5 reasons to use a contractor mortgage broker in 2023
Even today, many of our new clients are contractors who've approached a mortgage lender direct and been let down, often at the last minute.
This guide will help explain to ContractorUK readers why the failure rate of contractors who use their local branch or current bank's call centre is so high.
And in providing that explanation, we’ll give you five reasons to use a contractor mortgage broker in 2023 -- and beyond, writes John Yerou, CEO of Freelancer Financials.
Before we jump in, please note we've made every effort to offer unbiased viewpoints in writing this guide. But the advice here is based on our own experience providing contractor mortgages since 2004. It may or may not reflect the experience at every specialist mortgage broker.
Your payment structure makes you a specialist borrower
The first thing contractors need to understand when applying for a mortgage is that they're a specialist borrower.
Their income and how they process their earnings vary from the norm massively. But it's not only your payment structure (i.e. umbrella company, limited company /personal service company or agency PAYE) that confuses lenders.
When lenders assess permanent employees they assume a certain amount of continuity. Not so with contractors who regularly, exclusively work to short-term contracts. The nature of these short-term contracts goes against everything lenders perceive as ‘low risk.’
Regular work won’t help you as a contractor mortgage-hopeful
The fact that a contractor may have worked with the same end-user for multiple contracts counts for nothing.
The underlying fact is the contractor only has guaranteed work for the next six months.
Often, this period is less if the contractor is part-way through a contract at time of mortgage application.
Here are five reasons to use a contractor mortgage broker in 2023.
1. Brokers get beyond the front desk
Brokers circumvent this nonsense by dealing with specialist underwriting teams directly.
We've spent years developing relationships beyond the front desk. When a lender gets a mortgage enquiry from us, they know that the contractor has been vetted. They know that we know what to look for in a contractor mortgage applicant. Moreover, we know how to interpret contract income so that they understand you're low risk.
You won't get access to this understanding and accessibility through a generic broker or via the High Street/call centre route.
Despite all this, the real danger lies in the lender not recognising you as a specialist borrower in the first place.
Some contractors will read this article and go direct to a lender, anyway. There'll be other readers who'll be saying, "Yep. I wish I'd gone to a specialist broker first."
Why? Because being rejected for a mortgage is the beginning of a cruel, seemingly endless spiral. Here's what (usually) happens:
A contractor walks into their local branch. It's only right they assume that, if they bank there, the lender will look upon them favourably for a mortgage, right?
The team in your local branch won't be dealing with your mortgage. Not the nitty-gritty of it.
Yes, the in-branch adviser may vet it before sending it off to HQ. But it's this inexperience in appraising specialist income that will be your downfall.
2. Brokers can avoid ‘high risk’ hurting your credit score
Yes, they'll say all the right things to you in the interview. But, because their bank's dated system and formulae don't accommodate specialist income like yours, your friendly adviser will have to mark your application 'High Risk' when they put it in the out tray!
When it gets to head office, a generic underwriter will take one look at that risk allocation and already be primed to reject your application.
This is the start of that spiral. A rejection will appear on your credit history. When you get rejected and then visit the next mortgage lender, what's the first thing they check? Your credit score.
If they see a rejection, this next lender will be more than curious as to why. It predisposes them to reject you, too. And the more rejections you get, the less likely you are to get any type of credit at all, let alone a mortgage.
3. Brokers won’t let your limited company end up with a self-employed mortgage
But then there's the flip side. What if the in-branch adviser says they can offer you a mortgage tailored for limited company contractors?
Time for celebration, right?
I'd like to say yes; but, be very wary of what they offer you.
If they offer you an off-the-shelf mortgage, I'll bet you a pound to a penny it's a 'self-employed' mortgage. This is not the same as a contractor mortgage!
A self-employed mortgage relies mainly on your SA302 to 'evidence' your income. That's bad news if you're a limited company contractor.
My guess is you're only drawing enough salary to cover the minimum NICs contributions, and maybe a top-up of dividend drawings, right? You leave the rest of your income in the business as retained profit; most limited company contractors do.
That means, in the context of generic mortgage advisers, you're leaving the bulk of your mortgage affordability off the table.
If an adviser isn't using your annualised day rate to work out your affordability, vacate the building. Immediately!
4. Brokers understand your contractor earnings, like day rate and dividends
Your biggest asset as a limited company contractor is, arguably, your day rate. More often than not, your 'annualised' day rate means you earn much more than a permanent employee doing the same work as you.
When an adviser looks at your day rate on your application, they get all excited. When they look at your last SA302 submission, they get deflated. Worse, totally confused.
How can you earn £350/day, but only submit a tax return of, say, £13,000? It doesn't make sense to them. Nor does it fit into their algorithmic affordability calculation.
A specialist mortgage broker, if they're like us, has invested time and effort in getting to know your industry sector. They will know exactly why you draw only a little salary and top-up with dividends.
What's more, a savvy broker can explain your income to a specialist underwriter to help them make sense of your true mortgage affordability. That's if the underwriter needs it explained to them. Most underwriting teams we deal with have developed inherent knowledge of the professional contracting sector due to the amount of business we've put their way since 2004.
So, again: if a mortgage adviser isn't using your day rate as the starting point of the affordability calculation, you're in the wrong place.
5. A good broker will stop you dropping onto a lender’s inflated SVR
Whatever type of mortgage you take out, it will come with an incentivised initial rate period. This introductory rate will be substantially lower than the lender's Standard Variable Rate (SVR).
It's become standard practice—by lenders and brokers alike—to notify borrowers of the impending end of that period. That notification can come as close as two months to the end of the term, or as early as six months.
When you get that notification, a lender will offer you a 'product switch'. This simply means you can move onto another of their products with a new lower-than-SVR initial rate period without having to pay the 'redemption' fee you'd have to pay if you closed your mortgage account and switched to another lender.
On paper, that sounds great. No hassle, little paperwork, job done.
But that lender will only be offering you a product from their mortgage range. How do you know if what they're offering you is competitive compared to other mortgages on the market?
When we send you such a notification, rest assured, we'll scour the market for the best interest rate for your situation.
True, you might pay a small percentage of your current lender's early account settlement fee. But, if we're able to find a mortgage considerably cheaper than the one your lender's offering, you could well save that fee, and then some!
Most lenders don't charge a fee if you 'product switch' with them. Likewise, lenders appreciative of your new business may also waive their product fee, just to get you on board.
You simply don't know what's out there if you blindly accept your lender's initial product switch off the bat. Over the full term of your mortgage, there's zero reason you should ever pay your lender's SVR again. But many do, especially contractors, just because they don't want to 'go through all that again.'
The contractor mortgage application process needn't be so fraught. If you've got a relationship with a specialist broker, you know that they do all the heavy lifting for you. Like you, they specialise in one area, and are good at it!
Life's too short to trawl every lender every time you need to switch mortgages. A specialist mortgage broker will get you to the end of the term, not the end of your tether.
Find out more about contractor mortgages here.