Buyers Guide To Contractor Mortgages

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Our Buyers Guide to Contractor Mortgages helps to explain the whole process surrounding buying a house when you are a contractor. The slide show is broken down into specific sections detailing; 1. Why Contractors find it difficult to get a mortgage with High St lenders 2. First time buyers 3. Remortgaging 4. Buy to let for Contractors 5. Help to Buy for Contractors 6. What Mortgages are available 7. How much a Contractor can borrow and 8. The overall mortgage process explained.

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Buyers Guide To Contractor Mortgages

  1. 1. Buyer’s Guide to Contractor Mortgages A helping hand from... ContractorMoney Independent Financial Advice for Contractors
  2. 2. A Buyer’s Guide to Contractor Mortgages Fourteen years ago Contractor Money’s founder, Tony Harris, realised first hand how difficult it was to obtain a mortgage as a Contractor whilst working as the IFA for a Contractor Accountancy practice. Tony decided to make it his business to do something about it, so he started Contractor Money, now the UK’s largest Contractor Mortgage Specialist, and set about changing the Lenders’ attitudes to Contractors. He began negotiating contract based mortgage schemes with some of the biggest banks and building societies on the high street, and the Contractor Mortgage Industry was born. Our Contractor Mortgages buyer’s guide is designed to help you buy your new home or buy to let investment as quickly and smoothly as possible, by giving you the information you need to avoid the pitfalls of applying for a mortgage as a contractor. Instead you can take advantage of the wealth of knowledge we have as Contractor Mortgage specialists by reading this guide. A Buyer’s Guide to Contractor Mortgages 2
  3. 3. Contents Page 1 Why do Contractors get Refused a Mortgage on the High Street? ......................................4 2 I’m a Contractor AND a First Time Buyer ............................................................................ 6 3 I’m Ready to Move up the Property Ladder ........................................................................ 7 4 Re-mortgaging for a Better Deal ......................................................................................... 8 5 Buy to Let Mortgages for Investment ................................................................................. 9 6 What is the “Help to Buy” Scheme? ................................................................................... 11 7 What Types of Mortgages are Available? ........................................................................... 14 8 How Much can you Borrow? ............................................................................................. 17 9 The Mortgage Process Explained ...................................................................................... 18 10 Why Choose Contractor Money? ....................................................................................... 19 11 Need Some Help with your Mortgage? Our Experts are on Hand Now ............................. 21 A Buyer’s Guide to Contractor Mortgages 3
  4. 4. 1 Why do Contractors get Refused a Mortgage on the High Street? Traditional lenders (i.e. the high street banks and building societies) are often wary of the perceived short-term nature of contract work and even if they were prepared to lend to you, most would use salary alone to determine your maximum mortgage value. They don’t take into account those all important dividends that normally represent a significant proportion of a Contractor’s total income. Ironically, many underwriters in the central mortgage processing units of these institutions now have sufficient understanding of the contracting world to be happy lending to Contractors, but these mortgage applications rarely make it past the branch or call centre staff. Gaps in their training as well as computer based credit scoring systems mean that they are unfamiliar with, and not prepared for, the Contractor scenario. Contractors tend to fall outside of their ‘standard script’ when it comes to proof of employment, proof of income and time employed, thus resulting in many mortgage applications being refused before they have even been seen by an underwriter. So, Can I get a mortgage as a contractor? The answer to this question is most definitely “yes”. Thankfully the days when self-employed contractors had to present three years of accounts, or go down the expensive self-certification route to determine what they could afford to borrow, are long gone. Nowadays, there are Contractor-friendly lenders who will base mortgage size on multiples of your annualised contract rate. As a contractor you will need the help of a specialist Contractor Mortgage Broker to access the same mortgage options and competitive rates available to salaried employees. When a specialist broker or Financial Adviser acts as the intermediary between you and the lender, you can cut out the high street branches or call centres that cause the problems. Why do Contractors Get Refused a Mortgage on the High Street? 4
  5. 5. A specialist broker will also influence the way that your application is presented to the underwriter and in some cases the particular underwriter that your application is presented to. By putting your mortgage in front of the right people, a specialist broker can ensure the success of your mortgage application by presenting your case in the correct manner, and avoiding the need for providing irrelevant HMRC documents. Why do Contractors Get Refused a Mortgage on the High Street? 5
