Mortgages for IT Contractors
- Your adviser will search the of the whole market to find your ideal mortgage
- We aim to have the whole mortgage process sewn up in 4 to 6 weeks
- You can borrow up to 4.5 times your annualised contract rate
- Avoid the hassle of proving your income with accounts or payslips
Article provided by ContractorMoney. You can gain a quotation using the Contractor UK Mortgage Finder or by calling the ContractorUK Money Club direct on 03450 628888.
Property purchase represents a relatively secure and often very profitable investment that should be at the forefront of any contractor wish list when it comes to deciding on future financial goals. We aim to provide a 'crash course' on the pitfalls and opportunities that surround this area.
1. Mortgage Pitfalls and Opportunities
2. What method of repayment should I choose?
3. What do I need to look for in a lender?
4. Mortgage Top Tips
Mortgage Pitfalls and Opportunities
The relatively high income that you enjoy can be put to good effect to raise higher amounts of capital than was perhaps possible on a more modest, permanent wage. This should give you the opportunity to skip more than a few rungs of the property ladder and afford a far better home than would have been the case in a salaried position. It could also offer scope to buy a second property to rent out thus building up a further potential asset and an income stream for the future. On your enhanced earnings you should also have the ability to repay a substantial part of your loan each year instead of look to the normal 25 year+ term that most borrowers endure.
Unfortunately many contractors find trying to secure a decent size mortgage very frustrating. Most of the more traditional 'high street' banks and building societies will base the maximum they are willing to lend on salary alone. Even post-IR35, you may still have a low salary and high dividends and could end up living in a garage if it were left to their normal lending policy! A fundamental problem is that, regardless of IR35, the mortgage companies are often wary of the short-term nature of the contracts and fearful that you may not get an extension or new contract (which is ironic given the fact that you are considerably more employable than the average building society manager!!). Those that are more accommodating on income etc will often be the least competitive in terms of interest rates and flexibility.
Don't despair though. There are lenders who have a contractor friendly attitude, with good deals, sympathetic lending criteria and flexibility of payments. You can borrow up to 4.5 times your annualised contract rate and need only have been trading for one day! It is possible to take out a mortgage with a small deposit although the better deals are likely to be on offer to those who have 10% or more of the purchase price to put down.
A tip that's worth bearing in mind is that whilst it's good to shop around be very careful not to actually apply for the loan until you are confident that the company is happy to lend and that you are happy with what's on offer. Each time you apply for a mortgage a credit search will be carried out and if a number of applications, successful or otherwise, appear against your name a later approach to an alternative lender may very well be declined purely because of all this activity against your records.
It may be safer to employ the services of a Mortgage Broker. After all, the client you work for has called you in because you are a specialist in your field so get someone who does this sort of thing all day to help you. This is the biggest financial decision you make in your life so it's important to get it right! When approaching a broker ask specifically whether he has experience of arranging house finance for contractors. Many will be more used to the needs of the self-employed as opposed to 'employees' with short-term contract income. You will also be asked to pay a fee for the work that he will do in placing your mortgage. There is far more stringent regulation of the home finance market now and you should check that your broker adheres to the 'mortgage code' of conduct. This should ensure that you get a good service.
What method of repayment should I choose?
There are 4 main types of mortgage...
Repayment - With a Repayment mortgage (also known as capital and interest) the amount you owe will steadily reduce throughout the term of the loan. It is said that repayment mortgages are inflexible if you intend moving home in the early years, as there will be relatively little debt repayment initially. This factor needs to be balanced with the security of knowing that your mortgage is guaranteed to be repaid at the end of the term and is not reliant on investment performance.
Interest Only - Alternatively you can elect to pay only the interest to the lender and contribute to a separate investment that will ultimately be cashed in to repay the loan. This investment can be an Individual Savings Account (Isa) or endowment plan and will offer the potential for a profit over and above what is needed to repay the loan although without the cast iron guarantees of a repayment method. With an ISA mortgage you have complete flexibility to increase or decrease contributions to this tax efficient investment and you can redirect your investment to a different provider each year. These loans are increasingly rare on residential property but are still common for buy to let mortgages.
A potential drawback is that the capital is completely accessible and may be 'raided' for other needs rather than be allowed to grow to repay your mortgage. The flexibility of premium may mean that if your budget became tighter this payment could be the first casualty. A more disciplined approach is an attraction of the endowment route. With this option set payments are maintained to a single provider and additional benefits can be provided that will pay premium and mortgage interest in the event of illness, all incorporated within a single policy. Regular reviews are carried out to ensure that the policy is on track to repay the loan.
