We know that homeowners remortgage for many reasons. They may want to:
- save money switching to a new introductory offer;
- release equity for home improvements, travel or major life event;
- reduce the term of their mortgage with a new deal.
But are enough contractors using the opportunities to get a new fixed rate deal? With the average ‘switcher’ saving over £2,000 a year*, remortgaging is a smart move. Or not, as the case may be.
One reason for this saving is that fixed-rate mortgages have plummeted to record lows. Contractors looking to remortgage will find that now is an optimal time to look for a new home loan.
You only need visit our best buy table to see the record low mortgage rates on offer. While the base rate stays low, these rates will continue.
So why aren’t more contractors taking advantage of them?
Do contractors understand how mortgage-worthy they are?
One thing we do know about contractors is that they’re savvy with their cash. Or at least they’re tuned into their income and expenditure from their business’ perceptive.
But does that acute financial awareness overflow to their domestic circumstances?
If the number of UK homeowners settling for their lender’s SVR rate is a yardstick, perhaps not.
*Legal & General Mortgage Club’s June 2016 update makes for interesting reading.
Almost 2 million UK homeowners have settled for their mortgage provider’s variable rate. Based on their figures, if they switched to new 2-year fixed deal, they’d save over £170/pcm.
By comparison, that means one in six homeowners could save £2,062.20 a year. Just by remortgaging onto better mortgage rates!
Myths, motives and contractor mortgage affordability: the facts
I think that one aspect contractors often overlook is their mortgage affordability. High Street lenders haven’t helped.
Despite earning a considerable amount more than their permie peers, banks often reject contractors.
But your friendly bank or building society isn’t only to blame. Austerity, credit crunch, tax relief and responsible lending guidelines have all muddied the water.
It’s understandable then that limited company contractors don’t know where they stand.
Does their self-doubt stem from trouble they had securing a mortgage loan in the first place?
Maybe remortgaging takes second place to running their business? That’s understandable, too. Dabbling in their accounts, marketing and pitching their business, actually carrying out their contract. It all takes time.
Juggling so many balls, they never get chance to see if they’d be better off remortgaging.
Maybe there’s an even simpler reason contractors don’t look for better mortgage deals. They don’t know they can.
But nothing could be further from the truth; contractor-friendly mortgage lenders want their business.
Benefits of remortgaging for contractors
Switching before a lender’s introductory rate expires can save contractors thousands of pounds. Or it could cut down the length of their mortgage term, depending on their priority.
Let’s imagine you’re a limited company contractor happy paying your current mortgage payments. Then imagine that we secured you a much more competitive deal using your day rate.
You’d then have a choice; you could start:
- repaying your new monthly payments at the new rate and pocket the saving;
- continue paying what you were – ie overpaying – and decimate the term of your mortgage.
But there are other indirect benefits, too…
Using remortgaging finance to pay your mortgage off quicker
Remortgaging could be a great way to cut down the term of a mortgage. How? Imagine I got you a better deal on your mortgage than you’ve got now. Wouldn’t that be great?
Of course it would. But I say ‘could be’ for a reason. If you’re on a lender’s variable rate, I may not be able to improve on the rate you’re paying now.
A little bit more about that just below. But just for now, imagine I could and that it makes sense for you to switch.
How much contractors can save by remortgaging
Your current mortgage payment is £670/pcm and you’re comfortable paying that amount. The new deal I get you comes with a monthly repayment of £500/pcm. You’re £170 a month better off without lifting a finger other than to make a couple of calls.
Now you can pocket that extra cash. Invest it, put it aside for a life event or just enjoy life a little more. It’s your cash to spend whichever way you choose.
Or you can continue paying the £670 that you did on your previous lender’s variable rate. The effect of opting for the latter is this. Over a year, you’re paying £2,060 off the mortgage that you’re under no obligation to.
Now, as a high-earning contractor, you may dismiss £2,060 as not worth the hassle. You earn that in a week, so why bother?
Well, here’s the beauty of overpaying even just a little on your mortgage.
The interest you pay on any balance the lender calculates daily. So when you drop to a lender’s SVR, interest accounts for the bulk of your mortgage payment.
The more you pay off the balance, the less the lender has to charge interest upon.
Moreover, this has a compound effect year on year. Yes, you might only be paying off an unobligated £2,060 a year, but the effect of the term is considerable.
You can knock years off your mortgage term by overpaying in this way.
Or you can use a new lower interest rate to free up more cash each month for other investment opportunities, like buy-to-let or ISAs.
How the low BoE base rate can affect your repayment
The low base rate on offer from the Bank of England to the UK’s mortgage lenders extends the opportunity.
Today, lenders can make the rates they offer on new mortgages lower than ever. It’s so tempting that you should at least consider remortgaging your existing property.
But I’ll just touch on the ‘could be’ I mentioned above. If you’re on a life-time tracker mortgage, you may already be repaying at a fantastic rate.
Another stinger that could derail you is legal fees. There is an official paper trail to follow when remortgaging. You must remove your current lender’s interest in your property and register the new one.
But again, for those apathetic about switching, legalities are little more than an excuse. Most of the remortgages we offer include a free legal package. If that’s your argument for not switching, it’s moot.