  6. 6. 2 I’m a Contractor AND a First Time Buyer. As a first time buyer you may be put off by the miscon ception that getting a mortgage as a Contractor can be difficult. Don’t be. The expert advice provided by a speci alist broker, which is specifically tailored to you as a Contractor and a first time buyer, makes the whole proces s very easy. Before you start the process of buying your first home, you should work out what your total monthly expenses are, to ensure you can afford the mortgage before committing to the repayments. With the help of a Contractor mortgage service you can also get onto the property ladder at a competitive rate, which will help to keep your repayments at an affordable level. How much can I borrow as a First Time Buyer? Specially negotiated contract-based underwriting means that your eligibility is assessed based on your contract rate alone. This often allows you to borrow more than your permanent colleagues, which can be up to five times your annualised contract rate with some lenders. Your specialist adviser will ensure you keep within a comfortable borrowing limit though, so you don’t overstretch yourself at this early stage. I’m a Contractor AND a First Time Buyer. 6
  7. 7. 3 I’m Ready to Move up the Property Ladder. If you’re a contractor and you own your current home, then chances are you bought it when you were still employed. With a permanent job and a fixed income, getting a mortgage back then was not a problem. Since then, your life has moved on and as you are now earning much more as a Contractor, you’ve decided it’s time to take the next step up the ladder. Excited, you contact your local bank to get your mortgage application underway, only to hit a brick wall! All of a sudden, the very same bank that provided you with a mortgage for your current house, doesn’t want to know. All because you’re no longer employed and can’t prove your earnings with 6 months worth of payslips. Frustrated, you’ve all but abandoned your plans for moving to that new home but there’s no need to do that. With the help of a specialist Contractor mortgage adviser, you could get a mortgage offer in principle within 48 hours and borrow up to 5x your annual contract income, all without having to prove your income with 3 years of accounts. In the first section of this guide (see ‘Why do Contractors get refused a mortgage on the high street”) we explain exactly why you’re hitting that brick wall as a Contractor and how you can easily get over that brick wall with the help of a specialist Contractor mortgage broker. I’m Ready to Move up the Property Ladder. 7
  8. 8. 4 Re-mortgaging for a Better Deal. Once you have your mortgage and are settled in your home, a specialist contractor mortgage adviser can help you to keep on top of the bewildering array of mortgage options when the time comes to re-mortgage. Most Contractor mortgage specialists will email you within 2 months of the expiry of your current fixed/discounted rate scheme with a ‘no obligation’ recommendation on a competitive new deal. They will look at what’s offered by your present lender first and then compare this with the wider mortgage market to ensure you get a good rate. Should your broker find a better deal with a lender other than your current provider they will aim to ensure that the new lender pays towards any re-mortgage costs wherever possible. Re-mortgaging to Release Capital At the same time as aiming to save you money on your monthly mortgage payments, you may also want to take advantage of any increase in the value of your home to raise capital. This could help fund consolidation of expensive debts to further reduce monthly outgoings or provide monies for investment, business ventures or a deposit on a rental property/second home. Re-mortgaging for a Better Deal. 8
  9. 9. 5 Buy to Let Mortgages for Investment. After shrugging off the credit crunch in 2008/9, ‘Buy to Let’ investment has continued to grow in popularity. It has proved to be a particular favourite amongst the UK’s Contractor community with many Contractors investing aggressively, building from an initial purchase to a whole portfolio of properties. With rental demand higher than ever and attractive yields on offer in many areas of the UK it is easy to understand why Buy to Let is so popular. Why Invest in Buy To Let? • Unlike other investments, buy to let easily allows you to ‘gear’ any initial funds • Rental yields represent additional current income and a potential future pension • Exploit high demand from tenants unable to buy How do you Secure Competitive Buy to Let Mortgage Rates? Buy to let mortgages are available to Contractors as long as you have a good deposit to invest. For instance, if you have a deposit of 25% or more then you can expect to gain access to some very competitive mortgage rates, and your specialist mortgage broker will be able to show any lender that your employment status is academic as long as the rental income is sufficient to cover a margin above the mortgage repayments. With this in mind our advice is to do your homework and choose the right property that has a good rent yield. Buy to Let Mortgages for Investment. 9
