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The High Street + Self-Employed Status = Mortgage Disaster

You know that the way you work is special. You’re a contractor or freelancer or company director – the way you pay yourself is not run of the mill. You may even hire an accountant to work it all out for you. So why would you expect an inexperienced bank advisor on the High Street to get it?

High Street mortgage lenders work to a set model. That model, nine times out of ten, revolves around PAYE. That’s it. Self-employed people struggle to get mortgages because they do not use PAYE.

There are exceptions. Some lenders will go the extra mile. But nothing like the miles you’ll trudge trying to find them. And that’s not just me saying that. That’s real feedback from all type of self-employed people who experience bias on the High Street. But is it any real surprise?

Self-Employed – all tarred with the same discriminate brush

You, your client and I know the differences between hiring a freelancer ad hoc, a contractor on a short term basis and perhaps agencies to handle necessary but indirect work. IT infrastructure, marketing, events co-ordination – the list goes on.

When you get to your branch, no matter how you trade, in their eyes you’re “self-employed”. That’s it. Now, if there was a template that took into account the varying ways self-employed people declare their earnings, we’d all be fine. But there isn’t.

There’s not even a uniform way lenders assess affordability for permies. The mortgage market review and responsible lending guidelines are just that – guidelines. Two lenders can look at the same set of accounts and offer you totally different maximum mortgage loans.

How you can stand out in the mortgage marketplace

Some High Street lenders will ask for one year’s self-employed accounts, but most demand two or three. They’re about to forward a large sum to someone with no ‘permanent contract’. They must hedge their bets.

The key to a successful mortgage application isn’t crossing your fingers and hoping the advisor works out your earnings to loan you enough for the home you want.

The key is going to a broker who can package your application to highlight your earnings so that the mortgage provider can’t miss it!

Here are a couple of ‘for instances’.

Self-employed directors – efficient to death

Self-employed company directors face a huge uphill battle on the High Street. They have their earnings streamlined so that they pay as little tax as is permissible. Their ‘salary’ is low, supported by drawing low dividends. Great for your tax bill; useless for mortgage applications.

Remember, in-branch advisors are looking for one thing only on an applicant’s pay-slip: their take home. As a limited company contractor keeps their drawings low, they strike out before making first base.

What directors need is a lender who’ll use a director’s salary plus pre-tax profits. This elevates their upper borrowing threshold higher than using dividends alone as the qualifier. Those profits you’ve managed to retain are worked into the affordability calculator and not surrendered in the name of tax efficiency.

Contractors – options are limited

Contractors, although they have as little success on the High Street, have more options through a specialist broker. Especially one who’s put their neck on the line with a lender’s underwriters to thrash out what’s really necessary for a contractor’s application to succeed.

There’s not as much involved as you’d think. This is where in-branch advisors go about it the wrong way. To enable contract-based underwriting, an underwriter only needs:

  1. A copy of the current contract (or an extension if it’s due to expire);
  2. Bank statements confirming their earnings over a set period, usually the last three months;
  3. Official forms of ID to state that they are who they say they are;
  4. There is no number four.

Specialist brokers – the clue’s in the ‘specialist’ bit

Underwriters don’t need to see a contractor’s accounts. The nature of the way they work renders pasts assignments somewhat irrelevant. I say ‘somewhat’ for a reason.

Most contractor-friendly lenders will offer mortgages to contractors working on their first contract. But they will have to show a record of past employment in the sector to back up their application. Like I say, that’s for those on their first contract.

In either instance, director or contractor, there are fewer lenders that cater for them than permies. In their quest for a mortgage, many contractors leave nasty scars on their credit file from failed searches.

My one tip for all self-employed people: avoid the High Street if you’re looking for a mortgage. The chances are you’ll do yourself more harm than good.

Go to a specialist broker first time, every time, who can handle the entire process for you. The fee you incur will be worth every penny, saving you time, money and heartache in the process.

Author: John Yerou is the owner and founder of Freelancer Financials, which specialises in providing mortgages for the self-employed and contractors across the UK.

By John Yerou

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8 thoughts on “The High Street + Self-Employed Status = Mortgage Disaster”

  1. P. Basford

    So if you declare to HMRC that you earn next to nothing in order to avoid tax, you can be refused a mortgage on the grounds that you earn next to nothing.

    Perhaps the PAYE paying bank employee feels that this is the way it should be.

