Convincing major high street banks to consider all independent professionals’ mortgage applications isn’t easy. So, when Halifax told us it was extending its IT Contractor mortgage policy to all contractors, it was cause for celebration. A little one, at least.
Whilst the news is a step in the right direction, the bank hasn’t yet thrown caution to the wind. There are caveats to their lending criteria if you don’t work in Information Technology.
If you’re not in IT, read on. You’ve still got work to do to convince their underwriters you’re a safe bet for a mortgage.
But let’s not take anything away from this moment.
One of the Big Four has acknowledged all contractors as low enough risk to be at least considered mortgage-worthy. Now that’s progress!
We’ve waited a long while for the Halifax to consider applications from the broader contracting community. Until their recent announcement, theirs was a strict “IT Contractor Only” policy. That changed as of May 2013.
As I said in The Times,
“This is a major milestone for the UK’s freelance community…
“…it unbolts the contract based mortgage market to any professional freelancer.”
Before the policy change, Halifax only entertained contract-based applications from IT contractors. Their underwriters used an ‘annualised’ figure, determined by a contractor’s gross contract earnings.
That wasn’t so if a contractor worked outside IT. Instead, they had to provide at least one year’s accounts with their application. Even then, underwriters assessed affordability based on a multiple of salary and dividend drawings. That’s changed with Halifax’s decision to open up to all contractors.
Most contractors are prudent with their taxes, savings and income. But using accounts for mortgage affordability presents two major obstacles:
One reason contractors operate a limited company is because they’re a tax-efficient way to trade. Drawing low salaries and minimising dividends can offset higher taxes.
The downside is that reducing take-home pay reduces the amount you can borrow using most lenders’ models. You can see the conundrum.
Ian Wilson, Head of Sales at Halifax Intermediaries, explains how the new policy addresses the issue:
“We are pleased to be able to extend our existing IT Contractor policy. This is a natural step forward in supporting self employed customers in their aspirations to get on the property ladder.
“We hope that in widening our policy we will be able to help more customers benefit from our range of products and services.”
We couldn’t agree more, and see this as the catalyst for openness to independent professionals across the spectrum.
Do not underestimate the gravity of Halifax’s policy change. For one of the Big Four to view non-IT contractors as lower risk is a huge step.
Now, Halifax can assess ANY professional contractor using their gross annualised contract earnings.*
Other contractor-friendly lenders have positioned themselves likewise. However, many ask for at least two years uninterrupted contract history. Halifax, on the other hand, will accept freelancers from their first contract.
*To qualify for a professional contractor mortgage, your day rate must be at least £312.50 or £75K per annum.
This is true whether you’re ’employed’ (e.g., through an umbrella) or self-employed. Halifax will accept the gross value of your contract as evidence of income.
Working out the potential amount you can borrow from Halifax is easy. First, on your device, launch your calculator app; then:
Or, you can use our contractor mortgage calculator (it’s way quicker).
As an actual ‘annualised’ example, take a contractor earning £475 per day. He works five days a week, 46 weeks per annum. His day rate would equate to annual gross contract earnings of £109,250, or £475 x 5 x 46. This is what we mean by ‘annualisation’.
Using the calculation outlined, we then multiply that x 4.5, the affordability factor. That means the contractor could borrow up to £491,625 to buy or remortgage a property on a day rate of £475.
This entire method is called contract-based underwriting.
Before attempting to apply direct, to any lender, we recommend you speak to a mortgage specialist. Contractor mortgages, even if you work in Information Technology, are not yet mainstream.
It’s not worth risking approaching a standard mortgage broker or IFA. They neither understand how contractors work nor have experience in securing them mortgages.
We’re not just talking about the embarrassment of wasting each other’s time, here. Too many credit searches over a short period leaves traces on your credit file. In turn, if this activity is negative, it will have an adverse effect on your credit score.
After failed searches, it won’t matter what you earn or in which field. A tainted credit history will ruin any chance of getting a Halifax contractor mortgage. And, yes: that you can take to the bank!
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.