The Practical Guide to Limited Company Tax
If you have chosen to operate your business as a limited com...
By Jonathan London on 26th March 2013
Guest Blog Post from Taj Kang, Operations Director at Contractor Mortgages Made Easy, one of our partners supplying mortgage advise and services to contractors and freelancers.
There are many great benefits to working as a contractor, but obtaining mortgage when you have a more entrepreneurial payment structure has been an age old problem. The recent credit drought has done little to improve matters, options like self-certified… loans, where evidence of income was not required, have been unavailable since 2008.
Lenders have always incorrectly viewed contractors as higher risk, usually because they are pushed into either the self-employed… category, and therefore subject to scrutiny of income over 2-3 years; or the employed… category, bringing attention to bear on the short term nature of the contract and causing lenders to question the longevity of contracting income.
Limited company contractors in particular have been faced with the catch-22 situation; whilst their accountant advises that salary and dividend draw be kept to a minimum for tax efficiency purposes, the lenders will only work on this same salary and dividend draw to define earnings for a mortgage application, thereby ignoring a large slice of the contractor’s income. Both underwriting pigeon-holes… bring their inherent problems for the contractor, and an adverse lending decision has traditionally been a common outcome for any contractor who approaches a lender directly to secure funding.
The problem has always been around lack of understanding about contractors, mainly by the people who assess the risk for the lender. These people, the underwriters, have been taken through an education process around why an individual would choose to leave permanent employment and start working as a contractor. It was explained that those who have the ability to secure a contract in the typical professions where contracting is popular (e.g IT consultants, accountants, management consultants, interim executives, to name but a few), are hardly likely to struggle to find work because they have an advanced range of skills which are in high demand within their chosen sector.
Once the underwriters had grasped a more realistic understanding of the true low risk involved in lending to a contractor, an extra process was created for the professional contractor, with a more flexible and contractor friendly approach to mortgage underwriting.
The directors at Contractor Mortgages Made Easy (CMME) started the education process with lenders in 2004, and have since worked closely with key decision-makers within the banks to ensure contractors are not discriminated against due to lack of understanding.
There is now a process whereby a CMME Mortgage Consultant can present a report to underwriters following a fact-finding exercise with the contractor regarding the mortgage requirements. A copy of the contract confirming gross contract rate, alongside a copy of the contractors CV, confirms to the decision-maker at the bank that gross earnings are sufficient to support the proposed debt. The CV also provides evidence that the career history and qualifications should mean a high probability of no significant gaps between contracts. In short, bespoke underwriting is designed to recognise the full earnings and longevity of contract income.
In the past 9 years, contractor-friendly… lenders have come and gone, to be replaced by others who discover an appetite for relatively low-risk lending to professional contractors. CMME will continue to work on behalf of contractors who want to achieve borrowing based upon full contract earnings, at the same interest rates that their permy… colleagues can obtain. More and more lenders are expressing an interest in lending to contractors, providing a wider variety of products suitable for contractors in the UK.
If you would like further information regarding your mortgage options as a contractor, more information can be found here.
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