Help To Buy Contractor Mortgages
Because of their higher earning and retention capacity, many contractors have spotless credit files. That makes them perfect candidates for Help-to-Buy mortgages, which attract a mere 5% deposit. So why do so few contractors qualify for the government scheme?
There are two main problems independent professionals face:
- not all lenders are in the Help-to-Buy programme;
- even fewer are what we classify as contractor-friendly mortgage lenders.
Finding a bank or building society that fit both criteria is a bit like trying to find a needle in a haystack, then? Not always. Especially when you own a big enough magnet.
It’s not that contractors don’t earn enough to afford a mortgage that’s the issue. Contractors fail to get Help-to-Buy mortgages because lenders don’t understand the way they work. Or more to the point, they don’t grasp how one-man limited company owners pay themselves.
Help-to-Buy | Two key differences you have to know
Since the credit crunch, lenders have implemented Responsible Lending to the letter. It’s not surprising. The housing market remains unstable in many pockets of the country. As a result, 95% LTV mortgages remain few and far between.
So, what’s the answer if you’ve secured a contract, but only have a 5% deposit to put down? In this case, H2B could be a contractor’s quickest route to the property ladder. Here’s why.
Why the government intervened with backed 5% Deposit mortgages
In 2013, the Government launched Help-to-Buy. Today, they, along with select lenders, operate two different “H2B” schemes. But it wasn’t like that at first.
The Equity Loan scheme, the original initiative, targeted both the construction and property markets. When the Chancellor announced the scheme in April 2013, both of those sectors were on their knees.
One of the main causes was that lenders wanted at least 15% deposit as security. To be fair to those lenders, they were only implementing the new FSA (as was) guidelines. But so big a deposit put homeownership out of reach for many, not just contractors and freelancers.
The Equity Loan Solution
Equity Loan provided a solution for both the housing and construction causes. It offered prospects a leg up onto the property ladder, albeit for New Build properties only.
It also paved the way to homeownership for those who didn’t have huge savings. After the credit crunch, many people in the UK fell into that bracket.
Routing sales through the home builder themselves gave them insight into the programme’s impact. Adoption didn’t meet government expectations in the early days. But the appeal of having to find only 5% deposit soon caught on.
The government still uses that method today. Moreover, at the 2015 Autumn Statement, the Chancellor extended the remit of the scheme:
- lenders in the scheme will lend up to 40% equity for homes in London (from 2016);
- the government will remove restrictions on who can buy a home from April 2016;
- if you’re a first-time buyer, you’ll get a 20% discount on starter homes.
That’s all well and good for new builds. But it also soon transpired that not everyone wanted to buy a brand new home.
So the government launched a similar 5% deposit scheme, but for existing homes. The “Mortgage Guarantee” part of Help-to-Buy, thus hit lenders’ shelves before 2013 was out.
There are key differences between the two schemes you need to know, besides the property type. Yes, you want to know if lenders will accept the 5% you’ve saved for a deposit as a contractor. But you also need to know which of the two schemes best suits your current and future circumstances.
You can check out our guide to Help-to-Buy’s key points from October 2013. This contains an ‘at-a-glance’ view of the criteria as it was then. Here, we’ll look at those differences in depth; moreover, how they affect independent professionals.
Which lenders offer Help-to-Buy mortgages?
There are many, many lenders enrolled in the Help-to-Buy scheme today. Given that there was only a handful willing to test it, that’s testament to its latter success.
For some lenders, H2B worked a little too well. The Halifax had to restrict the amount its brokers could lend under the Equity Loan scheme.
In the government’s guidelines, both schemes have upper limits of £600,000. But some 6-9 months into the programme, Halifax had to take action. Take-up had been so prominent, their books showed a disproportionate amount of Help-to-Buy mortgages.
Halifax reacted by reducing the amount borrowers could access through its brokers to £150,000.
In November 2014, they raised that to £250,000. That was a step in the right direction, yes. But it highlights the continuing demand for Help-to-Buy across the spectrum of would-be homeowners.
The contractor’s constant battle with High Street mortgage lenders
The problem of finding willing High Street lenders remains the issue for contractors. Although numbers signed up to Help-to-Buy are many, only a handful are ‘contractor-friendly’ lenders.
As many contractors before you will attest, dangling your 5% deposit on the High Street is futile. The problem is you have accounts streamlined for tax efficiency to support what is a tiny deposit.
Present these two as your application and you’ll be out on the pavement in a trice.As a contractor, you need a mortgage advisor who understands contracting.
That sounds obvious when you say it. And you’d expect the High Street lenders to have cottoned on by now. The sad truth is, most of them haven’t.
A specialist broker can show you the best mortgage for your situation. That’s true no matter what type of contractor mortgage you apply for.
You need someone who ‘gets’ contracting and has a big magnet to find the needles in those haystacks. That’s also true no matter what type of mortgage product you’re looking for.
