A walk-in disaster: the High Street branch contractor mortgage
The biggest problem contractors face on the High Street is ignorance. That's not meant as a detrimental statement towards in-branch advisors everywhere. The simple fact is that, as a contractor, you're a specialist borrower.
Yes, many lenders now offer bespoke mortgages for contractors. But it's rare to find one that trains its in-branch staff in all specialist nuances.
Further obstacles for High Street mortgage affordability assessment lie in two places:
- Your limited company payment structure;
- The generic affordability calculations banks afford their over-the-counter mortgage advisors.
The best way to get a mainstream mortgage as a contractor is to avoid the High Street. That doesn't make much sense on first reading. But the fact is, specialist brokers can access the underwriters you won't find in a local branch.
Taking the fight to High Street mortgage lenders
It wasn't always the case that underwriters were understanding. We had to convince them that contractors weren't as high risk as lenders assumed.
Short term contracts, multiple employers in a short time frame, low 'salary'. These are all red flags to your average advisor. But for someone who understands limited company structure, there's less inherent risk. That's where brokers step in.
Educating underwriters in the contractor lifestyle
It's not the done thing to blow one's own trumpet in an FAQ like this. But we were instrumental in getting many lenders to accept 'contract-based underwriting'.
At the heart of our negotiations was a simple argument. An expert on a 6-month contract is no higher risk than a hot shot, regularly head-hunted employee.
In London and other big UK cities, firms constantly head hunt top-performing workers. It's almost expected. So how's that different to a specialist contractor jumping from one contract to the next? And one who probably gets paid more for their expertise than the respective employee?
The fact is, equations lenders use for affordability checks have become outdated; they:
- reflect High Street bias towards salaried employees;
- don't reflect current labour trends and the rising prevalence of the gig economy;
- don't reflect that the sun has set on the old days of time honoured service.
We won some banks and building societies around. Other mainstream lenders chose their smaller offshoots as the medium to attract contractors' business. And it's true: some lenders still don't offer a contractor-friendly policy at all.
The problem contractors face is knowing which lenders do and don't accommodate them. And, no: a 'self-employed mortgage' is not the same as a contractor mortgage.
Don't fall for the self-employed mortgage trap
Be very careful. Always be sure to point out that you're a limited company contractor!
If you say you're self-employed, an in-branch advisor will default to their self-employed mortgage…
…which is okay for subcontractors and sole traders.
But for independent professionals who use a limited company payment structure? Just, no!
So if a lender asks you for 2-3 years' accounts, you could be on a slippery slope. All they'll use for their calculation is your salary and any drawn dividends.
That combined figure won't take into account retained profits, stashed in your limited company. You need a lender who'll use all your income to work out what you can afford to borrow.
If your accountant's on the money, retained profit is where the bulk of your income resides. And even if a High Street advisor gets that, they still can't use those profits in their calculation.
The only way to guarantee an underwriter will make the most of your top line is through a specialist broker. And preferably one with 'whole of market' access, not a broker tied to a panel of lenders.
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.