the way IT contracting works, they look to build upon that service.
And why shouldn’t they feel confident to do so? The UK’s self-employed industry continues to grow. It’s forecast to reach all-time highs by the end of this decade. If lenders don’t move now, they could isolate themselves from a huge customer base.
Contract-based underwriting is not a High Street product
One thing we must make crystal clear, to which we alluded earlier. Yes, more lenders are adding contractor mortgages to their portfolio. But it’s still difficult to walk into a High Street branch and expect an adviser to understand the way you work.
Most of the time they won’t. Even worse, they’ll try to offer you a self-employed mortgage.
Don’t ruin your chances because branch staff don’t know how to package your application. It’s the underwriters at head office who, in the main, sanction contractor mortgages. Even those for IT professionals.
Before applying for any home loan, talk to a specialist broker. They’ll ensure that you make the most of your strongest asset: your contract!
Author: John Yerou
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.