Self-Employed, Contractors and the Mortgage Market Review
14th August 2014
There has been much written in recent weeks about the Mortgage Market Review, (MMR) and what effect it is having on those looking to take out a simple mortgage.
Many of us have heard horror stories of clients having to attend seemingly endless interviews at their banks, to tales of draconian budget planners where haircuts, milk deliveries and even daily coffees from Starbucks could cut down the amount lenders are willing to lend.
Whilst the tales above are accurate in the direct to branch space, they are very rare indeed in the world of the Mortgage Broker. The main reason for this is that independent brokers have had nothing to really change and it is business as usual. We have all been qualified and regulated for a long while now, used to going through a budget planner to confirm affordability and have always given advice.
Alarmingly and one of the great thrusts behind the MMR, bank mortgage “specialists” did not have to give advice. So before MMR you could walk into a branch and come out with the biggest loan many are ever going to take out in their life, without the benefit of any advice; bonkers.
Now there is a level playing field, so bank staff have to give advice, albeit limited to just their products. Throw in the fact that lenders are now responsible for ensuring that the mortgage is affordable and you have green, newly qualified bank staff taking every possible rule to the nth degree and causing bottlenecks and general mayhem.
It is unsurprising then, that amongst all this backdrop and difficulty for those who have a standard job, fear amongst the self-employed, contractor and freelance arenas has been growing when it comes to applying for a mortgage.
Fear not however! Part of these changes involve moving away from a simple income multiple calculation and on to the dark arts of “affordability”. Each lender will have a different method of applying this, taking into account earnings and looking at outgoings, dependents, debts etc, before stress testing against a future interest rate of around 7% and then coming out with a lending figure.
Whilst some borrowers will be hit by this, others can actually borrow slightly more than they did previously.
The good news is that lenders are becoming much more au fait with the self-employed world and those who were lending before MMR are still doing so now. If anything, we have seen an increase in lenders who want to sit down with us and understand the issues with this type of customer.
Hence, we have a broad spread of lenders who offer different underwriting criteria to suit your particular circumstances.
For those general self-employed applicants, most high street lenders will want to see your last 3 years accounts, with most wanting to see your last 3 years SA302’s. These can be obtained from the Inland Revenue directly with just a phone call and is worth getting in advance as part of the mortgage preparation stage. Other lenders will work off an accountant’s certificate from a suitably qualified accountant.
When assessing Self-Employed income lenders will fall in to two categories; those that take only the Net Profit Before Tax figure, and those that will look to assess the Directors Remuneration/Salary plus Dividends into account.
We also have lenders who understand accounts enough to take into account retained profits or complex LLP structures.
As a rule any recent dips in income will need to be explained, but a good broker can review business accounts, select the most appropriate lender and advise the best options and lending limits accordingly.
For a contractor or freelancer, lenders will want to assess factors such as experience of the applicant in the given industry, their history of contracting, the length of the current contract and the likelihood of it being renewed.
Although there are options for those who are on their first contract, as long as you have a minimum of 6 months remaining on a contract with at least a 2 year uninterrupted history in the same line of work, once you have at least 2 years history of working on fixed term contracts in the given industry, more lenders will be able to consider your application.
These lenders will want to have seen contracts renewed previously, whether this has been on a 3, 6 or 12 month rolling basis and at least 6 – 12 months remaining on the existing contract, although as low as 3 months can be considered on a case by case basis.
A typical approach lenders take is to look at the daily rate, not including VAT, multiple this by 5 to give a weekly rate and then multiply this weekly rate by between 46 and 48 to allow for small gaps in employments and breaks for holidays. This will provide a lender with the ‘targetable’ annual income to assess affordability and the application.
So the truth is, it is not all doom and gloom, in fact far from it. The key is to identify the most appropriate lender and structure the right approach, which of course is best achieved working alongside an experienced, professional broker.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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Andrew Montlake, Director and Spokesperson for Coreco, gives his honest and forthright views on the mortgage market, economy and all things property related. Monty was voted "Mortgage Personality of the year 2008", "Best Press Spokesperson" in 2011 and is the current holder of the British Mortgage Awards “Best Marketeer” title. Expect expert analysis, delivered in a down to earth style with a side helping of exuberance.