Going It Alone...
Posted on 25 March 2014 by
As the tax year draws to a close, mortgage specialist Alistair Hargreaves considers the perks and pitfalls of becoming a professional contractor – more control over your income and time are an attractive proposition, but how does it affect your mortgage prospects?
Does this scenario sound familiar to you? After a few years as an employed accountant, IT consultant, or solicitor you decide you want some more flexibility around your time and tax, so you take the plunge and become a contractor. You trade in the safety net of the 9 to 5 salary, corporate benefits and pension, and swap that for greater earning potential and a choice of working hours. Suddenly you are your own boss, with a daily pay rate. Fantastic – all that freedom and extra income! But what happens when you want to borrow money? In you stroll to your high street bank, where your mortgage has been for some time, and you sit down ready to talk about your house move or the further advance you want to arrange for the loft conversion. And very quickly it becomes apparent that there might be a problem...
The adviser asks for your payslips, and you explain that you have none as you are now a freelancer. Fine they say, let me see your last two years accounts. But I’ve only been contracting for six months you reply – surely that is not a problem? You’re doing the same job (maybe even for the same company) but getting paid a lot more. Ah, responds the adviser, we now class you as self employed, and as such we need to see a track record of 24 months accounts or tax returns before we can even consider your case. You argue that you have been with them for so many years and never missed any payments, even when it was hard going when you were still part qualified, but no. They are not going to lend to you anymore.
Suddenly that freedom seems all too restrictive. The majority of banks and building societies will always class contractors as self employed and always ask for a track record, in the same way as if you ran your own business from scratch. And, what’s more, most mainstream lenders will only assess the income that you are taking out of the company as salary and dividend. So even if you have been contracting for a number of years, but choosing to leave funds in the Ltd Co, you are still penalised.
This is not the end of the road, though. At John Charcol we have access to a range of lenders who will look at your gross daily pay rate, as opposed to your accounts or tax returns. So what does this mean? Well, for example, Mr X is an IT Contractor, having left his employed role nine months ago and now contracting himself back to the company he previously worked for. His contract states that he must work for 20 days a month, and he charges £625 per day. The lender will take that pay rate, multiply it by five, so getting to the weekly figure, and then multiply that by forty-six, so giving a whole year, with six week’s holiday. So, Mr X’s income on the above basis is £143,750. He does not need two years proof of this - simply a contract and a CV showing his experience in his field. Some lenders like to see that a contract has been renewed, others though will accept the first contract.
Typically, the professions that I see with contracts set up in this way are accountants, solicitors, IT consultants, management consultants and those working within the oil and gas industry.
Common sense lending for freelancing professionals at John Charcol. If you fit the profile above and have been struggling to find a lender, give one of our mortgage experts a call on:
0344 346 3672
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