A financial expert has warned that contractors seeking a new mortgage or looking to re-mortgage should act now before likely interest rate rises occur in early 2016, Contractor Calculator reports.
During a recent speech, Bank of England governor Mark Carney hinted that interest rates could rise “at the turn of this year,” and that over the next three years they could reach “about half as high as historical averages” – around 2%.
Commenting on how these changes will affect contract workers, Taj King – a mortgages expert for Contractor Mortgages Made Easy (CMME) – warns that “contractors who want funding in place before then should be talking to a contractor specialist financial adviser right now.”
He is also urging those on standard variable rate mortgages to re-mortgage as soon as possible, as a 2% interest rate rise could add hundreds of pounds each month to a typical contractor mortgage.
So, how exactly will an increased base rate affect contractor mortgages?
Kang offers an example to demonstrate: contractors with an average mortgage of £280,000 would have to pay an extra £6,000 a year following a 2% interest rate increase – which works out as an additional £467 per month.
He predicts that “tougher affordability measures will actually benefit contractors, but only if they work with a mortgage broker who understands contractors and deals direct with lenders’ underwriters who similarly ‘get’ how contracting works.”
“Most of our clients work via their own limited company and 90% of lenders use salary and dividends to define income,” he continued. “However, contractors applying to lenders using contract-based underwriting should have few problems with demonstrating affordability when rates increase.”
With rate increases potentially occurring early next year, the market will begin reacting long before this is actually confirmed. Even if the rises take place in February 2016, it can take months to find the right mortgage option and receive a valid offer – so contractors should be engaging now.
This is particularly important for contractors on standard variable rates, Kang explains, because “lenders will push up the standard variable rate aggressively as that’s where they will take the most profit.”