Contractors handed unprecedented leg-up the property ladder
The number of first-time buyers securing their first mortgage has hit its highest level since 2008, according to the Council of Mortgage Lenders (CML), and this is set to improve further as the government’s new ‘Help to Buy’ scheme takes hold, says freelancers’ IFA ContractorMoney.
Contractors to get help to buy their own new home
The good news is that a greater number of contractors will be able to take advantage of the Help to Buy scheme after a contractor-friendly lender announced their involvement and also broadened the industries covered by their contract-based income multiples, writes ContractorMoney’s Tony Harris.
Existing homeowners as well as first-timers to benefit
In Budget 2013, the chancellor announced an extension to the existing ‘First Buy’ scheme. This scheme had only enabled first-time buyers, who were earning under £60,000, to purchase specifically a new build property. In return for meeting these criteria, the purchaser was asked for as little as a 5% deposit but could require a mortgage of only 75% of the value of the property because the balance would be met via a loan of up to 20% from the government.
This initial scheme has now been extended under the name ‘Help to Buy’ and offers not only first-time buyers but also existing homeowners the opportunity to benefit. It is again only available on new build properties in England, but is available up to a property value of £600,000.
The scheme will only be offered to borrowers who plan to sell their existing home. Help to Buy won’t be available if you are planning to let your current property or if you already own a buy-to-let property. The scheme is managed by the Home and Communities Agency (HCA) who will appoint Home Buy agents to assess affordability and eligibility.
The Help to Buy equity loan will be repayable after 25 years or when you sell the property, whichever is sooner and will be interest-free for the first five years. Following this initial interest-free period, interest will be charged at 1.75% rising in line with RPI plus 1% each year. When you sell the property, 20% of the proceeds of the sale will go to HCA, regardless of the value of the initial equity loan, so an independent valuation will be required to ensure the sale is at open market value. Borrowers will be able to repay the government loan at any time through a process called “staircasing”.
Contractors can access Help to Buy for the first time
For the first time, contractor-friendly mortgage lenders are joining the government scheme so the new Help to Buy criteria will make it far more accessible to higher-earning freelancers. High Street giant Halifax is offering a Help to Buy mortgage and crucially for contractors, thanks to our negotiations with key individuals within the bank, they now provide lending based on a multiple of your annualised contract rate alone.
All professions are covered for the first time as well because, whereas to date the IT sector’s contractors have been the only professional persons covered to use the Halifax’s contract-based underwriting, we’ve been involved in a successful trial that aims to broaden this income measure to now cover the bulk of professional contractors.
Help to Buy Halifax rates revealed
The rates specifically for Help to Buy are currently fixed for two years at 3.89% on a repayment basis and there is no arrangement fee to pay. And under the Help to Buy package, contractors will need to put down only 5% of their own money as a deposit, and the government will then top this up by 20% (to reach a 25% deposit).
The way that the Help to Buy scheme is structured means that homeowners must first apply for a mortgage agreement in principal and then apply separately to the HCA to secure the government-funded loan for the deposit.This forces contractors to go through two separate affordability checking processes, which may potentially cause freelancers some problems as the HCA has yet to announce whether they will base their decision on our gross contract criteria or whether they will simply look at the traditional salary and dividend measures of income. Unfortunately, the latter approach will almost certainly cause many contractors to fail the eligibility tests.
While there are other Help to Buy mortgages available in the wider market, the Halifax use of our specialist contract-based underwriting allows you to avoid the hassle of using your last three years' accounts, or umbrella payslips, and should help you to borrow more, as affordability will be calculated without taking into account any tax saving measures that you may be employing.
… But you may not need it thanks to Funding for Lending
George Osborne is expected to today announce that he will be extending the Funding for Lending initiative that helped kick-start the mortgage market after the credit crunch had all but wiped out high Loan to Value lending. It is Funding for Lending that has helped boost the figures released by the CML that state that 43% of all borrowing is now made up of first-time buyer mortgages. The initiative is widely tipped to be extended by the chancellor for a year until Jan 2015.
Upshot is unprecedented boost for contractors wanting to get onto (or up) the ladder
Contractor-friendly lenders have been dropping their rates on an almost weekly basis over the last year, as they compete to attract first-time buyers and existing homeowners alike - and even contractors with as little as a 10% deposit can secure competitive rates based on contract rate alone. This is helping more contractors onto the property ladder than at any time since 2008 and this, in turn, should help to boost the market further up the ladder. If contractors are turned down for the Help to Buy scheme, or if you are looking to purchase a property that isn’t classed as a ‘new build’, then there are still a wide variety of options available.