Help-to-Buy | How “Equity Loan” works
There are three slices of the Help-to-Buy Equity mortgage:
- your 5% deposit;
- the government’s 20%* 5-year, interest-free loan;
- 75% mortgage from a lender enrolled in the Help-to-Buy scheme.
The “Equity” bit derives from the fact that the government has up to a 20% stake in your home.
*From 2016, this part of the finance will rise to up to 40% in London, as we mention above. But for our example, we’ll stick to figures applicable to the rest of the country.
You’ll still have to find the 5% deposit, no matter where you live. And you still have to organise the other 75% with a suitable lender. A specialist contractor mortgage advisor will help you out with that.
Then the government will forward you up to 20% of the home’s sale price. It’s not a gift. The Treasury isn’t that benevolent. It’s a hand up, not a handout, hence the term Equity Loan.
For the first five years of occupation, the Treasury will waive interest on that part of the mortgage. The home builder or their agent will arrange this part of your finance. After year five, you’ll begin to pay interest on the government’s stake in your property.
Upon the sale of your home, you then deduct 20% of the sale price and repay the government. Yep, that’s what I said. You must start to pay the interest on the loan after year five and pay back 20% of the sale price of your home. Not the 20% you borrowed of the price you bought your home for.
So, what does that mean in numbers?
Let’s run through an example of a Help-to-Buy contractor mortgage (using figures outside London).
If your home cost £240,000, you’d need to find the £12,000 deposit (5%) yourself. You’d then take out an equity loan for £48,000 (20%) and a mortgage for £180,000 (75%).
Now imagine that you’d live in your home for 10 years, but wanted to sell it. The value of your home at time of resale has risen to £300,000. That’s a nice profit for you…
…and the government.
For the first five years, you’d only be paying back the repayment mortgage. It’s worth noting here is that neither of the Help-to-Buy products are available on interest-only. You take them as repayment mortgages or not at all.
In the sixth year, you’d start paying interest at 1.75%. That’s on the Equity slice of the loan. These are NOT loan repayments, just interest on the Equity Loan.
This ‘fee’ percentage will then rise every year in line with inflation. You’ll be paying this from year six as well as your mortgage repayment.
What you have to pay back
Carrying on with the example, when you sell for £300,000 you must repay the government’s 20%. It’s not the £48,000 they loaned you. It’s 20% of the price you sell the house for. In this case, £60,000.
It may be that you remain in the home for the duration of the mortgage. If you never move, the loan will become repayable on its 25th Anniversary.
For some, owing this money will grind. Others will see it as a fair pay-off, especially if they plan to sell within five years of buying their home.
It doesn’t matter if you stay put for life, move home or default on your repayments and lose the home. You’ll always owe the government their 20%.
That is unless you pay it off early. And that’s where contractors can leverage this product better than most. Within 5 years, if they’re disciplined they can own 25+% of their home! Here’s how.
My tip: If you can raise the capital, you can pay part or all the Equity Loan off early. If you can muster that 20% in the first five years, even better; that’s because you:
- won’t pay a penny in interest on that part of your mortgage;
- will reap all the proceeds from the eventual sale of your home, as you’ll owe the government nothing.
Help-to-Buy | Mortgage Guarantee
The Mortgage Guarantee part of Help-to-Buy is much more straightforward. At least from a borrower’s perspective.
The same affordability checks that you’d undergo for any mortgage application still apply. But your qualifying results must be stronger than ever.
That’s because you’re only putting down a 5% deposit. Such limited security heightens other areas of risk in a lender’s affordability calculation.
Your credit file must be blemish-free to qualify for Help-to-Buy. If not, you’ll go to jail, not pass Go! and won’t collect your £200.
So how a bank or building society rates your affordability is still important. If you’re a contractor or freelancer, you have to take special care. You must ensure that your advisor can package your application in a way that shows your true worth.
Most contractors fail because High Street advisors don’t know how to qualify their earnings. They work to a lending model that they’ve tailored to employees’ PAYE earnings. You don’t fit into that preordained calculation, so they reject your application.
Until there’s a huge sea change, this factor isn’t going to change anytime soon. This last 18 months, we’ve seen many more lenders open their doors to contractors. But contract-based underwriting remains subject to specialist lending criteria.
Are Help-to-Buy mortgages right for me?
Help-to-Buy contractor mortgages, at first glance, aren’t the cheapest option. Indeed, you can access more competitive contractor mortgages if you have a larger deposit.
But choices remain few for 95% LTV mortgages, especially for the self-employed.
With house prices in many parts of the UK rising, saving that initial deposit is getting tougher. But for some, we know: it’s getting onto the property ladder that’s the key driver.
We also know that contractors are best placed to pay off the Equity loan before interest becomes due. If you’ve only got 5% deposit and can see the opportunity, Help-to-Buy may just be the mortgage for you.