If you’re a contractor on reduced income as a result of the COVID-19 pandemic, you may be tempted to take a mortgage payment holiday. I’d urge you to think before making that leap.
Most lenders are offering a 3-month break from paying your mortgage (plus loans and credit cards) while we remain in lockdown. If we don’t get the virus under control, they may have to rethink and extend that position.A protracted absence from work is one reason I urge all contractors to carry on making their regular mortgage repayments, wherever possible. This may seem counterintuitive, but lenders don’t have to guarantee mortgage payment holidays indefinitely.
There are other reasons, many of which I discuss here on ContractorUK. That article also explains why getting mortgages during lockdown, even remortgages, is so difficult. But for this post, let’s underline why I think carrying on paying is a good idea.
It’s been historically difficult for contractors to get a competitive mortgage using their contract, or contract rate. Now, I know that lenders are saying that missing payments now won’t affect your credit history…but I wonder.
Imagine a few months from now, if you would. An underwriter is looking over your application and sees that you took the 3-month mortgage payment holiday. That may immediately have them questioning to what degree your role is at risk.
We are yet to realise how much this pandemic is going to change the world once we come out the other side. Will lenders consider a non-key role as higher risk than those who perform key services? Will insurance premiums be higher for non-critical service providers?
Many in our industry, the contracting industry, are not looking at the bigger picture. For sure, IR35 is a big concern. But the role of contractors’ roles in the greater labour market may make IR35 moot.
The current contingency for employers is that the Government will pay 80% of employees’ wages for affected firms. Thus, employees are somewhat more secure in the event of lockdown or social distancing reoccurring.
But what about independent contractors? How does the government’s guarantee to cover self-employed wages up to £2,500 pcm stack up against what, say, an IT contractor earns? For the higher-earning contractors, £2,500 is more like a week’s income than a month’s.
Now, imagine you’re an employer looking to pick up the pieces after the pandemic. Would you rather have an employee to rely on, whose position hasn’t been greatly affected? Or risk rebuilding your business on contractors who’ve perhaps been forced elsewhere into the labour market while they’ve been out of pocket?
However you can reduce a potential lender’s perception of your risk to them as a borrower, do it.
Of course, only you know how far your savings will stretch. I’m by no means advocating that you spend all your savings on your mortgage.
But if you have a sizeable sum set aside, consider not taking a mortgage payment holiday, at least not yet.
If you have savings accounts that don’t punish you for drawing on them consider using them to pay your mortgage. Many lenders have made savings more accessible. And with interest on savings negligible, you have literally nothing to lose.
A Lloyds Cash ISA is now paying 0.05% interest rate. Could you forego that if redeploying your savings meant you were a more attractive proposition to lenders once the pandemic is over? I think we both know the answer to that!
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.