First Time Buyers Account for 3 in 10 Home Sales (Feb 2015)
Last Updated: 29-11-2020
Reading Time: 7 minutes
Many contractors still believe that first-time buyer mortgages are off limits to them. They're not, of course. But let's look at why this myth persists. Moreover, what independent contractors need to do to get that first step onto the property ladder.
I was taking a good look at the February 2015 Housing Report figures from NAEA. From nowhere, a flash of lightning and, Ping!: Eureka!.
The desire to become your own boss is higher than ever. The problem is, the infrastructure of UK finance isn't keeping up with those aspirations!
The catalyst for this 'light bulb' moment? The record 15% self-employed figure, and the testimonies of people who make up that figure. Each boss quoted raised genuine concerns about everything from mortgages to pensions.
Digging further, I came upon a subsequent report that showed the other side of the coin. Yes, it's great that more people are seeing the advantages of self-employment. But the flip side is a new glut of people likely to be unclear or apprehensive about how independent working affects them financially. So let's look at what lenders expect of the newly self-employed.
Challenges for self-employed borrowers
The crux isn't always that contractors needs their first mortgage from the High Street. By the time an employee is confident enough to go it alone, they've often already got a mortgage, but as a permie. Rather than rock the boat, they stick with the mortgage they have even when they fall onto the lender's higher SVR.
I base this reasoning on more than just a hunch. First Voice's June 2016 reports confirms the fears of those going it alone. The report alludes to the following needless (but understandable) apprehensions that those new to self-employment hold:
- uncertain how lenders react to fluctuating income;
- difficulties accessing any mortgage, let alone an appropriate one;
- a lack of bespoke, relevant income protection insurance;
- how and how much to save for retirement.
An ageing workforce also correlates well with the record 15% self-employed figure. That record statistic, I feel, has more scope to grow, too. Perhaps that's why the matter kept me up all night.
BoE predicts self-employment will remain high long-term
The ever-increasing number of Britizens opting for self-employment will have a knock-on effect. And sooner, rather than later. Led by a generation of elders, running your own business will become preferable to working for the man.
When self-employment becomes more of a norm, younger UK contractors will face a mortgage adviser for the first time in their life. They need to know the score from the off, an inherent knowledge. With schemes like Help-to-Buy paving the way for so many, who've only saved 5% deposit, a broader knowledge is imperative.
If permies can get on the property ladder with a 95% LTV mortgage, surely even those newest to contracting can, right? Well, yes…and no.
The High Street is NOT the solution for contractors
It's tempting to go to your local branch the first time you want a mortgage. They know you, you have history with them, and they're forever sending you mail shots to upgrade your bank account.
In the old days, that would have been the right way to go. Not so, now.
Since the credit crunch, High Street lenders are yet to offer a bespoke product for self-employed people of any type. That's not to say they don't cater for contractors. They do. But at senior underwriter level only.
That's why I'm beseeching you today to go through a specialist mortgage broker for your first mortgage. The High Street will leave you with the impression that your contract counts for nothing. That's so not the case.
They'll ask you for accounts. If you don't have them because you're new, they won't risk giving you a mortgage on your short term contract.
If you have limited accounts, 2- to 3-years' worth, they'll use your 'take home' to work out your affordability. If you're doing your tax-planning right, that figure will be too low to secure you anything near worth what your contract could get.
The best way for contractors to get a first time buyer mortgage
First time buyer contractors need only a few documents to get a mortgage. That's whether you've been contracting for decades or weeks.
It's how a broker expresses your affordability, based on your contract, that will make the difference.
So, to get your application rolling, here's what you need:
- a copy of your current contract;
- if this has less than 4 weeks remaining, you may need to secure an extension/new contract;
- three months' bank statements, to prove you’re earning what your contract states;
- proof of ID, such as passport, driving license, utility bills, etc.;
- your CV, to prove time served in your industry if you're expressly new to contracting.
And that's it. You'll need to speak to your broker so that they can get a clear understanding of your situation. The more they know, the better they're able to package your application in its best light. Then they can take it from there.
The next thing you know, you'll have the keys to your new home. You'll wonder what all the fuss was about and why contractors never went that route before.
30% of all NAEA mortgage completions were first time buyer mortgages. I'd love to see that figure increase as contractors take advantage of the trend, too.
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 April 1st, 2015 18:20pm in