Contractors’ Questions: Why so few mortgage options?
Contractor’s Question: I’m about to come off my mortgage deal which was fixed for 2 years, and my monthly repayments will rise significantly as a result. However the best alternative rate, also fixed for the same period, that my current lender can offer actually represents only a negligible saving per month. Of course, rising interest rates will see this saving increase. However because self-cert and fast-track have been removed from the market, my options – in terms of approaching another lender - appear very limited.
Am I missing a trick, or is there another mortgage route open to limited company owners? My options mainly appear limited because my salary doesn’t look good on paper owing to my salary/dividend mix. ‘Turnover plus expenses’ is no longer of interest to my lender either. I feel all this is unfair, because I actually volunteered to pay more than the minimum required payment on my mortgage (which I’ve done every month since 2008) but this has no clout with my current lender.
Will it hold any sway with others? Was I wrong to pay off more each month when I wasn’t forced to, especially now the upcoming repayments on the most suitable deals still look too steep? And what should I do, assuming I want the lowest repayment sum possible? Plus, am I right that rates can only go upwards over the next 2 years?
Expert’s Answer: Your problem is not uncommon in the contractor community at present, as many homeowners are finding that their fixed mortgage rate is coming to an end and the lender's standard variable rate (SVR) is, in some cases, considerably higher.
If you approach lenders directly then you will undoubtedly be asked to produce the last three years' accounts from your limited company in order to prove your income. However, if your accountant has been doing his job properly, then these accounts will show relatively small salary/dividends in order to ensure you work as tax efficiently as possible. Whilst this is great for avoiding the taxman’s grasp, it can have a significant impact on the amount you are able to borrow as lenders traditionally use a multiple of your salary/dividends to calculate affordability.
The good news is that, despite the death of self-certification mortgages, there is an alternative route for contractors that often allows them to borrow the same amount, if not more, as a 'permie.' Specialist contractor mortgage brokers are able to arrange your mortgage based on a multiple of your annualised contract rate alone. This has proven especially popular with ‘Ltd’ company owners, as it saves the hassle of having three years’ accounts that prove your income.
You needn’t worry about the perceived expense of using a broker to arrange your contractor mortgage either, as you should insist that their help comes without paying a fee and they can instead rely on introducer’s commissions from whichever lender you choose for your next mortgage.
I do understand that you may now be inclined to question the overpayments that you have been making in recent years. But please rest assured that overpaying your mortgage should stand you in good stead when you come to apply to other lenders as your Loan to Value (LTV) should be lower. This can make a significant difference to the rates that are available to you in the current market as lenders are reserving their lowest rates for borrowers that have a 20-30% deposit or more. If you have capital built up in your house then this will be taken in to consideration when you remortgage, so you have done the right thing in paying off more each month when you could afford to do so.
In terms of what will happen to interest rates in the next two years, nobody can predict with absolute certainty what will happen. At present, the media is certainly anticipating that the Monetary Policy Committee at the Bank of England will vote to increase rates in the near future.
Personally, I don’t see the base rate galloping ahead any time soon. My reasoning? Well against a backdrop of budget cuts, one of the few tools that the government still possesses to stimulate growth and spending is to leave the base rate at its current historically low levels. As a result, I believe the authorities will accept the current spike in inflation and do nothing too drastic. If you are concerned about managing your budget should rates increase however, then it may be wise to opt for a fixed rate mortgage again, so that you can rest assured your repayments will stay level no matter what happens to the base rate.