But, yes: you should always weigh up the pros and cons of switching your mortgage deal. And that’s why we’re here. One call and we can tell you whether we can improve on your existing interest rate.
We’ll also let you know how much it will cost you to wrap up your existing mortgage, including fees. We’ll never recommend that you remortgage if you’re going to be out of pocket.
And, yes; it may well be that you’re on a great tracker rate with your current lender. That’s awesome. Again, remortgaging may not be the right thing for you if that’s so.
But if not, you’re in a minority who’ve taken advantage of lenders’ special offers. As Legal & General’s figures imply, there’s a huge percentage of the UK yet to do so.
Remortgaging – isn’t it too much like hard work?
There are two types of contractor I’m appealing to here. One is the contractor whose mortgage is a legacy from their days as an employee.
The other is the contractor who was just thankful for getting a mortgage in the first place. Now they’ve got one, they don’t want to rock the boat.
They’ll live with their SVR, no matter what. Even if their contract rate’s increased since taking out their mortgage, they won’t budge.
Here’s why they should reconsider their position.
Austerity has changed mortgage lenders’ profiles of an ideal mortgage applicant. That’s why you hear of ‘mortgage prisoners’. They tend to be once creditworthy homeowners who bought at the housing boom peak.
Since the credit crunch, they’ve become somewhat uncreditworthy. Their mortgage is struggling to get into positive equity.
In truth, that’s not the typical profile of a contractor.
But mortgage prisoners who do fit the contractor profile are those with interest-only mortgages.
Getting the mortgage in the first place was simple enough. But with no clear, credible repayment strategy in place, they’re trapped. But there’s brighter news on the horizon.
Several lenders have recently relaxed their criteria towards interest only mortgages. Leeds Building Society is a prime example of a contractor-friendly lender to do so.
Here’s how it works in this instance.
A contractor can use the sale of the mortgaged property as their repayment strategy. For it to qualify, they must have at least 50% equity in their home today. Then at the end of the term, they must show a clear £150,000 equity in the property.
Why are mortgages harder to get today?
Lenders introduced responsible lending guidelines after the credit crunch. Since then, one sector of UK labour has risen above all others: the self-employed.
At one point, it was the rising volume of self employed that supported the entire labour force. Amongst that subsection was – and is – the number of limited company contractors.
Contracting soared, driven by the short-term need for:
- IT specialists;
- homegrown Oil and Gas supplies;
- continual and brutal NHS cutbacks in staff;
- businesses in need of specialist consultants.
It’s taken mortgage lenders a long time to recognise this trend.
There are more contractor-friendly lenders today than ever
Only one of the ‘Big Four’ assesses a contractor’s mortgage affordability using their contract. But other smaller lenders have seen the opportunity and pounced.
This is where contractors can take advantage of remortgaging the most. In the past, you’ve struggled to make anyone take your contract rate seriously.
Today lenders will listen, addressing each application on merit.
Not that you’ll find these eager ears on the High Street. Mortgage lending to contractors remains a specialist niche. But that’s where we come in.
A specialist mortgage broker can show underwriters your true worth
We can make your day rate look appealing to a contractor-friendly mortgage lender. We can turn the way you do business into an irresistible prospect to our underwriters.
We can use your contract rate to make remortgaging to better rate a real possibility. Two things make this work:
- relationships we’ve built with contractor-compliant underwriters gives us a direct line to them;
- the way we package your application, highlighting your greatest asset: your contract rate.
All too often, in branch advisors can see how much you earn. But your accounts show optimised tax breaks, meaning you draw low salary and dividends. It’s this reduced figure in-branch staff use as the base of your affordability.
These in branch IFAs can see your potential. But the lending model they use means they can’t get at it.
The underwriters with whom we’ve negotiated terms see your true potential.
They use your contract rate and retained profits to calculate your affordability. You won’t get this access at the vast majority of High Street lenders!
Your remortgage bucket list: become prepared
If the BoE was to increase their base rate, thousands of borrowers would be stuck on their lender’s SVR.
At this minute, it’s unlikely they will. But that doesn’t mean you shouldn’t prepare for it. If for nothing else than to get a better rate today.
Think of it like this. What if your client asked you if you wanted a pay rise for nothing. What would you say to that?
In real terms, a remortgage could act as a pay rise for you.
As I said at the start, contractors are in a great place to be savvy with their income. But that doesn’t stop on the commercial front.
Use your day rate to secure a lower mortgage interest rate. If you’re just curious, see how much you could borrow with our mortgage calculator.
Don’t mess around with the High Street. Use a broker who knows how to make the best of your contract rate. You could start saving before the month’s out.
Yep – we can get your remortgage sorted in less than a month from now. Lenders are dying for your business if you:
- have paid your current mortgage on time and have good credit;
- have a sustainable contract or industry in which you contract;
- have an existing contract or can get the promise of a continuation;
- can prove your contracting income over the last three months.
Conditions have primed the market for remortgage deals for contractors. It’s a far cry from the times when you couldn’t get lenders to see your contract rate’s potential. We do. Isn’t it about time you did, too?
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.