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Before applying for a mortgage directly to a bank, we advise contractors speak first to a financial adviser. True, we are independent financial advisers who specialise in helping freelancers and contractors. So, we’d forgive you for thinking: “You would say, that, wouldn’t you?”
But rest assured, we recommend caution when approaching High Street banks for a mortgage for good reason. Based on years of experience, we can confirm with certainty two things:
- multiple credit searches leave a footprint on your history. Hint: this is not good, especially if your credit score is borderline;
- most High Street lenders do not ‘get’ contracting. At least at branch or call centre level. At best, they’ll try to offer you a self-employed mortgage, which is not the same as a contractor mortgage.
Why do mortgage lenders favour permies?
Contractors who apply direct to a High Street lender are fashioning a rod for their own back. I’m not trying to be dramatic. It’s the simple truth based on the bitter experiences of many of our clients.
For one, rejection will have a negative impact your credit score. Two, the same could also jeopardise your chance of owning the home you’ve set your heart on.
As a contractor, the deck is already stacked against you. Why? Because most lenders build their affordability calculations around people in full time, permanent employment.
A ‘permie’ can almost guarantee regular income. Even in times of ill health, most employers pay generous sick leave.
It’s also improbable that permies will lose their job. The two possible exceptions would be retirement or redundancy. Even then, both of these terminations usually assure a lump sum to help protect the bank’s investment.
In addition, a set amount of disposable income suits a mortgage lender’s affordability equation to a tee. The culmination of all these factors adds up to low risk, allowing neat little boxes to ticked and few hidden surprises.
How global economic meltdown affected risk
The effects of the credit crunch continue to impact upon our lives today. Yes, austerity measures brought in to steady the UK economy have become commonplace. Unbeknown to the majority, the UK’s mortgage industry also went through its own renaissance.
The electorate, the Government and even the EU demanded heads on platters. Banks were the culprit in the eyes of the masses, thus became the public scapegoat.
The FSA (as was) was in the spotlight and, if it was being kicked from pillar to post, wasn’t going to take the whole rap. Enter, player one: the Mortgage Market Review.
The MMR looked to plug any holes responsible for the banking industry’s flagship product
sinking. It found these holes, one of the biggest to affect the self-employed being the ‘self-cert’ mortgage .
Butts that once sat at the captain’s table ended up below deck plugging leaks. Not pleasant imagery, but nonetheless true.
Enter player two. Sat at the captain’s right hand to replace those vacated seats we now see Responsible Lending. These were a set of new guidelines guaranteed to shore up the mortgage ship. The legislature would ensure that only those who could afford mortgages on paper got them.
The problem is, many lenders have taken these Responsible Lending guidelines to the extreme. The degree to which some lenders are implementing them has even surprised the FCA.
As recently as the 21st May, FCA mortgages and mutual sector manager Lynda Blackwell asked:
“We look at some of the questions being asked [by mortgage providers] and wonder why?”
That was at the Financial Services Expo in Manchester a little over a fortnight ago. Yet the majority of High Street mortgage lenders are standing their ground. Their mantra remains “the lower the risk the better”. To them (and you), this means anyone not in full-time employment or without years of accounts is too high risk to countenance.
How will applying direct jeopardise my chances?
The risk you run as a contractor is leaving many footprints on your credit file without securing a mortgage. We’re not saying that there are no contractor-friendly mortgage lenders on the High Street. There are. Some. Even then, advisers at branch level may not have the training to understand how contractors operate.
In addition, by applying through a branch direct, you’re not dealing with an underwriter. The risk here is that the adviser won’t present your application to the underwriter in a way that showcases what you can afford.
Given that your job falls outside the norm, it will be an underwriter who approves your mortgage. Or they’ll be the one to reject it if the information passed on is not ‘just so’.
You’ve worked so hard to get where you are today. It’s not worth jeopardising the mortgage your earnings deserve because the middle man doesn’t ‘get’ the way you work.
It’s natural to think that an adviser in branch knows best; we know from experience that’s just not so. You have a current contract, one that your expertise has earned. Talk to an IFA familiar with contract-based underwriting before applying for a mortgage to make it count.
Owner and founder of Freelancer Financials, a trading style & trade mark of Mortgage Quest Ltd – who are one of the most instantly recognisable brand names in providing mortgages for contractors and freelancers across the UK.