Contractors’ Questions: Do lower dividends hurt my mortgage chances as a limited company director?
Contractor’s Question: I take the point in this Santander mortgage-related article about the advantages of using a specialist mortgage broker. But my broker who is a specialist for self-employed people has told me that due to my company dividends as a director being lower in 2020 than in 2019 (partly due to covid-19 impacts), the lender will penalise me by lending me less.
It’s irritating that I’ve been more frugal and my company has higher retained earnings as a result, but the lender will lend me a lower amount as a result. So if I went with a limited company mortgage specialist would they have better deals in place which get around this dividend-related unfairness? And are mortgage brokers for company directors different to brokers for the self-employed?
Lastly, if I do go with a mortgage broker specialising in PSCs, what multiplier do they use and what amount will the lender apply the multiplier to?
Expert’s Answer: This is a great question. The differences between contractor-specialist mortgage brokers and ‘vanilla’ or self-employed brokers are stark.
Let me try and answer your questions based on our experience of the market as it stands today.
SA302 versus annualised contract rate
It sounds to me like the broker you've spoken to has appraised your income from an ‘SA302’ perspective. A specialist contractor broker, on the other hand, will work with your annualised gross contract rate, thus including retained profits and not just work on your dividends drawn.
To achieve an annualised figure, lenders will use your day rate multiplied by 5 (to get a weekly rate). They’ll then take that weekly rate and, in normal times, extend by either 46 or 48 (weeks) to get a gross annual income for lending purposes.
It is this gross annual rate that they will use as the basis for your mortgage affordability. However, as the industry in which you work is now a prominent criterion, don’t be surprised if they adjust their offer if you work in an industry particularly impacted by furlough and lockdown.
No clear rule of thumb
If your income has been inconsistent because of covid-19, a specialist underwriter will appraise your application as a bespoke case. How much risk each lender assigns to your specific case, including the industry you work in, will be down to that lender. There is no clear rule of thumb.
This risk aversion also applies to the multiplier lenders are offering. If you have a low deposit and work in a susceptible industry, expect your mortgage offer to reflect that.
That aside, I'm not surprised that your broker has taken the stance they have.
To compound matters, the simple truth is, there aren't that many contractor specialist brokers out there. One, because of the size of the market. Two, because, as you'll know, contractor income isn't as straight forward as PAYE or sole trader income.
And while there are self-employed brokers out there, let's be honest, most banks have long-established lending criteria for self-employed people. However, the same cannot be said for lenders' policies for limited company contractor applicants.
Our answers by numbers
Think about your run-of-the-mill, ‘vanilla’ high street broker for a second. Eighty-five per cent of the people who walk through their doors are employed, PAYE. A further 10-to-12% are traditional self-employed. That leaves just 3-to-5% who are limited company contractors/company directors.
Of course these brokers are going to say they can help you. But, only dealing with 1-in-20 customers who are contractors (at best), puts them at a huge disadvantage. Plus, in their eagerness to help, they could unwittingly cause you untold damage from a credit score perspective.
The bottom line, vanilla and self-employed brokers are not as invested in the contractor mortgage market as much as bespoke specialist brokers. It's also less likely that lenders will assign non-specialist brokers a dedicated specialist underwriting team because of the low volume their business generates.
True, a self-employed broker may understand the machinations of a contractor's income a little more than your vanilla broker. But also true -- their diversity could put them at a disadvantage against a pure specialist contractor mortgage broker, as it looks like you've sadly found out for yourself.
The current climate and contractor borrowing
As a contractor-specialist brokers ourselves, I can corroborate some of your broker's data, though. Yes, all lenders are more risk-averse under the current climate. They're applying stricter measures against everyone.
But what I can say, to put your mind at rest, is that we work with all the lenders who have bespoke contractor policies on a weekly, if not daily basis. And while they're not immune to what's going on, 99 times out of 100, there is a solution based on annualised contract income.
Your next step is to speak to an adviser or broker who totally gets your income (hopefully you can see that we do), but also one who equally has direct lines to the underwriting teams who'll understand your income as well.
That you've been frugal should put you in good stead; lenders should see that as a positive, not a negative against you. It's just a case of getting your application to someone who understands your total contract income at the lender end.
Risk aversion and contractor mortgage affordability: the new normal
And finally, you ask about the income multiplier. Some lenders have taken a tight line on contractors, dropping their evaluation to 2 x annual income (Nationwide being one example). But there are lenders still working to x 4.0 and x 4.49 gross annualised income, Halifax, as you’d expect, being at the top end.
But I reiterate, there is no generic list of criteria that lenders are working to. Each have their own risk profile, and your individual circumstances will impact on the offer you receive.
For example, two contractors working in different industries, but who’ve been contracting for the same length of time and on the same day rate could get a different mortgage offer from the same lender, simply because the lender sees one industry as a higher risk than the other.
Six determining factors (at least)
What you eventually get offered, and the accompanying interest rate, will depend upon factors like:
- size of deposit/loan-to-value;
- time served in your industry at time of application;
- what that industry is;
- copies of your contract, and any extension if you're close to its end,
- 3-6 months' bank statements (some will ask for personal as well as business, but not all),
- and their own credit checks.
The higher you score against those criteria, the greater the multiplier and lower the interest you'll get offered! We hope this answer helps you on your way to buying your next property. But to you and other contractors, we’d say do give us a call if you want to discuss the process further. Best of luck!
The expert was John Yerou, chief executive of contractor mortgage brokers Freelancer Financials.