The rapid growth of self-employment has been a pronounced feature of the UK labour market in recent years.
The number of self-employed workers increased from 3.3 million people in 2001 to 4.8 million in 2017. Indeed, in 2001 they represented 12% of the labour force – a proportion which rose to 15.1% in 2017.
Within this self-employed labour market there is a growing employment class of contract professionals.
It is estimated as many as 1.7 million people in the UK are now contracting on a full-time basis, according to a report by IT Contractors UK.
As such, contractors represent a significant proportion of the workforce, operating across many sectors but most notably the IT, finance, construction and oil and gas industries.
Changes to the way contract workers are engaged are due to take place in April 2020, when IR35 regulation will bring the private sector in line with the public sector.
This may well see more contract workers become employed, but things will certainly become even more interesting in terms of the advice these workers will need when it comes to mortgage borrowing.
The mortgage myth for contractors
There is a common myth that it is a struggle to obtain a mortgage if you work as a contractor, and that lenders do not have an appetite to help you.
The reality is very different. Several lenders have criteria in place specifically to provide flexibility for these clients Contractors can access the same rates and options that employed clients enjoy.
What is true, however, is that the income structures of contractor clients are more complex. As we stated in last year’s article on self employed mortgages, it is crucial for contractor buyers to speak to an adviser with experience and specialisation in this area and also with access to as many lenders as possible.
How will my income be assessed?
Contract workers have become an area of increasing focus for lenders. As such, some are providing simplified ways to calculate the amount of contract income that is taken into account.
Contractors will often earn a day rate, with the contract showing the income as a payment per day or week. Clients who work on this basis may have also set up their own limited company, or may be getting paid via an umbrella company.
There are now lenders who specialise in this area and will multiply the day rate by the number of working days in the year, typically looking for a year’s contract history.
Lenders who can work on this basis vary quite significantly on the number of weeks they use for their income assessment – from 36 to 48 weeks depending on lender. This can significantly alter the loan amount a contractor may be able to borrow.
For example, if you have a day rate of £200 then some lenders will take your income as £36,000 and others may use up to £48,000.
This could be a difference of £60,000 in the borrowing amount and therefore the purchase price at which you can buy.
Contractors should also bear in mind that a lot of the main high street banks do not have specialist contractor policies, and so would only lend using self-employed income for the affordability assessment (for limited company directors typically salary and dividends, using an average from the last two years’ accounts).
This can be a problem as with the growth of this industry we find a lot of clients have only recently moved to contracting, and do not want to wait two years before they can get a mortgage.
We have access to lenders which, as long as your move to contracted work is in the same industry, can take the contract income from day one. Or, if new to the industry, can work from a six month track record.
Also, contract income often increases, and so it can be beneficial for the mortgage to have a lender which will use the income from the most up-to-date contract, and not the previous year’s accounts.
What documents do you need?
One of the main issues that contractors, and in fact all self-employed clients, often cite as a major frustration is the documentation requirements.
A good adviser will ensure that documentation requirements are discussed in full with the lender pre-application to ensure there are no delays.
They will also help a client to understand where to obtain these documents and exactly what the lender requires.
At Alexander Hall we also look through the contracts and accounts like an underwriter, so that any questions the lender may ask can be spotted in advance.
Typical requirements that are good to have ready are:
- Your current contract, signed by all parties
- A breakdown of your contract history and records of your last two years’ contracts
- A copy of your CV
- Your latest two years’ accounts (if available/applicable)
- Three months’ personal and business bank statements
Using an intermediary
Constant improvements and tweaks to lenders’ criteria and product ranges mean that it is vital clients speak to an intermediary to get the most up-to-date advice and, of course, the most competitive deal available to them.
To see why our clients rate us so highly and to ensure you’re getting expert mortgage advice from one of the top intermediaries in the UK, do get in touch via our website, alexanderhall.co.uk.
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Case Study
Let’s take a look at a case study. This recent Alexander Hall client illustrates the above scenarios perfectly.
The client
Luke*, a young IT professional, was a first-time buyer and had found his dream property. Luke was an IT contractor, set up on a self-employed basis with his own limited company.
The scenario
Luke was in the middle of a good six-month contract, which made the mortgage seem easily affordable.
However, Luke had met with three high street banks which all advised his income was not sufficient.
He had only been working as a contractor for 18 months, and so his first year’s accounts had a low salary and dividend income of £18k, as he had retained a lot of profit in the business.
The solution
We spoke to a lender which agreed to use Luke’s day rate, with a calculation of five working days and 48 weeks per annum. His day rate was £425, meaning that instead of £18k this lender could use an income figure of £102,000.
The rate offered by this lender was also lower than those being offered by the banks the client had initially spoken to, so his monthly payments are also now lower as a result.
A mortgage offer was secured within two weeks and the client was looking to move into the property by the end of that month.
Property value: £620,000
Loan amount: £496,000
LTV: 80%
Rate: 1.43% 2 year fixed
APRC: 3.7%
Term: 35 years capital and interest
Lender arrangement fee: £999 added to loan amount
Mortgage payment: £1,505pcm
*Name changed
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Greg Cunnington is director of lender relationships and new homes at Alexander Hall
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