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Contracted out

Brokers wants to see better mortgage deals made available for contractors.

Brokers want to see more flexibility from lenders when it comes to contract workers looking to secure a mortgage.

Earlier this month, specialist lender Kensington Mortgages launched a range of products for contractors. The products are available to applicants of any profession who have been contracting for 12 months. Income is calculated on their confirmed weekly rate x 46. Rates start at 3.44 per cent for a two-year fix at up to 75 loan-to-value, with a £999 completion fee and £100 administration fee.

Lenders say they consider mortgage applications from contract workers, but the criteria varies from lender to lender.

Lloyds Banking Group says applicants who are classed as pay-as-you-earn need to provide evidence of 12 months or more continuous employment with their current employer, with six months of the contract remaining or two years continuous service in the same type of employment.

Yorkshire Building Society requires applicants to have at least 12 months of a contract remaining and failing that, must provide evidence of two years continuous employment.

HSBC says when assessing a lending request from a contractor, it assesses their employment track record, the length of their current contract and the likelihood of continued employment in their field. The lender will also assess proof of income through audited or management accounts, tax returns or payslips.

Santander for Intermediaries did not outline its specific position on contractors but said “all lending decisions are based on affordability and we always take into account the customer’s overall financial position, including income, outgoings and any dependents.”

But advisers say while high street lenders are gradually becoming more flexible towards contractors, more still needs to be done for lenders to adapt to a changing society in which more and more workers are employed on short-term contracts.

Your Mortgage Decisions director Dominik Lipnicki says: “Traditionally contract workers have struggled to get approved for mortgages. Lenders have been very slow to catch on to the fact that people are more flexible than they have ever been with employment.

“It is no longer the case that people just work their whole career in one place or on one fixed contract. More and more people have short-term contracts and many lenders have not catered for those clients.”

Specialist firm Contractor Financials mortgage adviser Luke Somerset says: “If you look back 10 to 15 years, you see contractors were having to turn to the smaller mutuals who recognised the earning potential of these borrowers and the fact they are adept at securing contracts for themselves. Professional contractors can earn significant sums moving from one company to another on say a three or six-month basis and I think the larger lenders are starting to appreciate all of this a bit more.”

Lentune Mortgage Consultancy managing director Stuart Gregory feels borrowers may be confused by lenders’ different requirements. He says clearer criteria would help alleviate the problem and also highlights that fixed contract employees are just as likely to lose their jobs as contract workers.

Gregory says: “With contractor mortgages, it is important lenders are clear on their criteria. Many lenders take into account how long the individual has been employed on a contract basis, not just on the current project, but also on a general level. 

“It also helps if a strong employment history in that area of work can be shown – for example, an IT specialist who perhaps may have been employed on a PAYE basis before transferring to contract work.

“Lenders of course have to balance risk, but there are no guaranteed jobs – any person on a permanent contract could get a redundancy notice tomorrow.”

Lipnicki says: “We have seen lenders becoming a little more flexible in how they assess such cases and obviously we have seen Kensington release a specific product for these people, which is great and has been a long time coming.

“A lot more needs to be done however, with growing numbers of contract workers, we need to see more lenders coming up with products for this market.”

London & Country associate director of communications David Hollingworth says the situation is getting better, but expects to see further improvements as the market recovers.

Hollingworth says: “More people do seem to be working on a contract basis, which can offer benefits to both the employer and employee.  But when it comes to applying for a mortgage, the borrower will of course need to be able to evidence their income. 

“That is obviously sensible but I think more lenders will look to tweak their criteria as they see demand from good quality borrowers working on contract.  Halifax has extended its IT contractor approach to others on higher net worth contracts and others like Clydesdale Bank have long had an open mind to contractors. It would be good to see a continuation of that trend.”

But Chadney Bulgin mortgage partner Jonathan Clark, who has advised several contract workers on their mortgage applications, believes contractors are still not being afforded the same options as other applicants.

Clark says: “In my experience, contract workers have traditionally been misunderstood by a majority of the mainstream, high street lenders and I have never seen how that can be fair.

“The number of workers who operate on this basis is continually growing in the modern market and many of these are high-earning professionals. With that in mind, these major lenders would be well-advised to review their criteria and the way they view such applicants if they are looking to increase their business volumes.”

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