Contractors, here’s how you navigate the new mortgage landscape, post-Budget 2021
In such a turbulent time, nobody wants to put their head on the block and predict the financial future. But, upon being 'encouraged' by ContractorUK back in February, I did take a punt on the future of stamp duty.
And I'm happy to say, I called it right, writes John Yerou, chief executive of Freelancer Financials. Chancellor Rishi Sunak did extend the stamp duty holiday in his Spring Budget 2021. He agreed to let the stamp duty holiday run as it currently is until June 30th this year. Then he added a cushion thereafter.
A tapered return to 'normal' stamp duty
In particular, beyond June, we'll see a 'tapered' return to the 'normal' £125,000 threshold for zero stamp duty. Between July 1st and September 30th 2021, the tax-free stamp duty rate will have an upper threshold of £250,000.
Neither rates extend to second mortgages, nor do they extend to investors from overseas. But, if you were worried that lenders wouldn't process your mortgage in time for the previous deadline (March 31st), you should be safe with the extra time Mr Sunak has granted us.
Don't leave it 'til the last
Lenders as well as homebuyers will appreciate the extension, too. In the run up to March, borrowers swamped lenders and brokers alike with mortgage applications.
Some quarters are suggesting that the stamp duty holiday has ‘over-stimulated’ the market. I can't help think that, with furlough also extended until September, most in the finance industry will be glad of the glut of new business before summer's out.
For contractors especially, we urge you not to dally if you're thinking of buying or moving. Lender application-to-completion turnarounds are still protracted, especially with the influx of pre-deadline applications.
Remember, lenders were slow to clear the backlog after the first lockdown. So, I'd warn against complacency for anyone thinking they've got until June/September to apply. You can find the continued favourable stamp duty holiday rates on the gov.uk website here.
Landlords and corporation tax
And you can see why reporters are suggesting that a hike to up to 25% doesn’t matter a great deal to a great many. According to a respected broadsheet’s news story featuring estate agent chain Hamptons, “A typical company landlord would have to own about 10 buy-to-let properties worth £190,000 each, with mortgages at 75 per cent loan-to-value, to earn a profit above £50,000.”
But to make clear, that's for landlords who use a limited company only for their buy-to-let portfolio.
Don't fall for the 'it doesn’t matter' reporting – your numbers might indicate otherwise!
The thing is; most contractors also use their limited company as their payment structure for the services they provide. And most contractors who do invest in buy-to-let tend to squirrel away £50,000 in profits from their contract income alone.
There always were an infinite number of possible responses to the question, "Is Buy-to-Let Right For Me?". And now no longer is a 'one-size-fits-all' answer at all conceivable! That's even more true as lenders move to a ‘per application’ basis for working out interest rates, with the new risks and heightened criteria.
If you are concerned that your current portfolio may not be as profitable as it was in previous tax years, we’d recommend that you to talk first to an Independent Financial Adviser.
5% deposit mortgages/ the Mortgage Guarantee Scheme
At Budget 2021, the chancellor unveiled a return to 95% Loan-to-Value (LTV) lending. In plain English, that's a 5% deposit mortgage! To help those struggling to get onto the property ladder, Mr Sunak had to do something.
Not convinced? Well in March 2020, Moneyfacts counted 5% deposit mortgages to total a healthy 391. A year on and prior to last month’s Budget, that number had dropped to just five!
But back to right now. While the idea of low-deposit borrowing might seem tempting to some, even contractors, I would advise caution. And more than that actually, we recommend all contractors wait until they have built up a larger deposit before applying for a mortgage.
That's because with only 5% deposit, the lender's risk increases substantially. And while the new 5% deposit deals are government-backed, borrowers will still pay through the nose for such high LTV borrowing.
Negative equity: could it happen again?
Nobody is certain how the money markets will react to the extended furlough and lockdowns lifting. And who's to say that the mini-exodus of people from London won't see prices across the capital drop by more than 5%?
Should a house price drop by 10% and where the lender has forked out a 95% mortgage, the lender is looking at 5% negative equity. And it's folly to think that this couldn't happen, given how we saw the market move after the 2007/08 recession.
I wouldn't say 5% mortgages are suitable, based on specific cases. In part, that's because we don't know what your circumstances are until you talk to us. Based on what we've seen across lenders over the last 12 months, lending criteria are more stringent.
Bigger deposit, lower risk; simples
You'll get much further with a 10% deposit (and even further with 15%) than you will with 5% to put down. And who's to say that, with such an influx of applications as we see at the present time, lenders won't cherry-pick the best applicants and leave those looking for low hanging fruit out to dry?
What’s certain is that now is not the time for contractors to try and gauge how well they're positioned to get a mortgage based on generic mortgage advice, as I painfully witnessed in a webinar last week! Lenders are basing their criteria on you, as an individual.
For contractors, it's critical you have a professional on-hand who can interpret your contract income in a meaningful way to underwriters who are on-side. Unless you know the mortgage industry inside out, with people connections to match, that's probably not you. We regard your home as probably the biggest purchase you'll make -- ever. Don't pay a penny more than you have to, even during these unprecedented and still challenging times.