With many lenders now adjusting to new processes in the wake of the biggest change to the mortgage market in many years, it is now possible to see what this means for contractors.
What used to happen as recently as March this year, is a contractor could call the bank and have a very high-level conversation with one of the mortgage advisors, and probably come out the conversation with an Agreement in Principle certificate.
The contractor then went out, found a house, and then sent in a mortgage application which, if there was a fairly healthy deposit on offer, probably sailed through.
New regulations are announced!
Under new regulations introduced in April in the wake of the Mortgage Market Review (MMR), that process is now a thing of the past.
This approach from lenders was based purely on risk profiles rather than affordability, so in essence, if they felt that they had a very good chance of getting their money back if a borrower failed to maintain payments, then the mortgage would be granted.
Now, the onus is very much on verifying affordability of any loan. Even with as much as a 90% deposit, the borrower will still have to prove that the 10% mortgage is affordable.
Whilst at face value this may seem like overkill, the basis for this change is certainly a positive one.
Borrowers dealing directly with banks face three-hour long mortgage appointments in branch, including some very in-depth questions around expenditure, in particular lifestyle queries such as spending on hairdressers and eating out.
While some of these more unusual questions may die down in the coming months, mortgage borrowers do now have to accept that affordability is at the forefront of any mortgage application, making the potential for a declined application a stark reality.
Lenders also have to consider the financial position in the coming years, by ‘stress testing’ the mortgage against a potential rate rise in future. In some cases at levels as high as 7%, far higher than typical contractor rates at circa 3.5%.
As a contractor, there is already a worry that lenders do not assess the income correctly, and with these new processes that fear becomes even greater, meaning that it could become more difficult to borrow what is needed, especially if all of the contract income is not taken into account.
“Now more than ever there is a far greater benefit in using a Contractor specialist mortgage broker” says Andy McBride, Business Development Director at specialist broker Contractor Mortgages Made Easy.
“Not only to ensure that your income is assessed in the fullest possible way, but also to navigate you through a sea of confusion following the recent flood of regulatory changes.”
“Not forgetting of course that by pursuing funding options directly with a lender, there is a very real risk that even a specialist broker may not be able to help following a declined application.”
Help is at hand
“The processes we have in place for Contractors via major High Street lenders ensure that all of the gross contract value is used to define income, making affordability issues highly unlikely. In a climate where affordability is the key factor that determines a successful application, it makes no sense to ignore a large part of the contractor’s income.”
This article was contributed by Andy McBride at Contractor Mortgages Made Easy. If you would like a quote based on your current contract then contact CMME on 01489 555 080, or click here to visit their website.