Pension Mortgage - The last investment backed option is to contribute to a pension mortgage. You benefit from tax relief on your contribution towards a retirement vehicle and can then take a lump sum from your plan at retirement to pay off your loan. In effect the government is subsidising part of your mortgage and you ultimately end up with an increased pension in retirement as a by -product of your mortgage choice. Like the Isa and endowment route the performance of your investment is crucial to your ability to settle your loan.
Whichever option you choose it is important that you arrange your loan through a lender that will allow lump sums to be repaid from the mortgage throughout. With a repayment and Isa mortgage and with some endowment policy backed loans, this could shorten the term of your loan dramatically. Alternatively you could continue to fund the investments safe in the knowledge that your potential profit would be even greater given the fact that the eventual debt needing settlement had been reduced.
This area is probably the most important financial decision you will make in your life and you should seek the help of an independent financial advisor to work out which route is best for you.
What do I need to look for in a lender?
It is important you ask a prospective lender how often they recalculate the outstanding mortgage that interest will be charged on. Many high street names will calculate the outstanding amount only once a year (typically December 31st when everyone is too inebriated to notice what's going on !) and a lump sum repaid in January will have interest charged on it for 11 months until the lender will recognise that you no longer owe this sum. In any other business this would be extortion but in the marvellous world of mortgages this seems fair game. Look for lender who recalculates at least monthly and ideally daily so that you and not the bank or building society benefits from your payments.
Beware lengthy lock in/loyalty clauses. Many lender offer headline grabbing rates to tempt you in the door but will insist that you remain with them long after the rate has soared back to an uncompetitive variable rate. If you try to vote with your feet you can face penalties that can, in the worst cases amount to 8% of your total loan.
Avoid mortgage indemnity insurance premiums wherever possible. This is a costly scam that protects the lender against you suffering from negative equity (where the house price falls below the size of your loan). The catch is that you pay the premium of £1000-£3000 and you are still liable to the insurance company to pay them back the money they have passed to your lender ! Some don't charge for these at all and many will only charge if the deposit is less than 5%.
If you use a broker ask for his experience of a particular lenders turn around time on an application before deciding to go with them. If you deal direct then it's a bit more of a leap in the dark but at least try to make them accountable for time-scales. There is no point in you securing the deal of the century on a mortgage rate only to find that they use an abacus and written ledgers to process applications and you end up losing your dream home because they take 2 months to get your mortgage offer out to you (true story!!!). Speed of processing is a big asset even if the rate is not the best around particularly if there pressure on you from the seller/ your getting a good price on the property/ you are really keen on the property.
Look out for compulsory insurance clauses. Some lenders insist that you take their home insurance, unemployment cover, pet plan etc. These in house products are rarely good value and will cost you more in the long run than a marginally less good deal with no strings attached.
If you are looking at a buy to let proposition then avoid high costs/uncompetitive rates. Rates should be no higher than ordinary market residential rates and there should be no hefty administration fees. In essence buy to let represents no additional work for the lender and you should not be asked to enhance their profit margin.
Shop around for a solicitor- you shouldn't pay more than £375-£450 inclusive regardless of purchase price. Steer clear of in-house solicitors in estate agencies, building societies, banks as they are often expensive and may forget who they are acting for when they are reliant on referee for their next months client. Personal recommendations are best and when you talk to them its always best to hypothetically talk up future wills etc. If they see a new income stream from a young professional they may keener to give good service and find less to charge for in additional 'unforeseen' expenses.
Don't fall for pressurised estate agency brinkmanship. Even if there are 3 prospective buyers waiting to snap up your dream home go and have a beer and weigh up the pros and cons. If you lose that one there are plenty more 'once in a lifetime, never to be repeated, guaranteed money spinner' properties where that came from. With stamp duty, estate agents bills moving costs solicitors bills etc you really don't want to be moving again in too much of a hurry if it turn out not to be the right choice.
Your 'gut feeling' is often as valid as the surveyors' report. A survey is a good a piece of litigation limitation as you will see. It will suggest potential problems of everything but be liable for nothing missed no matter how serious. They will point out a discoloured ceiling rose but miss the mushrooms growing out of the floorboards. Buyers beware but don't be put off a property because the surveyor doesn't like sash windows!
Don't believe all the hype surrounding buy to let. If you are convinced there is rental demand in a certain area then as an investment this makes a lot of sense. However estate agents have a vested interest in talking up this market and are shifting a lot of hard to sell property on the back of the obvious attractions to buyers who can borrow at the current low interest rates and make a fair return on paper. The estate agents then potentially have an income stream for management/resell if things don't work out. Don't underestimate the hassle factor and try to buy close to home so at least you can spot the signs if something is amiss.
The value of investments may fall as well as rise and past performance is not a guide to future returns.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Financial advice is given by ContractorMoney, which is a trading name of Contractor Financials Ltd and is regulated and authorised by the Financial Conduct Authority.