They are entrepreneurs, small business owners and, in many cases, highly sought-after professionals
Carl Shave is a director at Just Mortgage Brokers
Traditionally, it has been somewhat difficult for contractors to secure mortgage lending, at least in comparison to broadly similar applicants who are in 'regular', salaried employment. The reasons for this are understandable no matter how frustrating - mortgage lending being concerned as it is with the minimising risk to the lender.
It’s easy to see why those with a 'permanent' employment contract and (arguably) more likelihood of a sustainable long-term income would be seen as a less risky lending proposition. If anything, this attitude has only become more entrenched since the financial crash of 2008-09 and the subsequent Mortgage Market Review – at least amongst most of the mainstream lenders.
That said, in more recent years there has been a notable increase in lenders who are more willing to consider lending to contractors, facilitating this by either adopting more flexible underwriting policies – assessing on a case-by-case basis – or even implementing tailored assessment criteria for contractor mortgages. This might take the form of, for example, assessing affordability based on the applicant’s current work contract and using the base contract rate to work out an annualised income, rather than the more traditional method of scrutinising the past three years of accounts and using that as a guide to future income.
While this has been encouraging to see, it’s still true that contractor mortgages are very much seen as the province of smaller, more specialist lenders, and that the big high-street names – for the most part – still tend to think of contractors as 'mortgage misfits'. Frankly, we think it’s time for that attitude to change, and for more lenders to recognise that contractors should in fact be looked upon more favourably as professional, low-risk mortgage candidates – because that’s often exactly what they are.
It’s certainly true that the nature of the workforce and employment has changed in the UK in the past few years. While it might be comforting for lenders to still think of permanent-contract, PAYE employees as low-risk applicants with a stable job and sustainable income, the reality is that the job market is turbulent. A 2013 skills and employment survey for the Economic and Social Research Council and the UK Commission for Employment and Skills showed that British workers’ sense of job security was at a 20-year low, with particular concerns expressed about the likelihood of reductions in pay. A more recent YouGov poll similarly reported confidence in job security at its second lowest in the past 20 months.
By contrast, the working population of the UK now has over 300,000 more people in self-employment than during the 2008-09 recession, and that number is increasing all the time. That represents a considerable shift in how the country’s workforce earns its living, and lenders have a responsibility to review their mortgage application procedures, and their lending and underwriting policies, to reflect this new reality.
Perhaps at the most basic level, what is really needed is a change of perspective and attitude – because the truth is that most contractors aren’t high-risk misfits unable to hold down a steady job and guarantee an income. They are entrepreneurs, small business owners and, in many cases, highly sought-after professionals able to demand high fees from their clients. Some may act as sole traders, while others operate as directors of their own limited companies – and in the latter case it’s common to draw a mix of salary and dividends from company income to maximise tax efficiency. Isn’t it time we started seeing those high-income, tax-savvy professionals as the low-risk mortgage prospects that they so often are?
