Convincing major high street banks to consider all independent professionals’ mortgage applications isn’t easy. So when Halifax Bank told us it was broadening its IT Contractor-only policy, it was cause for celebration. A little one, at least.
Whilst the news is a step in the right direction, the bank hasn’t yet thrown caution to the wind. There are caveats to their lending criteria if you don’t work in Information Technology.
For those who do work in IT, you’re exempt from the extra criteria and there’s little new to see. Your contract remains (almost) the rubber stamp, irrespective of how much you earn.
If you’re not in IT, you’ve still got a bit of work to do to convince their underwriters you’re a safe bet for a mortgage.
But let’s not take anything away from this moment. One of the Big Four has acknowledged all contractors as a low enough risk to be at least considered mortgage-worthy. Now that’s progress!
Halifax – going beyond the IT crowd
We’ve waited a long while for the Halifax to consider applications from the contracting world in general. Up until their recent announcement, theirs was a strict “IT Contractor Only” policy. That’s changed, as of May 2013.
As I told the Daily Mail,
“This is a major milestone for the UK’s freelance community…
“…it unbolts the contract based mortgage market to any professional freelancer.”
Before the policy change, Halifax only entertained contract-based applications from IT contractors. Their underwriters used an ‘annualised’ figure, determined by a contractor’s gross contract earnings.
If a contractor worked outside IT, they had to provide at least one year’s accounts with their application. Even then, underwriters assessed affordability based on a multiple of salary and dividend drawings.
Tax-efficient limited company accounting: a double-edged sword
As most contractors are prudent with their taxes, using accounts presents two major obstacles:
- intelligent tax-planning has the detrimental effect of reducing borrowing potential;
- those just starting out are unable to provide the prerequisite one year’s financial accounts.
One reason contractors operate a limited company is because they’re a tax-efficient way to trade. Drawing low salaries and minimising dividends can offset higher taxes.
The downside is that reducing take-home pay reduces the amount you can borrow using most lenders’ models. You can see the conundrum.
Ian Wilson, Head of Sales at Halifax Intermediaries, explains how the new policy addresses the issue:
“We are pleased to be able to extend our existing IT Contractor policy. This is a natural step forward in supporting self employed customers in their aspirations to get on the property ladder.
“We hope that in widening our policy we will be able to help more customers benefit from our range of products and services.”
What does this policy change mean for Professional Contractors?
Do not underestimate the gravity of Halifax’s policy change. For one of the Big Four to view non-IT contractors as lower risk is a huge step.
Now, Halifax can assess ANY professional contractor using their gross annualised contract earnings.*
Other contractor-friendly lenders have positioned themselves likewise. However, many ask for at least two years uninterrupted contract history. Halifax, on the other hand, will accept freelancers from their first contract.
How do you qualify for a Professional Contractor Mortgage?
*To qualify for a professional contractor mortgage, your daily rate must be at least £312.50 or £75K per annum.
This is true whether you’re employed (e.g., through an umbrella) or self-employed. Halifax will accept the gross value of your contract as evidence of income.
How much can I borrow?
To work out the potential amount you can borrow from Halifax, first, get a calculator. Then:
- multiply your daily contract rate by how many days you work each week;
- next, multiply that figure x 48 weeks; this gives you your ‘annualised’ earning figure;
- finally, multiply this total by 4.5 – the affordability factor – to get your potential mortgage value.
As an example, take a contractor earning £475 per day and working five days a week. His day rate equates to annual gross contract earnings of £114,000 (£475 x 5 x 48).
Using the calculation outlined, that means they could borrow up to £513,000 to buy or remortgage a property.
Before attempting to apply direct – to any lender – we recommend you speak to a mortgage specialist first. Contractor mortgages – even if your contract’s in Information Technology – are not yet mainstream.
It’s not worth taking the risk of approaching a standard mortgage broker or IFA. They neither understand the way contractors work nor have experience in securing them mortgages.
And we’re not just talking about the embarrassment of wasting each other’s time, here. Too many credit searches in a short space of time can arouse suspicion on your credit file. In turn, this activity will have an adverse effect on your credit score.
No matter what you earn or in which field, a tainted credit history will ruin any chance of getting a Halifax contractor mortgage. And you can take that to the bank!
Author: John Yerou
John Yerou is the owner and founder of Freelancer Financials; a trading style & trade mark of the award winning Mortgage Quest Ltd. One of the most recognised names in providing mortgages for contractors and freelancers across the UK.
In 2004 John began his career in Financial Services as an independent mortgage adviser and broker. John has been instrumental in negotiating bespoke underwriting for contractors with high street lenders.
His presence in the industry as a go-to expert is growing by the day and he is regularly cited and writes in publications both locally and nationally.