Contractor business model still flummoxing mortgage lenders

Contractors eying property who approach high street banks without going through a specialist mortgage broker first are struggling to secure home loans.

Identifying three stumbling blocks to contractors who want a home loan but fail to take advantage of specialist underwriting, an accountancy group said the trio was effectively penalising such workers for running their own companies.

Firstly, many lenders find invoice values or dividend totals difficult to compute and instead insist on regular payslips as proof of income, even where a contractor’s take-home figure is higher than that of an employee’s, according to the group, NoPalaver.

Turning to the second obstacle, the accountant said that many high street lenders “fail to understand the contractor business model”, which often features a range of different assignments but this is marked down by the lender as a “sign of job instability”.

Thirdly, said the group, lenders struggle to determine a contractor’s identity, sometimes because the worker is not in one place long enough to register on the electoral roll – which mortgage providers typically use to verify an applicant’s personal details.

Reflecting on these three barriers to home loans – which are only in place for contractors who seek a mortgage alone, without a specialist broker – the boss of NoPalaver said they were shattering the home-ownership dreams of a growing chunk of the UK workforce.

“The number of self-employed people has increased by 10% since the start of the financial crisis… [but] contractors don’t fit in easily with the forms and processes they [lenders] use to make a mortgage approval decision”, said Graham Jenner, the group’s director.

As a result of their high take-home pay, and assuming they fail to use arrangements that let them borrow based on a multiple of their contract pay rate, he says contractors are “often surprised at the gap between the size of mortgage they apply for, and the size of mortgages that lenders are prepared to offer”.

Those contractors who approach mortgage lenders without opting for specialist contract-based underwriting in advance should therefore be willing to hand over “extra information,” such as an earnings certificate from their accountant, in order to boost their chance of securing a home loan.

“Contractors should provide banks with a figure for the equivalent gross salary that they would have to earn as an employee to generate their current net income,” added Mr Jenner.

“A simple way to show a contractor’s earnings power compared to an employee’s could help dispel some of the mortgage provider’s concerns.”

But last night an independent financial adviser who has negotiated with lenders to let contractors take out a home-loan based solely on a multiple of their annualised contract rate, revealed that his database shows contractor mortgage applications to be soaring.

ContractorMoney said: "Our specialist underwriting package saves the hassle for contractors of them having to prove income using the last three years’ accounts and often allows such freelance professionals to borrow more than their ‘permie’ colleagues. In fact, we are seeing more completions by contractors now than at the height of the property boom in 2007."

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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