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Umbrella companies can be of great help to contractors who do not want the hassles associated with running a Limited Company. As part of our series 'Path of Education for New Contractors,' we have covered the basics of umbrella companies in an earlier article. In this article, we look at what are the legal obligations of an umbrella company towards contractors.
When it comes to securing a mortgage, Limited Company contractors go through many challenges, because a large number of mortgage lenders don't provide loans to contractors. In this article of 'Path of Education for New Contractors,' we look at the challenges faced by contractors while securing mortgages.
We take an example of a fictitious contractor, Harry, who has started contracting recently and is looking for a mortgage.
Harry searches for terms like mortgages for contractors on a search engine and finds many websites offering contractor mortgages from leading high-street lenders.
Being a new contractor, Harry doesn't know that many lenders shown on these websites lack a lending policy for contractors. Some of them have a policy for self-employed people, but very few have a separate lending criteria for freelance contractors.
Harry sees a high-street lender on one such website. Out of ignorance, Harry fills up an online application form, and the website sends the form to the high-street lender. The website gets a commission for passing on a prospective customer to the bank.
When a contractor applies for a mortgage to a high-street lender, the application is either rejected straightaway or is processed further. If the application was sent to a lender who doesn't have a lending policy for contractors, the contractor is better off with a rejection rather than the application moving to the next stage. We'll see why.
Harry is an engineering contractor and earns £30 per hour. The frontline advisor at the lender is impressed with Harry's hourly rate and is not fully aware of the bank's lending policy for contractors. The front-line advisor decides to process Harry's application.
As a first step, the advisor runs a credit search. Harry has a good credit history, and his credit search turns out to be clean. The advisor decides to move forward with Harry's application and provides Harry with an agreement in principle.
Excited with this agreement, Harry starts looking for a new property. He selects a property, makes an offer to the seller, and gets the offer accepted. Harry even starts preparing a guest list for his housewarming party.
But Harry is not aware, the underwriter at the lender's bank has not yet seen Harry's application. Harry gets a big shock when the underwriter rejects his application.
Lenders without a customised policy for contractors work out the affordability of contractors using trading accounts. The underwriter in this case included net income as one criteria for assessing Harry's repayment ability. Even though Harry charges a high rate to his clients, he pays himself a low salary to save taxes. He withdraws the remaining amount in form of dividends.
In most cases, the lending criteria of high-street lenders is designed for full-time or permanent employees. Because the underwriter at the high-street lending firm is mainly concerned about take-home pay, Harry didn't fit the lender's criteria because of his low salary.
The website used by Harry for application promised a loan of up to five times his annualised pay. Whereas the underwriter relied solely on Harry's low salary and offered Harry a small loan amount, much less than the five times of annual pay Harry was dreaming. Harry is somewhat fortunate to be eligible at least for a small loan amount because, in some cases, underwriters don't approve any loan for contractors.
Apart from this dejection, Harry had to go through a lot of other trouble in the process.
And if that's not all, Harry realizes that the lender has recorded a credit search against his name.
If there are a lot of credit searches against Harry's profile in a short period, it can create a negative impression. Prospective lenders may get suspicious about why there are so many rejections, and this will reduce the chances of him getting a good mortgage. With so much credit activity, some lenders may not even be willing to consider Harry's contract for a mortgage, leaving him without his most important negotiating tool.
If Harry does find a lender who offers mortgages to contractors, he can get a mortgage only if his application is fool proof and is without any room for doubt.
As you can see, the contractor in our example has gone through a very disappointing experience. This is the reason it's better to get rejected straightaway by a frontline adviser, if the lender doesn't have a separate lending policy for contractors. In this example, if the frontline advisor was aware of the lender's policy, he would have straightway returned the application to the broker. While Harry would have still lost time, the experience must have been far less painful. Harry isn't the only one to have gone through this anguish. Many contractors will have similar experiences to share about how their mortgages got rejected by high-street lenders.
One of the main reasons behind this is that some websites promise mortgages to Limited Company contractors without understanding the lender's policy towards contractor mortgages. Because of such websites, genuine contractors like Harry are losing out on mortgages they deserve.
To avoid this situation, you should go only for mortgage brokers, who have a proven track record in providing mortgages to contractors. Contractor Financials is one such provider who specializes in contractor mortgages and provides mortgages on the basis of contractor's contracts. Till date, they have helped more than 10,000 contractors in securing mortgages.
You may also find the following contractor calculators useful for your salary and tax calculations.