Contractors’ Guide to Mortgages in a New Era
Since breaking reports on the pandemic, the housing market has plummeted to the bottom and reached its highest peak – with contractors at the forefront of countless challenges throughout the outbreak. So, is there a light at the end of the tunnel for the self-employed post-lockdown? Could you set your sights on a new property or a buy-to-let investment? Are you paying too much on your current mortgage rate?
Now, with the market primed for home sellers and buyers – we take a look at the options available to contractors looking to take advantage of the trends today.
Stepping on to the property ladder
Contractors looking to make their first move on to the property ladder could be at an advantage this year as a result of government support like the mortgage guarantee scheme. Chancellor Rishi Sunak announced 95% loan-to-value mortgages for buyers during spring’s budget back in March as he vowed to do "Whatever It Takes" to help the economy recover in the aftermath of the covid-19 outbreak.
“The deposits required are too high”
This is likely to be well-received by contractors and the self-employed as a recent survey carried out by IPSE (The Association of Independent Professionals and the Self-Employed) and contractor mortgage experts CMME revealed that 55% of respondents stated “the deposits required are too high” when asked to select the main reasons they are not planning to get a mortgage in the next five years.
How does the scheme work?
The mortgage guarantee scheme was designed to help buyers with lower deposits pursue their mortgage plans by offering 95% mortgages with just 5% deposits up to a property value of £600,000. Now in full swing and available until December 2022, the scheme is accessible to both first-time buyers as well as existing homeowners. The government website provides further details on the scheme.
Make your mortgage work for you
As a contractor, you will have dedicated yourself fully to your craft, building your reputation and working around the clock to make your passion a success. You work hard and your money should work hard for you – your mortgage is no exception.
Save £1000s by remortgaging
Did you opt for the first mortgage option you came across when you first organised your mortgage? The answer is probably not. For most people, a mortgage is one of the biggest financial commitments they will ever enter into, but what if it could also save you money?
The Bank of England Base Rate is at a historic low (0.10%) which means now could be the perfect time to think about remortgaging to a better rate. An article by the Evening Standard reported that UK homeowners are currently wasting £4,500 a year on unfavourable Standard Variable Rates.
So, it’s a good idea to keep a regular eye out for more competitive mortgage rates, however, there are prime times you might want to consider reviewing your mortgage rate:
Your mortgage is due for renewal
Your lender will automatically move you on to a Standard Variable Rate (SVR) at the end of your current deal which is likely going to be higher than the deal you were previously on.
It’s worth looking at the market around 3 months before your rate gets swapped over, as there may well be a better rate out there for you. 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.
Your house value has increased
Lockdown inspired many to take on new home renovation projects last year. According to mortgage comparison site money.co.uk, UK homeowners have spent £55 billion perfecting their home during the first national lockdown in 2020.
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 means you may now find yourself in a lower Loan to Value (LTV) band, so you could be eligible for much lower rates.
Whilst exit fees are something you should certainly consider before switching deals, the associated savings with a new mortgage rate could make accounting for paying the early exit fees an option.
You want to 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. Releasing funds for a new kitchen, garden refurb or general upkeep of your home is possible with a remortgage. Your options are not limited to home renovations though, here a few ideas most people use the cash for:
- Car or other motor purchase
- Wedding or special occasion
- Consolidate debts elsewhere and make them easier to manage
- Pay the deposit on a second home or buy-to-let property
If you’ve been thinking about becoming a landlord, you are not alone – according to the ONS, private rental prices rose by 1.3% in England, by 1.5% in Wales and by 1.0% in Scotland between March 2020–March 2021. Buy-to-let (BTL) mortgages are designed for landlords who plan to let their property out to tenants.
Although usually more expensive than regular mortgages, investing in a buy-to-let property can be the ideal way for a contractor to boost income.
Are there extra costs to being a contractor landlord?
Some of us may have some experience with rentals and what that means – be it as a tenant or landlord, so will be familiar with the repairs that might be involved. Whether that’s decorating, stamp duty, or running cost, it’s important to consider your outgoings:
- Letting agent fees
- Mortgage repayments
- Furnishing the property (if you so choose)
- Income tax
- Landlord insurance
- Smoke and carbon monoxide alarms
- Energy Performance Certificates
- Gas Safety Certificates
Are you mortgage fit?
Applying for a mortgage may seem daunting on any occasion, but when you add a pandemic, the off-payroll working rules (IR35), and Brexit into the equation, it becomes even harder. There are however certain steps you can take to improve your odds and get yourself in tip top shape to secure a mortgage for your dream home:
Check your credit report
Do you want to leave the lender no reason to turn your application down? Keeping your credit rating up to scratch is an essential step and although it will not guarantee approval – it is a step forward. Get started with CMME’s free guide on credit rating.
Improve your credit score
Naturally, improving your score is the next step and there are certain measures you can take to do this:
- Pay off existing debt
- Register on the electoral roll
- Check for any errors and have them removed
- Don’t undertake credit searches before you look at mortgages
- Don’t miss bill payments – pay on time
- Dedicate some time to Credit Karma for keeping track and tips for improving your credit score.
Get your paperwork ready
You will need to provide minimal documentation to support your application. Ensure your CV is up to date and obtain a copy of your current contract as this will be used to demonstrate your earnings.
Review the marketplace
It’s a good idea to determine what type of mortgage might suit you and your needs and investigate all costs associated with the property (e.g. a leasehold flat will incur monthly and annual charges in England and Wales) including council tax, insurance and utility bills.
This applies to both first-time buyers and existing homeowners - preparing in advance can help confirm your goals are realistic and achievable.
Speak to a specialist
The reality is that most lenders have little understanding about the contracting market and fewer will have a grasp on workers switching between an umbrella employee and back to contracting. This means that their standardised procedures do not accommodate contractors.
Our partner CMME specialises in providing mortgage advice for independent professionals, 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.
CMME’s sister company Contractor Wealth can give bespoke financial advice and support to self-employed professionals. When you are ready to make the most of your money - Speak to Contractor Wealth on 01420 592 667 or click here to arrange a callback.
The value of your investment and any income you receive will go down as well as up and you could get back less than what you originally invested.
Contractor Wealth is a trading name of Contractor Wealth Management Limited, an appointed representative of Quilter Financial Services Limited and Quilter Mortgage Planning Limited, which are authorised and regulated by the Financial Conduct Authority.
Your property may be repossessed if you do not keep up repayments on your mortgage.