(Newswire.net — October 21, 2014) London, LONDON — Any freelancer or contractor worth their salt knows that along with the freedom and increased pay rates of striking out on their own, comes one important downside – the difficulties they will face when trying to apply for a mortgage. It has always been this way and things got even worse in 2008 with the bursting of the housing bubble and the arrival of the credit crisis – both of which led to financial institutions and high street banks tightening every aspect of their lending criteria – meaning it became even harder still for contractors and freelancers to apply for mortgages.
The problem has always been one of trying to shoehorn the non-traditional freelance pay model into a traditional financial format. Banks and building societies streamline all their lending applications into two models, one for people who are employed and one for people who are self-employed. For contractors and freelancers this can immediately throw up problems. Nowadays, contractors often make use of payment vehicles designed for ultimate tax efficiency and some of these make it more difficult to classify the contractor as specifically ‘employed’ or ‘self-employed.’ For many years the banks have solved this by simply choosing to push that contractor towards one or other model and will then also ignore any of their other income that doesn’t fall within the criteria of that model. Thus, if a contractor works via an umbrella company the mortgage underwriters would declare them to be employed and would take their payslips as proof of income. Simultaneously they would ignore other areas of income for the contractor and would not take into account expenses claims that the contractor is still permitted to make. Consequently the contractors income, according to the mortgage underwriter, would be significantly different to their actual, real world final income and they will find themselves on the end of a much lower (if any) mortgage offer than they would normally be entitled to if they were a regular, salaried worker. At the same time they would also face the double whammy of mortgage underwriters seeing the end date on their current contracts and deciding that they are not a good risk because they do not have the required longevity of income that they expect to see. This is often the case even when the contractor can show other contracts lined up in the future and a steady history of constant contract work!
Thankfully in the last couple of years there have been some changes to the mortgage market and as banks have started to loosen their belts again, so have mortgage companies also started to notice that the contracting and freelancing working model is becoming ever more prevalent across the marketplace and that contractors have significantly higher earning potential than most regular workers. As such a number of specialist contractor mortgages have come on the market, geared towards a different income model. These new contractor mortgages have dealt with the usual problems up front by using bespoke underwriting to create a product specifically designed to take into account every income model used by freelancers and contractors. They allow for income to be calculated not just using the two models mentioned above, but also on an annualised version of the contractors day rates which therefore ensures that their total and complete yearly earnings are used when assessing their suitability for a loan. Thus are the complexities of any tax vehicle ironed out and a fair figure is reached that should keep both bank and contractor happy. Similarly, such mortgages allow for previous contracting history alongside a decent contract length in hand (normally at least six months) (any any other evidence as to their skill level and demand) as proof that the contractor will have no problem in finding work and maintaining payments on the mortgage.
In other words, these contractor mortgages are what contractors have been waiting on for over twenty years. They are mortgages designed by people who have worked in the contracting sector and which finally offer the freelancer or contractor a dais shake when it comes to mortgage assessment and the likelihood that they will be offered a mortgage with the same competitive rates of interest as those on the high street. Of course, they are not everywhere yet. Don’t expect your local bank to offer them. Instead, find an independent mortgage broker, preferably one who specialises in contractors, freelancers and the self-employed, and ask them to show you all the contractor mortgages on the marker. There are only about five or six at the moment but more are coming onto the market ever month. With the housing market roaring away again, there has never been a better time for contractors to get onto that housing ladder!