Scottish Widows Bank Contractor Mortgage Lending Criteria
Scottish Widows Bank launched its range of contractor mortgages in 2015. The lender, like Halifax and BM Solutions, is another under Lloyds Banking Group’s umbrella. As the latter two lenders already cater for contractors, why add Scottish Widows?
It’s a good question. Especially as Halifax is the most synonymous bank with contract–based underwriting.
Lloyds Banking Group hasn’t been around for 250 years by making rash decisions. Adding another contractor–friendly lender to their already powerful armoury is an example of why.
Yes, Scottish Widows uses the same lending criteria as Halifax. But the newcomer extends the group’s lending proposition for professional contractors: offset mortgages.
Market–leading offset mortgage rates for contractors
You may ask, “What’s so great about offset mortgages? They’ve been around for years.”
Indeed they have. But never since their introduction have interest rates on savings been so low. Let’s face it: money we have in our current account is eroding against inflation.
By taking out an offset mortgage, contractors can still make their money work for them. That’s because cash in savings or current accounts is offset against any mortgage balance.
Here’s an example: say the house you want to buy is £250,000 and you have £50,000 in cash. But you don’t want to put it all down as a deposit.
You want to retain a degree of flexibility. Maybe you have plans for your new home or house improvements. Perhaps you want to invest some profit back into your business.
You know you can still get a competitive interest rate with just 10% deposit, so that’s what you do. You put down £25,000, leaving you with £25,000 cash in the bank and a mortgage of £225,000.
Repayment vs Offset Mortgage — a brief overview of the concept
First, let’s do a comparison: imagine you’d taken out a repayment mortgage.
You’d pay interest on the full £225,000 outstanding mortgage from Day 1. Your £25,000 cash balance would be earning you zip in a savings or current account.
Next, consider the alternative. And here’s where offset mortgages are the smart choice in today’s economic climate.
You put down the £25,000 the same, leaving you with £25,000 in the bank and a mortgage of £225,000. But you wouldn’t pay interest on the full £225,000 outstanding balance!
The lender deducts your £25,000 cash from the amount upon which interest is due first. That means you’d only pay interest on £200,000 so long as you keep the £25,000 ‘offset’ against it.
The net effect is that either your monthly payment or the mortgage term reduces. In an age when it costs you to have cash on the hip, offset mortgages are a real consideration for contractors.
Interest Only Mortgages
Scottish Widows is another bank looking to make interest only mortgages more attractive propositions. In a brave move, borrowers can now use the sale of the main property as a repayment vehicle.
As you might expect, the barrier to entry is higher than standard contractor mortgages:
- loan–to–value ratio can’t exceed 50%;
- borrowers must have equity of at least £200,000 in the property;
- 50% LTV + minimum £200k equity = £400k minimum property value for interest only;
- applicants must earn at least £100,000 per annum (£417/day contract rate).
Lending criteria for contractors
Scottish Widows applies the same terms to contractors as does its sister bank, Halifax. That’s all well and good if you know the underwriting terms the Halifax uses for contractors.
If you’re not familiar? Here are the criteria you need to meet for a Scottish Widows mortgage using your contact rate:
About the contractor:
Both limited company and PAYE umbrella contractors can apply for Scottish Widows mortgages. If you’re an IT contractor, then you don’t have to meet a minimum earning threshold. If you work in a field other than IT, you must earn at least £312.50/day.
Even contractors on their first ever contract can apply. But if that’s the case, they must be able to show a working history in the same field covering at least two years.
No matter how long you’ve been contracting, an up to date CV is mandatory. It must show your entire employment and contracting history.
About the contract and income:
Scottish Widows considers the gross value of your current contract evidence of income. It’s not difficult to work out your annual income for affordability purposes. Take your day rate, multiply it by 5, the days you work per week, then by 48, the number of weeks you work per year.
The bank then applies a multiplier to your gross annual income to finalise the sum. That’s usually 5, so a contractor earning £350/day could borrow up to £420,000. The calculation would look like this:
£350 (day rate) × 5 (days/week) × 48 (weeks/year) × 5 (multiplier) = £420,000.
At the time of application, there must be 4–6 weeks left to run on the contract. Failing that, you must provide evidence of a contract renewal/extension.
Neither should there be more than 6–week gaps between contracts. That’s fundamental, as the lender uses 48 weeks a year to work out gross annual income.
And that’s it, the full lending criteria. Scottish Widows’ offerings are an important addition to the contractor mortgages we offer. That they’ve taken the existing Halifax range and added to it underlines their intent.
Next step? Your move.
Author: John Yerou
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.