  2. John Yerou

    Contractors that operate through a LTD company structure don’t declare next to nothing to HMRC to avoid tax.

    The problem lies with the majority of lenders who calculate potential borrowing based ONLY on your income. In the case of a company director, this is often Salary and Dividends alone. This method of calculation doesn’t realistically reflect the company directors true earning potential, as the majority of directors don’t draw all their net profits for tax purposes.

    However, their are a number of lenders who get it and are prepared to take into account Net Profits as well as retained profits held in the company for tax purposes.

  3. J Byrne

    Sorry, but brokers are not required to get a mortgage as a contractor. Nice sales pitch tho!
    Be prepared to collect the obvious info that a broker will charge their fee to ask you for, company accounts, interim accounts if you don’t have 2 years submitted, contract details etc.
    I went to a high street lender and got approved for their best deal interest rate. It took a bit of extra leg work providing a full set of information, but same info the broker will be after. Nothing special about my lender and to be honest once you’re used to the grind of doing ltd accounts, collecting that info is trivial.
    Ignore the FUD in this article ! Go direct 🙂

  4. Stephen kenton

    Easy for you to say, but I had a nightmare going direct. Because I don’t draw all my earrings and limit my salary and dividends it caused huge problems. I nearly gave up until one of my friends who experienced similar problems introduced me to his broker. The only reason it worked for you is either because your loan was small in comparison to your drawings or your accountant doesn’t know what he is doing. So be mindful of telling others to go direct, when you have no idea.

  5. Stephen kenton

    [quote name=”J Byrne”]Sorry, but brokers are not required to get a mortgage as a contractor. Nice sales pitch tho!
    Be prepared to collect the obvious info that a broker will charge their fee to ask you for, company accounts, interim accounts if you don’t have 2 years submitted, contract details etc.
    I went to a high street lender and got approved for their best deal interest rate. It took a bit of extra leg work providing a full set of information, but same info the broker will be after. Nothing special about my lender and to be honest once you’re used to the grind of doing ltd accounts, collecting that info is trivial.
    Ignore the FUD in this article ! Go direct :-)[/quote]
    [quote name=”J Byrne”]Sorry, but brokers are not required to get a mortgage as a contractor. Nice sales pitch tho!
    Be prepared to collect the obvious info that a broker will charge their fee to ask you for, company accounts, interim accounts if you don’t have 2 years submitted, contract details etc.
    I went to a high street lender and got approved for their best deal interest rate. It took a bit of extra leg work providing a full set of information, but same info the broker will be after. Nothing special about my lender and to be honest once you’re used to the grind of doing ltd accounts, collecting that info is trivial.
    Ignore the FUD in this article ! Go direct :-)[/quote]
    [quote name=”J Byrne”]Sorry, but brokers are not required to get a mortgage as a contractor. Nice sales pitch tho!
    Be prepared to collect the obvious info that a broker will charge their fee to ask you for, company accounts, interim accounts if you don’t have 2 years submitted, contract details etc.
    I went to a high street lender and got approved for their best deal interest rate. It took a bit of extra leg work providing a full set of information, but same info the broker will be after. Nothing special about my lender and to be honest once you’re used to the grind of doing ltd accounts, collecting that info is trivial.
    Ignore the FUD in this article ! Go direct :-)[/quote]

    I hate it when someone writes an article that most of us contractors can relate to and then some smart arse person like you comes along spouting crap because he doesn’t believe in paying a broker fee. You’re the type of person that rings around getting all the information he needs and then attempts to do the work to save a few hundred pounds. Hardly worth it if you’re a contractor in London earning £600 a day.

  6. Peter Darrell

    Loved the article and couldn’t agree more with the author.

    Try going direct in your first year of contracting with less than two years accounts and you definitely hit a brick wall. I ended up going to a mortgage specialist I found on Contractor UK forum.

    Also pleased to say that they only charged me £395.

  7. Phil lloyd

    Great article. Whatever you do, don’t waste time going to HSBC. I wasted 6 weeks only to be told No!

  8. Stomas

    I used Freelancer Financials last year. Got me a decent rate with Clydesdale Bank. Their MD is a regular poster on Contractor UK, that’s how I found them. There are plenty of other mortgage specialists on that forum as well. I’ve got to admit, didn’t bother with the high street so not entirely sure what other options were available to me. But overall I was delighted with the service I received.

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