Stamp duty holiday: the ramifications for contractors once it ends
The housing market has fared unexpectedly well since the first coronavirus lockdown ended.
But today, contractors and other individuals looking to buy property face three factors that threaten an extended run of confident home-purchasing, writes John Yerou, chief executive of Freelancer Financials.
These threats are -- the stamp duty holiday ending on March 31st 2021; punitive measures from lenders and thirdly, housing/banking capacity. Each carries a different weight of restriction on the contractor community. So just as the unwelcome news of fewer properties coming onto the market breaks, let’s assess this triple threat and outline what contractors might do to mitigate it.
Stamp duty holiday scheduled to end soon
For four months in a row over last summer, house prices dropped. As a result, government income dropped. With the future then so uncertain, the government needed to reverse that trend.
So as part of chancellor Rishi Sunak’s Plan for Jobs, the government introduced the Stamp duty ‘holiday’ – under which residential properties worth up to £500,000 were temporarily let off from paying any stamp duty between July 8th 2020 and March 2021.
This holiday certainly helped, and has buoyed the market ever since its introduction. Yes, it meant 90% of homebuyers paid no stamp duty at all. And yes, for those who did pay, the average 'bill' dropped by some £4,500 per purchase! But at least it got the market moving.
At time of writing, the holiday is due to end in a little over two months' time on March 31st. This concerns commentators two-fold:
- The possible collapse of mortgage chains, leaving many homebuyers stranded, and;
- A prospective deluge of homebuyers looking to buy before April.
The first point is somewhat obvious. If a homebuyer has to fund stamp duty and has not budgeted for it, they become the weak link. Those in any such chains could lose deposits, as well as hope.
The latter point raises one of the previously capacity issues: mortgage lenders' staffing levels.
How are mortgage lenders coping under lockdown?
Many banks and building societies are operating with remote personnel working from home. It took them a while to adjust, but, on the whole, they're getting there. Yet this has come at some cost.
Contractor borrowers have come to expect a swift turnaround when leveraging contract-based underwriting. Two-to-three weeks from application to completion was commonplace.
Today, the process is much longer. Lenders are having to work with new processes themselves, with staff working from home. It got so bad at one point that, when chasing them, their assertive answer was "Don't call us; we'll call you!"
If the chancellor fails to extend the stamp duty holiday, banks will realise their earlier fears. A deluge of buyers would test their stretched resources to the breaking point.
I have to admit, when I first heard that amid the unfolding coronavirus situation people were leaving the city for the suburbs, I thought it was a fad. Admittedly, that was in early summer and the actual figures didn't back up the headlines.
But now, homebuyers have an aching desire for space. Lockdowns have forced people to stay indoors, many Londoners in small apartments. Working and living in cramped spaces is ideal for neither productivity nor mental wellbeing.
That brings us back full circle: city dwellers want out. House prices in the suburbs will rise as a result of the fresh desire for gardens and greenery. But there are only so many suitable locations and homes to go around. And all this at a time when the stock of new property has shrunk by 12%, when compared with January 2020.
Where do you draw the line between a comfortable commute and a comfortable compute? Contractors will face that tough decision as the world of work morphs over coming months and years.
Punitive measures for self-employed borrowers from mortgage lenders
If all those scenarios were the extent of what we're facing, they'd be manageable. But since I began drafting this article for ContractorUK, a new obstacle has emerged.
It is that a number of lenders are reportedly asking for higher deposits from self-employed individuals (including some contractors). And unfortunately, these lenders are not only the ‘usual suspects’ already known to be less than welcoming to freelancers and contractors.
On the contrary, some lenders we've long-regarded as solid backers of self-employed borrowers are in that number. Many have tweaked their lending criteria, citing ‘security’ as their reason for doing so.
Even Halifax are reappraising contractor affordability
Halifax is one of the biggest surprises. They were the standard bearers for contractors after the 2007/08 financial crisis. But even they've now added barriers for accessing their contractor mortgage products.
First, Halifax cut its contractor income 'multiplier' to 4.49 at best. Then, it reduced the number of qualifying income weeks from 48 to 46. So, yes - Halifax is still accessible, but no, you won’t necessarily get the same favourable terms you’ve come to expect from them.
Let’s now turn to the less-restrictive mortgage market for self-employed sole traders. Well, it's impossible to ignore Santander – but they might very well ignore you! In fact, they currently won't touch a self-employed applicant who doesn't have at least a 40% deposit. That's a huge drop in their prior 90% LTV policy for the self-employed.
Nationwide is another lender that's battened down their hatches. For contractors, the lender has dropped its income multiplier to 2.0. For sole trader self-employed, they accept 15% deposit as the minimum.
Similarly, TSB has set its minimum deposit for self-employed applicants to 25%. Their income multiplier ceiling has also lowered to 4.25.
There are many other examples I could give, including the news that some lenders in Scotland have seen their minimum deposit for first-time buyers rise 20% this year to £35,000! But almost needless to say, if you’re noticing a toughening in your lender’s stance, it’s more than likely not personal to you.
Despite his lack of room for financial manoeuvre due to the pandemic, my expectation is that the chancellor will extend the stamp duty holiday after he gets to his feet on the afternoon of March 3rd. The consequences for not doing so would flatline the market overnight. Elsewhere at Budget 2021, contractors eyeing property will need to keep a close watch on any base interest rate decisions, or mortgage-related changes at Mr Sunak’s hand.
But as to changes by the industry, some standout lenders and offers are still there to be snapped up. Accord Mortgages, for one, have bent over backwards for our brokers, and continue to do so.
So don’t let a hard-ball lender (or broker for that matter) convince you that contractors don’t have options. What is true, however, is that the longer you currently leave it as a contractor, the less likely your accessibility to favourable terms. And the more likely you are to get caught in the rush, should the chancellor do the wrong thing for contractors, and the wrong thing for the market, and end the stamp duty holiday. Two wrongs will certainly not make a right!
Even worse potentially, and I'm not saying they definitely will, but mortgage lenders denied an extension to the holiday could start to ‘weigh up to weed out’ applications. Under duress, lenders could cherry-pick the safest applicants, leaving other would-be borrowers stranded. So as we approach the hopefully brighter months, it’s hard to imagine a more obvious time for contractors to get independent, experienced help in securing the best mortgage deal for them. Chancing it all on a financial plan that doesn’t hatch this Spring is unwise, especially with so much uncertainty -- among other undesirable elements -- still very much in the air.