  10. 10. 3 Things to Consider when Buying a ‘Buy to Let’ Property. 1. Think about who you will be renting to. When deciding where and what to buy, you should consider the type of people that will be renting in your chosen area. For instance, if you are hoping to rent to students then you will want to choose a house that lends itself to multiple occupancy and is close to the university and nightlife. Likewise, if you are hoping to rent to families with young children, then you will want to choose a larger house that is close to schools, parks and includes features such as a dishwasher and parking. 2. Too Busy to Find the Right Property? Let your Mortgage Specialist do the Searching For You. Some Contractor Mortgage specialists offer a property acquisition service which is available to busy contractors who are looking to invest in Buy to Let but don’t have the time to search for properties themselves. Expert buying agents will not only find the right property to suit the rental market in your chosen area but will also handle the negotiations with the estate agents on your behalf. By using both a Contractor mortgage service and Contractor Home Search, the entire process of finding and purchasing your investment property will be completed quickly and efficiently, with the minimum involvement from you. 3. Have a Contingency Fund. As it is the landlord’s responsibility to rectify problems with the property, such as a broken boiler, it is important to have a contingency fund saved so that you can cover any unexpected costs that may arise. It is also essential that you have a comprehensive landlord insurance policy in place to protect yourself against major structural damage or loss of rent if a tenant defaults and we can help source a competitive scheme that fits your needs. If you’re too busy to take on the responsibility then you can employ a letting agent to manage the property for you, who will act as a go between for you and your tenants for a percentage of your rent each month. ‘Let to Buy’ If you are struggling to sell your home in the current market as you don’t want to accept a low offer, but are still keen to move, then let to buy could offer you a quick and hassle free solution. By switching your current property on to a buy to let mortgage and then renting it out, you will be able to release money for the deposit on your new property. The lender on your new property is then able to ignore the buy to let mortgage as it’s deemed to be self-funding. They can then apply the full income multiplier to your contract based income, therefore maximising your borrowing potential. Buy to Let Mortgages for Investment. 10
  11. 11. 6 What is the “Help to Buy” Scheme? “Help to Buy” is a Government backed initi ative aimed at making the first rung of the property ladd er or a subsequent movement up it, more accessi ble for those struggling to save suitable deposits The s cheme has been introduced in two phases (phase 1 in pril 2013 and phase 2 in October 2013, three months earlier than originally planned). These phases now sent the two repre “Help to Buy” options potentially or purchasing available f a property up to the value of £600,000. 1). Equity loan – available on new build pro perties only, using a government equity loan of 20% of the purchase price towards the deposit plus a traditional mortgage of 75% LTV so the buyer only needs a 5% deposit. 2). Mortgage guarantee – available for new and pre-owned properties on a standard mortgage of up to 95% of the purchase price. The Guarantee is arranged behind the scenes by the mortgage Lender and won’t require any involvement from the buyer who simply needs a 5% deposit to put down. The guarantee will only come in to play if the homeowner defaults on their mortgage so acts as a safety net for the Lender. It will also be available on re-mortgages in the future so those homeowners that are on a lender’s Standard Variable Rate (SVR), because they don’t have enough equity in the property to re-mortgage to a competitive rate, will be able to save hundreds of pounds a month on repayments by switching to a lower rate on the scheme. What is the “Help to Buy” Scheme? 11
  12. 12. Contractor ‘Help to Buy’Options At a Glance… 1. Equity Loan 2. Mortgage Guarantee Age & location of property New Builds, in the UK New or pre-owned & in the UK Value of property Up to £600,000 Up to £600,000 Minimum deposit required 5% 5% Fees Interest free for 5 years then interest at 1.75% of loan value, increasing annually by the Retail Price Index plus 1%. Standard mortgage fees/early redemption penalties may apply No fee for the guarantee, this fee is charged to the lender. Standard mortgage fees/early redemption penalties may apply Available to First time buyers & existing home owners First time buyers and existing home owners Process Apply for mortgage in principle & then apply for equity loan Same as for a standard mortgage Borrowing from Equity loan from Homes Community Agency (HCA) on Government’s behalf PLUS Standard mortgage from Contractor Mortgage lender Participating mortgage lenders: Repayment type Monthly repayments on capital repayment mortgage plus lump sum for equity loan (see below) Capital repayment mortgage only Repayment period Chosen repayment period for capital repayment mortgage plus 20% of house value to be paid after 25 years or upon sale, whichever is sooner (subject to independent valuation) for equity loan Period of your chosen mortgage term Other eligibility criteria Must be your only property. Property to be purchased from a participating builder. Will be assessed to ensure that you are in need of Government help for a deposit. Must be your only property so existing homeowners moving up or down the ladder will need to sell their old property. What is the “Help to Buy” Scheme? • • • • • Halifax Lloyds banking group RBS brands Santander Barclays 12
