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Loans and Mortgages
There are many advantages to being a contractor. You normally receive a higher rate for your services than permanent workers, you can pick and choose your hours, you can structure your contract income to give the best return etcHowever, there are disadvantages as well. One such disadvantage is that you may find it much harder to get a loan or mortgage. It’s often easy to get a first quote or agreement but when the provider realises you’re not a permanent worker the application falls apart. This can be very distressing especially if you’ve already gone to great effort to find a house only to be refused a mortgage.
Why is it difficult to get a Loan or Mortgage?
Loan or Mortgage providers like security. They like permanent employees who receive the same lump sum paid into their bank account each month. Contractors receive varying sums each month and some months don’t get paid at all when not in contract.Proof of income is also a major problem as providers need to see payslips to approve a loan or mortgage. For Limited Company Contractors in particular this can cause real problems as those outside IR35 set artificially low salaries (normally around £12k) to minimise tax burdens. When providers look for proof of earnings they only see £12k rather than £90k.
Poorly trained or motivated staff add to the problem. You may find you’re banging your head against a brick wall when trying to explain how you get paid.
Limited Company Profits and Accounts
If you run your own limited company you will have to show at least two years company accounts to prove income (many lenders require 3 years audited accounts). If you have just started in business this could mean a very long wait.In the first year you may decide to retain profit in the limited company. This could lead to issues with loans and mortgages as a provider would not consider the income yours until distributed as salary or profit.
Expense claims also affect earnings and the provider will not consider expenses when assessing personal income. The more you receive in reclaimable expenses the less is available to distribute as salary or dividends. In the first year of business a company generally incurs numerous start up expenses (website development and hosting, accountancy fees etc). You might consider not claiming these expenses if trying to be aggressive with assessable levels of personal income.
The problem is that while Limited Company Contractors are not deemed to be non ‘sub-prime’, they are ‘Complex-prime’. Even if you do get the deal you want, you are likely to have to go through a specialist, and expensive, broker.
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