Read on below for a guest article by CMME.
This article is for information purposes only and should not be seen as financial advice. You should always check the terms and conditions and consult with your accountant or a finance expert for any tax advice.
You have made it halfway through 2021 as a contractor – so is there a light at the end of the tunnel for the independent sector post-lockdown? Are you paying too much on your current mortgage deal? Could you use additional funds for those big life events?
Getting the best mortgage rate for contractors can be a daunting prospect, which you will likely be familiar with if you have been through the process before. Recent research reveals that only 29% of self-employed homeowners believe mortgage lenders fully understood their earning capabilities when they applied. The impact of this kind of bias for contractors could lead to reduced borrowing potential, higher mortgage rates, and requests for heaps of paperwork.
Getting an excellent rate to begin with or making sure you’re on the best one for an existing mortgage can be hassle enough if you are in traditional employment but contractors may face additional obstacles. We have collaborated with our expert mortgage partner CMME to provide you with a contractor-friendly guide to finding the best mortgage rate today.
What are mortgage rates and why are they important?
A mortgage rate is the rate of interest charged on a mortgage by the lender. Rates aren’t usually an exciting prospect when you’re thinking about sourcing a mortgage for your new property, especially as they are only one aspect of obtaining a mortgage as a contractor.
This is however a really important step of your application to consider because the better your mortgage rate, the less money you waste unnecessarily each month. You work hard and your money should work hard for you – your mortgage is no exception.
Unless you choose to switch to a new deal, your mortgage will automatically be moved over to a Standard Variable Rate (SVR) once the introductory fixed rate, which is normally for a period of between 2 and 5 years comes to an end. Most of these SVR’s are not typically competitive which means your monthly repayments could be much more than you were paying before.
Mortgage rates are impacted and influenced by the Bank of England’s rate which was slashed in March 2020 in an emergency response to the Coronavirus pandemic and remained at that historic low ever since.
What is a remortgage?
A remortgage is when you take out a new mortgage on a property you already own – to replace your existing mortgage or borrow money against your property. Though homebuyers will be familiar with this term, many might not be fully aware of what the process entails or whether it is a viable option for them.
When is the best time to remortgage?
It is a good idea to keep a regular eye out for more competitive mortgage rates, however, there are prime times you might want to reconsider reviewing your mortgage rate:
Your mortgage is due for renewal and you get moved on to a Standard Variable Rate
Your lender will automatically move you on to a Standard Variable Rate (SVR) at the end of your current deal which you will likely want to avoid.
The most common mortgage deals are fixed-rates lasting two to five years that allow you to repay the same amount on a monthly basis, however, once the introductory rate comes to an end (and you don’t remortgage), you will automatically be enrolled onto your lender’s Standard Variable Rate (SVR).
Although your lender will often write to you a few months before your fixed-rate mortgage ends and offer another one, it is good practice to set yourself a yearly reminder to review your current deal so that you are prepared when the time comes. This is also a good opportunity to research the current rates available and increase your chances of saving on future repayments by finding a more competitive deal.
Usually, using a broker vs direct to lender means contractors will have access to more of the mortgage market or exclusive deals generally not offered through your current mortgage provider. This may mean saving more by remortgaging.
There are low rates available on the market
It can be worthwhile keeping track of current market news and rates on a regular basis to ensure you do not miss out on a prime deal. Now might be the perfect time to remortgage if you are looking for the best contractor mortgage rate and want to take advantage of the Bank of England’s base rate being at an all-time low (0.10%).
Raise additional funds
Have you been thinking about refurbishing your home office? The reality is, you are likely to be spending a lot more time working from home for the foreseeable future, and you might be thinking about finally putting your home improvement plans to work. Your options are not limited to home renovations though, here are a few ideas most people use the cash for:
- Car or other motor purchase;
- Buy to Let property;
- Wedding or special occasion;
- Pay a child’s tuition fees;
- Consolidate debts and make them easier to manage.
Your house value has increased
If lockdown inspired you to take on a new home renovation project, the value of your home may have gone up.
With house prices rising at a rapid rate, your house might be worth a lot more than it was when you set your current mortgage deal. This also means you may now find yourself in a lower Loan to Value (LTV) band, so you could be eligible for much lower rates.
Whilst you should consider exit fees, also known as an early redemption charge (ERC), before switching; the associated savings with your new mortgage rate could be worth accounting for the payment of those fees.
Barriers you may encounter as a contractor
A 2020 survey carried out by contractor mortgage experts CMME and IPSE (The Association of Independent Professionals and the Self-Employed) showed that 96% of respondents were required to provide more paperwork when applying for their mortgage because they were self-employed.
You may face bias as an independent professional if you approach a high street lender as most will have little understanding about the contracting landscape and fewer will have a grasp on workers switching between an umbrella employee and back to contracting which means that their standardised procedures do not accommodate contractors.
For many people, a mortgage is their biggest financial commitment. When you originally chose your mortgage, you didn’t just choose the first mortgage you came across – you probably made sure it met your needs first.
Is your current deal the best rate for your circumstances today?
Speak to a contractor expert
Our partner CMME specialise in providing mortgage advice for contractors and umbrella employees, with access to some of the most competitive rates on the market. So however you choose to work, CMME will fight your corner and ensure the right mortgage deal is available to you.
Find out more or book a free initial consultation with a mortgage expert here.
Your property may be repossessed if you do not keep up repayments on your mortgage.
