Contractors unable to access cheap mortgages
According to an analysis of Insolvency Service data, contractors have seen their share of all personal bankruptcies double from 11% of all bankruptcies in the second quarter of 2007 to 24% in the second quarter of 2013. Over the same period, permanent employees declaring bankruptcy fell from 89% of the total to 76%.*
Professional Representation Network explains that while full time employees have been able to move their mortgages onto cheaper deals and see their monthly interest payment tumble, most contractors have been unable to access cheap mortgages because banks and regulators have tightened the criteria for lending to the self-employed in the aftermath of the financial crisis.
Kristian Gourlay, director at Professional Representation Network, commented, “Many permanent employees have seen their finances rescued by record low mortgage rates but contractors have not seen the same kind of falls in their mortgages as they can’t shop around.”
“Contractors are increasingly referred to as mortgage “prisoners” – locked into high interest rates as the availability of mortgages for contractors has shrunk.”
“The Bank of England’s ultra-low interest rates needs to be extended to contractors because they find it very hard to get a good deal from high street banks and building societies.”
Professional Representation Network explains that the Financial Conduct Authority (FCA) and its predecessor the Financial Services Authority (FSA) have made it more difficult for contractors to remortgage due to the introduction of new rules requiring borrowers to prove their income. This has effectively banned self-certification mortgages.
The new rules penalise contractors because lenders are required to get evidence from borrowers
of a consistent salary or income. This means that even if contractors earn more than permanent employees overall, the lender may not lend to them because they cannot provide regular monthly payslips.
According to the Council of Mortgage Lenders, the percentage of new home loans given to self-employed people has halved in the past five years: from 16% of the total in 2008 to 9% in the second quarter of this year.
Kristian Gourlay added, “Even extremely well paid, highly experienced contractors struggle to access mortgages at competitive rates of the kind that full time employees now find easy to access.”
“Permanent employees have benefited hugely from cheap mortgages but contractors are still finding it tough to access loans at competitive rates. Contractors are effectively paying the price for reckless lending by banks prior to the credit crunch.”
Professional Representation Network says that availability has become so poor that they have started up their own service to help contractors source better mortgages.
Says Gourlay: “The FCA has established a lending environment that seems to discriminate unfairly against contractors and the self-employed, giving little consideration to those people who don’t get paid in a & lsquo;conventional’ way.”
“The UK Government is very positive about the vital role entrepreneurial contractors have to play in the economic recovery, but it could play a bigger role in providing practical support for contractors that have been effectively shut out of the mortgage market.”
Professional Representation Network says that mortgage lenders are hesitant to lend to contractors because they view contractor earnings as volatile and often don’t understand contractors’ business model.
However, Professional Representation Network explains that contractors can now earn substantially more money than permanent employees with excellent job opportunities created as a result of the growing use of contractors in the UK economy.
Kristian Gourlay added, “It’s surprising that lenders are reluctant to lend to contractors given that they often receive excellent pay, have a wide variety of roles to choose from, and are now playing an increasingly important role in the UK’s workforce.”
“Contractors who do manage to negotiate a mortgage at a competitive rate are normally only successful if they visit a broker that specialises in the contractor market. We’re increasingly seeing contractors being turned away by high street banks and big building societies. Many contractors give up at that point, but there are specialist lenders that provide attractive rates to contractors.”
Professional Representation Network’s mortgage service:
· provides contractors with specialist mortgage advice and bespoke mortgage products specifically for contractors.
· is able to offer contractors individually negotiated, tailored underwriting terms from a wide variety of lenders, enabling contractors to access very competitive rates.
· has developed extensive experience of advising specialist contractors - such as oil and gas and IT contractors - on mortgage options, meaning that Professional Representation Network is able to guide these contractors through typical problems that can arise.