Renaissance amongst lenders, but is it too little too late?
Last Updated: 29-11-2020
Reading Time: 9 minutes
Reading the news last week was heartening for contractors in one respect. There are more new mortgage lenders prepared to work off day rates than ever before.
The bad news? National headlines in the Guardian and Mail Online made dire reading. They reported that Chancellor Osborne is gunning for contractors yet again.What's he up to this time? Anyone contracting via a limited company longer than a month he wants the client to put on payroll. Given our feedback, I can say with certainty: neither the client nor the contractor want this!
The Autumn statement this week will clarify any truth in those stories. It may turn out that the digital dailies were sensationalising the hearsay. We can live in hope.
So after all that, I can’t help get the feeling that there's an underlying trend. That more lenders are coming on board is great news. But it may turn out a little like that old adage:
“Shutting the stable door after the horse has bolted.”
All our hard work undone? Never!
For years, we’ve been knocking the doors of mortgage lenders on behalf of contractors. Trying to get underwriters to see the value in a contract rather than accounts has been tough.
We’ve achieved unsurpassed results with many banks and building societies. You only need see how many lenders welcome contractors today compared to five years ago to gauge that success.
True, most still only accept applications through specialist brokers. But our input has led to a more enlightened approach to contractor mortgages than ever before. That's one goal of our mission complete, but we're not giving up now.
Contractors stabbed in the back by Osborne?
Where my heart sinks is seeing more lenders put the welcome mat out to contractors. But the lifestyle of the independent for whom those doors are opening is itself under threat.
The government seems determined to push as many workers as possible onto PAYE. There’s a great overview of HMRC’s proposals over on Contractor Weekly to save me going into it all here.
To sum up, early figures suggest that 90% of all contractors could suffer from new HMRC measures if they are introduced. How true that proves to be will impact the effect of this week’s brighter news:
Virgin Contractor Mortgages - an overdue overhaul
There was a time when Virgin was one of the safest bets for mortgages for contractors. Then, they just lost the plot.
It seems they tried to produce a generic calculation for contract-based underwriting. How else would you explain that they accept a 6- or 12-month contract, but not a 9-month contract?
We're a firm that’s dealt with contractors’ mortgage requirements for a decade. To us, Virgin's oversight stands out like a black cat on a ski slope. There is no one-size-fits-all method for appraising a limited company contractor’s circumstances.
For the record
This is where Virgin Money is now. The minimum work history (as a contractor) they’ll accept is two years. Compare that with Halifax. They'll offer mortgages from day one of a first contract in the right circumstances.
Virgin also demand that at least half of an applicant’s current contract remains. So if a contractor is on a year’s assignment, it must have six months left to run. Or if it’s a six-month contract, a contractor can be no further into it than three months.
You get the picture. Well, apart from the nine month contract, which, as stated above, they cannot accommodate.
Now compare that criteria with other contractor-friendly lenders. Some lenders will accept an application on the promise of a contract extension. Others need only 4-6 weeks remaining to execute their affordability calculations.
Back on track
Put all these factors together and you begin to see how inflexible Virgin Money has become. But it seems they’ve listened. Or they've developed acute awareness of the volume of lenders now offering contractor mortgages.
They have promised to review their bespoke underwriting methods. But as far as we know, it’s only the criteria for contractors going under the microscope.
Watch this space for further details of their overhaul, which we’ll release as soon as we have them.
Three rising stars shimmer against the black backdrop
Amidst the doom and gloom, it IS great to see our efforts pay off. Here are three lenders who've shed much needed light on recent events.
One lender with whom I’ve sat down to help develop underwriting criteria is Nationwide. The result of those negotiations? Well, wow - they've exceeded expectations. The building society is now:
- welcoming all contractors on fixed terms assignments;
- using day rates (or hourly rates) upon which to base their affordability calculations;
- not restricting contractor mortgages to the IT sector as many contractor-friendly lenders do;
- no minimum income requirements.
That last point is a real big deal. Halifax expect minimum annual income of £75k for contractors working outside the IT sector. Clydesdale - irrespective of sector - expect you to earn at least £50k over a year.
As you see, it’s a coup for our community. We began educating Nationwide teams as far back as 2012, so it’s been a long process. But now they’ve launched their range, they’ll prove a welcome addition to the fold.
Given our instrumental input, I look forward to offering their mortgages to our clients.
Another new kid on the block is Scottish Widows. Like Halifax, they belong to the HBOS Group. It’s no surprise, then, that they've adopted carbon copy bespoke underwriting.
Their criteria for assessing contractors is identical to that of Halifax. If they're half as successful as their predecessors, there's huge potential. But why should HBOS offer us another outlet for the same products?
Well, here’s the difference. Yes, the underwriting’s the same. But their portfolio of mortgages offers a diverse choice.
They're one of few lenders who offer fixed rate, offset mortgages to contractors. They're ultra-competitive, too, thus a great addition to the family.
To complete a hat-trick of twinkling stars (and HBOS-group mortgages), we have BM Solutions. They saw the trend of growing numbers of lenders catering for contractors. And, like Halifax who got the ball rolling, they decided the sector had potential.
Again, they add dimension, rather than being just another HBOS outlet joining the party. Their sole focus is on Buy-To-Let mortgages.
And this is where contractors who tough out the rough times ahead can make real headway. As it stands, they face a barrage of changes from the government. Most will make the limited company payment structure a lot less appealing than it is now:
- lifetime pension contributions, they're already reduced;
- travel and subsistence relief for umbrella contractors is set to disappear in April;
- new taxes will apply to dividend drawings that exceed £5,000;
- face revoked access to NICs employment allowance as a single-employee limited company.
The savvy contractor will see Buy-To-Let as a way to invest for the future. Neither will they say no to topping up their income today.
Adding these lenders to our contractor-friendly portfolio has made other news easier to swallow. After last week, I’ll raise my glass 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.
Posted by John Yerou
on November 23rd, 2015 16:02pm in