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?
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.
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 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, 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:
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.