  13. 13. The great news for contractors is that Contractor-friendly Halifax is one of the participating lenders and has already launched their 95% mortgage under the Help to Buy Mortgage Guarantee scheme. Halifax use the contract based underwriting that we discussed earlier in this guide and they lead the way in competitive products in the Contractor mortgage market. Their Help to Buy Mortgage Guarantee product is as contractor friendly as the rest of their range so Contractors can still borrow based on a multiple of their annualised contract rate alone, even at a 95% LTV. The even better news is that this contract based lending is available to any Contractor in any profession. Halifax “Help to Buy” 95% mortgage at a glance Maximum Loan to value (LTV) Deposit required 95% 5% Interest rate 5.19% – fixed for 2 years Fees £999 arrangement fee – this can be added to the mortgage Property type Available on properties up to £600,000 and over two years old The amount you can borrow will obviously depend on your income and your credit score but if you have a good credit profile then you should be able to apply for a loan of up to five times your gross annualised contract rate. What is the “Help to Buy” Scheme? 13
  14. 14. 7 What Types of Mortgages are Available? What different types of mortgages and interest rates are available to Contractors? It is fair to say that the myriad of different mortgages available can be confusing, particularly for a first time buyer, but a good Contractor mortgage advisor will take the guess work out of finding your ideal mortgage. They will search the entire market and then offer impartial, independent advice to help you choose the one that best suits your individual needs. With the help of your Contractor Mortgage Broker, you will need to decide how to structure your monthly payments, either through a repayment mortgage or an interest only option, and whether you want a fixed rate, tracker rate or a flexible offset mortgage, which offers the opportunity to put your mortgage at the very heart of your finances. Below is a summary of the different types of mortgages available and the main features of each one. Interest Only Mortgage • Rarely available post credit crunch but previously popular with first time buyers • The monthly payments are generally lower than repayment mortgages because you are only clearing the interest each month • The original mortgage amount won’t change over the life of the term so if you don’t start to make a dent on the loan amount by overpaying, or arrange a separate repayment vehicle to clear the final debt, it can be more risky. Capital Repayment Mortgage • Your monthly payments will cover both capital and interest • Your repayments will be structured to pay back your mortgage by the end of the term so there is no need for a separate repayment vehicle • Good for Contractors who wish to overpay on your mortgage and clear the debt quicker. What Types of Mortgages are Available? 14
  15. 15. Split Mortgage • Combines a repayment and interest only mortgage • Popular with first time buyers because the monthly payments are cheaper than on a repayment mortgage • Less risky than an interest only mortgage because the loan is repaid over time. Flexible Mortgage • Very popular with Contractors • They allow you to over pay when you can and underpay when you need to • Interest is calculated daily so you will benefit immediately from overpayments • Payment holidays can be taken for when you are in between contracts. Once you have decided on the type of mortgage you require, you will then need to look at how you want your interest to be structured. The interest options available are listed below. Fixed Rate • The interest rate on the loan is fixed for a certain period, so your repayments remain equal no matter what happens to the Bank of England base rate • Great if you need to know exactly what your repayments will be for a fixed period • Can be slightly higher rates than the tracker mortgages available but the added security of the fixed repayments tend to appeal to first time buyers and Contractors on a tight budget. Tracker Rate • Linked directly to the Bank of England base rate • You benefit from any falls in the base rate but are also at risk from any increases that would affect your repayments • It is possible to access capped rate mortgages which work in the same way as a tracker rate but are capped at an agreed level so that your repayments cannot rise above a certain amount. This can be helpful if you are on a tight budget. What Types of Mortgages are Available? 15
  16. 16. Offset • Your debt is linked to your current account so you only pay interest on the balance between the two • Popular with contractors as offset mortgages offer great flexibility • Enables you to lower interest rates on your mortgage with the money you hold in your instant access and savings accounts without paying off a large sum. Standard Variable Rate • If you are already a homeowner and your fixed term has ended, you may be on your lenders standard variable rate • This means the interest on your loan will be dictated by your lender, and will rise and fall in relation to the base rate and the cost of borrowing • The standard variable rates offered by your lender are often much higher than those offered on fixed, flexible or tracker rate mortgages • You can choose a mortgage with discounted rates which will be your lenders standard variable rate discounted by an agreed amount. What Types of Mortgages are Available? 16
  17. 17. 8 How Much can you Borrow? Providing you have enlisted the help of a good specialist contractor mortgage adviser, you can expect to borrow up to 5 times your annualised contract income. For example, if your contract rate is £200 per day then your annualised contract income is £48,000. Based on this it is possible you could borrow up to £240,000. To find out exactly what you could borrow, simply use our Free Mortgage Calculator at http://www.contractormoney.com. How Much can you Borrow? 17
