Leeds is the latest lender to add contract-based mortgage underwriting to its product range. The Building Society is rolling out this outstanding addition to their portfolio in phases.
That means there will be a pilot period. During the trial the mortgages are only available through a select number of specialists. I’m over the moon that Leeds BS has chosen Freelancer Financials for the wider roll out to market.
Martin Richardson explains how their policy addresses the lack of High Street contractor mortgages. The General Manager of Business development for Leeds Building Society said:
“We realised that, while the number of professional contractors is growing, they currently have very limited choice when it comes to securing a mortgage.”
“We are keen to broaden this choice and have looked at the difficulties contractors encounter through traditional underwriting and how we might overcome these.”
Leeds Building Society Lending Criteria:
Their policy is unlike that of some contractor-friendly lenders. Leeds Building Society is willing to accept only one year’s contracting history.
Another major advantage is its policy doesn’t discriminate between IT and non-IT professionals. Leeds welcomes ALL professional contractors, irrespective of which sector they work in.
Add into the mix that they offer mortgages to contractors who are:
- first-time buyers;
- home movers;
and their range covers all bases.
So, what else do you need to qualify?
Contractors must provide evidence of their ability and/or skills to re-contract within their industry. The historical period between contract(s) must not exceed 6 weeks in each instance.
To meet Leeds “contract-based underwriting” policy, borrowers must also meet the following lending criteria:
- applicants must have notched up at least 12 months of contracting history;
- the lender calculates earnings over 46 weeks (230 working days);
- they calculate annualised income as Daily Rate x 5 (days) x 46 (weeks);
- they don’t like to see more than 6-weeks gaps between contracts (without good reason);
- they ask for auditable evidence of the last 12-months contract – including a copy of CV;
- they must see evidence of a contractor’s ability to renew contracts/re-contract;
- for supporting documents, they ask for 3-months personal and business bank statements;
- applicants for their contractor mortgages must achieve a gross annual income greater than £50,000;
- they restrict their contract-based lending to a maximum of 85% LTV (15% deposit minimum).
Fixed Rate Offset Mortgages
Leeds BS is offering several mortgage products to its potential contractor customer base. The range includes offset versions of their 2-, 3- and 5-year fixed rate mortgages.
This type of product will suit contractors*, who often save up to cover times they’re not working. It includes the following offset mortgage deals:
- 2 year 3.19% fixed rate, up to a maximum LTV of 85%;
- 5 year 3.89% fixed rate, up to a maximum LTV of 75%;
- 3 year 3.49% fixed rate, up to a maximum LTV of 80%.
*What is an Offset mortgage (and why are they a good fit for contractors)?
An offset mortgage optimises the cash assets you already have. It’s a way to use the capital in your savings and current accounts to reduce the interest you pay on your mortgage.
Offset mortgages offer great flexibility. They allow homeowners to save interest they’d otherwise pay on their mortgage. This has a compound effect. You can use those savings to either pay off your mortgage earlier or reduce your monthly payments.
Which option you choose will depend upon your circumstances. If you need to reduce your monthly outgoings, put the savings towards the repayments.
If you want to reduce the term, just continue repaying the normal monthly amount. The savings you accrue will help you pay off the mortgage earlier.
Offset mortgages can pay dividends for contractors
Contractors can benefit more than many other workers from offset mortgages. It gives them another choice.
Many limited company contractors hang on to retained profits, drawing low salary and dividends. But the Chancellor is on a great crusade against PSCs.
By leaving the savings in your accounts, they’re “offset” against your outstanding mortgage balance. Hence the term ‘offset’ mortgage, now available to all contractors through Leeds Building Society.
Depending on how you draw your salary will impact upon which financial option works best for you. Your accountant can help you make the right decision.
But even so, your savings earn little interest in the current economic climate. Why not put them to work for you instead of them being another tax burden.
Update, April 2016
Leeds Building Society has relaxed its policy on interest-only mortgages. This is awesome news for contractors who build up a cash pot over the year.
The recent announcement goes into more depth about Leeds’ range of interest-only mortgages. They include 2-year and 5-year fixed rate and a 2-year discounted rate. The least deposit to qualify is 25%, working up to a 50% LTV option.
The article explains their interest only offering from a standard mortgage perspective. Please remember that Leeds’ mortgages for contractors are only available through select mortgage brokers.
The building society is also offering a 2-year fixed interest-only part & part mortgage. That’s where you have part of the mortgage as capital and interest (repayment). The other part you only pay the interest on the loan.
As with all interest-only loans, you must have a credible repayment vehicle in place. These are not like the self-cert mortgages of the past, where obtaining a mortgage was a synch.
Both Leeds’ offset and interest only mortgages offer contractors ways to leverage their savings. With compliant options lessening, they’re an opportunity to make your savings work for you. Why not take it?
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.