When applying for a contractor mortgage, brokers should also look to see whether their client is paid on a single contract.
Nick Groves is an underwriting team leader at Kensington
More and more British workers are choosing to work on a contractual basis, as opposed to full-time employment. Over five million individuals work on a flexible, non-permanent basis for UK plc, according to the Freelancer & Contractor Services Association (FCSA). This includes 3.7 million self-employed without employees, and 1.7 million temporary employees.
The use of flexible resources, as a proportion of overall workforce, has also risen significantly during recent years, and now stands at approximately 20%. IT and engineering form the lion’s share of this growing sector, but more people across a range of industries are now turning to contracting.
Indeed, flexible workers are engaged in a broad spectrum of sectors including:
• White collar professionals (commercial, banking, education, legal, sales)
• Construction
• Transport and logistics
• Engineering
• Industrial / blue collar / utilities
• IT and telecoms
• Health and social care
Workers are engaged across the pay range, with recent research from the FCSA indicating that 85% earn more than £10 per hour, and 30% earning more than £20 per hour. However, in a mortgage market that was built on lending to customers who work on a PAYE basis, it can still prove difficult to find a successful contractor the mortgage they deserve. So what do intermediaries need to know in order to deliver exceptional service to clients who are contractors?
The number one priority is to ensure that your client’s contracting background fits the lender’s requirements. Typically, lenders will assess the income of contractors on a day rate, usually at 46 weeks, to account for any contract voids such as holidays or illness, so it’s important to be aware of this.
On top of this, most lenders look for at least 12 months prior history of contract work. Because contractors often work on a short-term basis in three to six month contracts, it is likely a lender will also want to see evidence of a contract renewal, or a new agreement with another employer within this time frame. If a client is coming to the end of their existing contract, a lender is likely to look for information about the contractor’s intentions as well. It’s useful for a broker to provide an indication of whether their client will be renewing the contract, or will be actively looking for work.
However, it is important to be aware that different lenders have different requirements when it comes to work history. At Kensington, we’ll consider less than 12 months contract work if the applicant has a previous background as a PAYE employee in the same industry.
We recently approved a mortgage for an occupational therapist who had worked for a firm for a couple of years on an employed basis. Then in September last year they moved to self-employment as a contractor, requiring employment and self-employment income to be considered in the same year. In instances like this, brokers should provide evidence of their client working in the industry prior to their move, such as their P60 or last pay slip. Given that they were working in an existing profession and for the same firm, we were able to use employed income from April to September 2015 and then the contracted rate to provide a pro rata annual income that we used for affordability.
At Kensington, our mission is to underwrite the person, rather than a credit score, something which is difficult to do with an automated process. One tip for brokers who work with a lender that underwrites every application individually is to think about providing the lender with a copy of the applicant’s CV as this can help the underwriter to build a bigger picture about the client’s background in their respective industry.
Next, when submitting bank statements to demonstrate income, it’s important that the information provided is clear, concise and exactly what the lender is looking for. We look for at least the last three months of bank statements and it’s a must that this is from the relevant account that payments from contractual work are paid directly into, not an account into which the borrower has transferred funds into themselves. It can be a business account or personal account, but it needs to be the bank account that your client’s salary is paid directly into by their employer.
Many contractors are also now paid through umbrella organisations and with applicants today often operating as limited companies, contracting can be a complicated affair. We understand that many contractors choose to use an umbrella facility for tax or National Insurance reasons, and it’s important that the industry doesn’t leave out these individuals due to the complexity of their case.
Make sure your contractor clients can provide transparency about the nature of their employment. Brokers should look to include both their client’s name and that of their limited company to make the connection, and if they are working with an umbrella organisation, they’ll need to establish the hierarchy of employment.
Finally, when applying for a contractor mortgage, brokers should also look to see whether their client is paid on a single contract. This can make all the difference in the success of an application, as it can determine what type of mortgage the lender deems most appropriate.
We look to take borrowers on the contractor route if their primary source of income comes from a single contract. Though rarer, we do see individuals that work on multiple contracts at the same time, for instance Monday to Wednesday with one employer, and then Thursday to Friday with another. In this case, we’d view the borrower as self-employed and would take the traditional route of income verification, such as your client’s SA302, accounts or through the Inland Revenue.
If you are considering a contract mortgage for your client it’s important that there is a clear understanding about the nature of their employment, their background in their industry and, importantly, the requirements of the lender. Contractor mortgages are often viewed as complex – but with the right approach and good communication between contractor, broker and lender, there’s no reason to fear this category of product.