  18. 18. The Mortgage Process Explained 9 1 2 1. How Much can you Borrow? 2. Find the Right Property As a guide you’ll typically be able to achieve up to 5x your annualised contract rate. Once you have an agreement in principle (AIP), you can start looking for a property. Write yourself a list of criteria the right property must have and then search the property websites and contact local estate agents. 3 4 3. Make an Offer 4. Submit your Application Start lower than the level you think the vendor will accept, you never know a cheeky offer might be accepted, and you can always raise your offer if it isn’t. Once your offer is accepted you need to act quickly, submit your application and then find a solicitor. Your mortgage advisor will liaise with the underwriter to ensure everything runs smoothly. 5 6 5. Searches and Surveys 6. Receive your Mortgage Offer Your lender will want to make sure that the property is a sound investment so they will insist that certain surveys and searches are carried out. Your lender will issue you with a formal mortgage offer and will also contact your solicitor to take the next step towards completion. 7 8 7. Sign the Contracts 8. Exchange Contracts Your solicitor will liaise with the Vendor’s solicitor to draw up the contracts and both parties will need to sign them to agree the sale. Once both parties have signed the contracts your solicitor will set an exchange date with the Vendor’s solicitor. At this point you will need to pay your deposit to your Solicitor. 9 10 9. Agree a Completion Date 10. Complete and Move in! Once you’ve agreed a completion date with the Vendor, your mortgage processor will notify the Lender to ensure funds are ready for release on that date. On completion, you will receive a call from your solicitor to let you know that the sale has gone through. Congratulations! You can now collect your keys and move in! The Mortgage Process Explained 18
  19. 19. 10 Why Choose Contractor Money? Contractor Money is the UKs largest Contractor mortgage specialist. Today we are able to utilise bespoke underwriting with our lenders, to offer you borrowing based on a multiple of your entire contract earnings and not just the taxable element. As the original Contractor specialist IFA, our firm has been instrumental in changing the attitude of the lenders towards contractors and negotiating the contract based mortgage schemes available in the UK today. As such we have uniquely strong relationships within the mortgage processing departments of the major lenders, so you benefit from our influence with key decision makers. We will ensure that your application is put in front of underwriters within the lending institutions who understand your unique employment status and appreciate that the demand for your skills is high. After a brief chat by phone or e-mail, we should be able to find you a competitive mortgage regardless of how long you’ve been freelancing and even in the very first week of your contract. We’ve helped over 22,000 Contractor clients secure a mortgage to either buy their first home, move up the housing ladder or invest in a Buy to Let property! Choose us and you will: • Get the home you want by being able to borrow up to 5x your annual contract income • Get access to “contractor friendly” lenders who understand your unique working status • Benefit from competitive “high street” rates you thought were only available to those in permanent employment • Enjoy a comprehensive specialist service from initial consultation to completed mortgage offer and beyond • Pay no fees! That’s right; we won’t charge you a penny for our advice or service saving you over £500. Why Choose Contractor Money? 19
  20. 20. And if you’re looking for a buy to let investment: • We can help you find the ideal property • We aim to have your purchase sewn up within 4-8 weeks. Above all you can expect our professional team to be with you every step of the way. In short, we remove all the difficulties you face as a contractor. By avoiding the branch networks of the mortgage providers and putting your application in front of the right people, we can ensure the success of your mortgage application, avoiding the need for providing irrelevant HMRC documents because we will have presented your case in the correct manner – as a professional contractor who is eligible for bespoke underwriting for contractor mortgages rather than a limited company director or employee. We’re the sole financial expert to these Contractor specialist websites… ...and trusted advisers to clients of the UK’s best service providers. Why Choose Contractor Money? 20
  21. 21. 11 Need Help with your Mortgage? We hope you’ve found this guide useful and informative, but you probably have some more specific questions or queries that you’d like to discuss with someone? Or maybe you’re ready to start looking for a mortgage and would like to know how much you can borrow? Whatever stage you are at, we’d love to hear from you so we can help you secure the mortgage you need to make your next step in your life. Our team of experts are on hand now, so give us a call on 0845 066 8888 or visit the website (http://www.contractormoney.com) to calculate how much you could borrow. All the best, The Contractor Money Team Contractor Money Gainsborough House 2 Sheen Road Richmond Surrey TW9 1AE Tel. 0845 066 8888 Fax. 0845 060 8888 Email. advice@contractormoney.com Web: www.contractormoney.com Need Help with your Mortgage? 21
  22. 22. ContractorMoney Independent Financial Advice for Contractors Contractor Money Gainsborough House 2 Sheen Road Richmond Surrey TW9 1AE Tel. 0845 066 8888 Fax. 0845 060 8888 Email. advice@contractormoney.com Web: www.contractormoney.com

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