Contractors that are trying to get a mortgage can have a better chance at succeeding compared to permanent workers, according to Taj Kang, business development director at PCG affiliate Contractor Mortgages Made Easy. However, before applying, freelancers should have a good idea about the new mortgage regulations.
The new rules introduced by the Financial Conduct Authority as part of the so-called Mortgage Market Review have prioritised the concept of affordability, vesting the term with extra meaning. Traditionally, banks have always been concerned with individuals' ability to cope with their mortgage payments. Under the new rules, agents will also examine a person's lifestyle-related costs as presented in bank statements. The rationale behind this is that individuals are unlikely to reign in all of their voluntary spending in order to service mortgage payments.
Many contractors who use limited companies for their contracts will limit their salary and dividend draw up to the higher tax bracket.
When applying for a mortgage, it's worth defining a contractor's earnings based on their gross contract value by using bespoke underwriting, Kang says. Many contractors who use limited companies for their contracts will limit their salary and dividend draw up to the higher tax bracket, usually around £42,000. Yet if the same contractor is on a daily contract rate of £400 the figure that can be used for a mortgage application via bespoke underwriting is £92,000, Kang explains.
The author advises freelancers not to approach a bank directly since financial institutions tend to define earnings for freelancers based on their personal taxable earnings. This will usually fail to reflect a contractor's real income value as it will not take into consideration retained profit, expenses and any other income that is not accounted for as earned income.
Despite the ongoing negative coverage of the new mortgage rules, freelancers have little to worry about if they define their income as gross rather than net earnings, just like permanent employees. Kang even believes that contractors have the upper hand on permanent employees in this case because their ability to borrow could give them the chance to outbid rival purchasers, Kang concludes.