A Contractor’s guide to getting mortgage fit
As the lockdown is eased, many of us are reassessing our finances in all aspects of our lives. When it comes to getting a mortgage, the decisions we’ve been putting on hold can now start to progress again. But the mortgage landscape is a very different place to pre-lock down times, with significant changes such as falling house prices, a temporary stamp duty holiday and interest rates at an all-time low.
With this evolving backdrop, we asked CMME for their help in demystifying the mortgage market and helping Contractors get in tip top shape to secure a mortgage. Here is what Simon Butler, Head of Mortgages & Protection at CMME, had to say…
Has the impact of Coronavirus made it harder to get on the property ladder or get a good re-mortgage deal?
Mortgage lenders have reacted in different ways to the issue, but the approach has been broadly similar in terms of what has been changed.
Loan to value restrictions are the biggest consideration, with many lenders now capping borrowing at 85-90% of the value. This means a larger deposit will be required to proceed. Warnings from various providers and industry bodies that value decreases between 7-15% (RICS, Nationwide, BOE) will affect the chances of 95% or even 90% being offered as widely as these options were available at the beginning of the year. It is likely to remain a limitation for some time yet.
Also, it is essential to note that lenders add further restrictions by tweaking their internal credit score cards. Any loan at higher loan to values will be far more scrutinised than one at 80% or below, so reviewing your credit file is essential.
The relaxation of the lockdown measures has helped considerably, as physical valuations can now be completed. Much of the backlog for existing applications has been dealt with and we are able to secure valuation bookings for new applications at this time. This appears to be improving overall confidence in the market for lenders, surveyors, and ultimately new borrowers.
What are your top five tips for first-time buyers?
1. Check your credit profile/report to ensure you have a healthy score (close credit and store cards that you do not use to boost your score). I recommend a comprehensive and free report with Noddle (https:// www.noddle.co.uk). Do not undertake credit searches before you look at mortgages. Pay off as much debt as possible.
2. Get a deposit. Either save, get a gift from direct family, or look at a Springboard deposit (where parents place money in a savings account connected to the mortgage). The bigger the deposit, the lower the interest rate.
3. Ensure your bank statements are in order for the past three months (no missed/late direct debits/stay in the black)
4. Review the marketplace, know what house prices are doing and investigate all costs associated with the property (e.g. a leasehold flat will incur monthly and annual charges in England and Wales) including council tax, insurance, and utility bills. Also consider using government buying schemes.
5. Get your paperwork ready. You’ll need three months’ personal and business bank statements from you and your family, in-date passport and/or a driving licence, proof of your earnings (contracts, and maybe trading accounts if you don’t work via contracts) and proof of deposit.
What are the best tips to avoiding any unnecessary pitfalls in the application process?
Ask the estate agent in writing if there are any known defects with the property. Do not take out credit until you have completed the mortgage. Be open and honest with your information (do not try to hide the school fees/maintenance/ debts) and tell the broker the full details. When asked for documents, get them over ASAP!
What can a contractor do to improve a negative credit rating?
- Make sure you are on the electoral roll
- Pay off debt
- Make more frequent payments towards your credit/store cards
- Close unused cards
- Try not to apply for new credit
- Avoid insurance companies who credit score
- Speak to debt charity Step Change if you are having financial problems
- Be realistic: if you have a low credit score and want to avoid high lender fees and rates, then think about waiting before applying and improving your score
Do contractors get less advantageous mortgage rates than PAYE employees?
The short answer is no. However, because freelancers don’t always fit the traditional lender mould when it comes to borrowing, some lenders may take a more risk averse approach resulting in a higher interest rate or a loan value that doesn’t fit your true borrowing potential.
A broker will be able to help you present your case in the best way in order to maximise your borrowing potential. As a contractor it may be beneficial to see what your lending potential could be based on your day rate. Use the free CMME mortgage calculator HERE.
What about working structure – does this impact your ability to secure a mortgage?
Again, the short answer to this is no. But it is the case that with the upcoming regulatory changes to IR35, alongside the economic impact of the pandemic, many self-employed professionals may be considering their options in terms of how they work.
Whether that involves moving to an umbrella company or taking a temporary fixed term PAYE role, your mortgage options should not change although how you position your financial status may change. In this instance it would be advisable to consult a broker who will work with you to get the best possible outcome for your needs.
Will taking a mortgage payment holiday make it harder to re-mortgage as a contractor?
We have seen that lenders have committed to ignoring these holidays if present on a credit report, but that does not mean they will accept an application while the applicant is effectively “on holiday” with their payments.
Coventry BS are looking for at least three months of mortgage repayments to be made (with evidence provided at application) before they will accept a new mortgage application.
Nationwide are currently requiring one month and will not accept an application until this has been made.
What we are interested to see is whether the additional 12 months holiday that has recently been agreed by the BOE and Government is going to be a concern for lenders.
The FCA is looking to push mortgage lenders to not penalise borrowers, but Nationwide have been very vocal with their concerns in the press. They have highlighted the risk that underwriting a mortgage to prove affordability for an applicant that has taken a holiday anywhere between 12-15 months is a considerable problem for an underwriter.
It may be a while before we understand the impact of this point.
Will being furloughed impact your ability to get a mortgage or remortgage?
Mortgage lenders have moved with haste to implement criteria changes for an applicant on furlough. For an applicant currently on furlough the general principle has been for the application to be assessed on the 80% figure, rather than the full level of income that would normally be received.
What we have not seen yet is how lenders will deal with a client returning to full time hours, after taking furlough. If we consider the way that the remortgage holidays are being dealt with it is highly likely that lenders will take a similar approach (think 1-3 months at full pay before they will accept using that level of income.)
What impact will the stamp duty holiday have for house buyers?
With immediate effect, stamp duty on all property purchases below the value of £500,000 has been put on hold until 31 March 2021. The potential saving of thousands of pounds in stamp duty charge will impact how much buyers are able to include as a deposit, which in turn could provide the opportunity to secure a lower interest rate.
So overall, this is great news for buyers; given the current lack of low deposit mortgage options on the market, the temporary removal of stamp duty from the process will allow many buyers to boost their deposit fund. This can only be seen as a positive move for the housing sector and mortgage market as a whole.
Does it pay to use a mortgage broker vs going direct to a bank or high street lender?
Getting the right mortgage or remortgage deal can save you £100’s each month. But, with over 6,000 products on the market, it can be a daunting prospect to find the right one for you. Moreover, the economic fall out of the Coronavirus pandemic has meant many banks & mortgage lenders have restricted their lending criteria, tightened their credit scoring, and capped borrowing, making it even harder to secure the right deal.
A mortgage broker can help you navigate the landscape and position your finances in the best possible light to get the right outcome for you. And, say the worst scenario happens and a mortgage application gets rejected first time around, the broker should be able to identify the reason and apply to another lender where possible, potentially avoiding a breakdown in the process.
So, against this current backdrop its arguably more important than ever to use the help of a qualified mortgage broker when you are looking to either remortgage, take out a first time mortgage or invest in a Buy to Let
Speak to an expert
As Kingsbridge’s preferred mortgage partner, CMME understands the way contractors & self-employed professionals work and can help navigate the lender landscape to secure the mortgage you deserve.
Click here to arrange a free no obligation chat about your mortgage plans.