Reply to: Is paying min dividends/salary going to create problems with mortgage applications ?

[TheMortgageSquad]

I spoke to Halifax directly, although on their website they say annual income is estimated based on the daily rate, the advisor told me they look at last 2 years self-assessment numbers instead

Herein lies the problem with going direct to lenders sometimes. Unfortunately its a flip of the coin as to what Advisor you speak to. Because the vast majority of clients most Advisors speak to on a daily basis fit into the neat full time permy employed, self employed sole trader or Limited Company director boxes, it confuses them when a day rate contractor comes along and says they contract through their own Limited Company. They hear 'Limited Company' and try and pigeonhole you into their Limited Company (self employed) criteria, asking for things like tax calculations and company accounts. This is where using a broker who specialises in contractor mortgages can really help as they have the knowledge, experience and contacts to ensure that your mortgage application is dealt with in the correct way and your income assessed as a multiple of your contract rate if needed.

Despite what some another poster has said, it is not just Halifax, Nationwide or Clydesdale Bank who can offer Contractor mortgages, there are a lot of other lenders who can, including Natwest, Skipton Building Society, Scottish Widows, Accord Mortgages, MPowered Mortgages, Kensington, Virgin Money and BM Solutions to name a few more. Each have their own spin on how they will view contractors and the documents they need for an application.

A good contractor mortgage broker should be looking at the best option for your own specific circumstances. Even if you contract outside IR35 through your own Limited Company there may actually still be options available to you using your company accounts and/or tax calculations (SA302's) as an alternative to a contractor mortgage which could open up other, more competitive options from non contractor friendly lenders. Just because you are a contractor, it does not always mean you have to find a contractor mortgage. The broker should be checking all avenues for you.

[Martin@AS Financial]

Currently going through a mortgage process. So far, fairly painless. Had to supply a copy of my contract which had 5 months remaining, credit reports and last years submitted accounts. Pre-approved fairly quickly.

upon full submission, they require more details, one being last 3 months bank statements…which I’m a tad confused by as it’s the businesses statements they have asked for….surely it would be my personal accounts they require to see what I am doing with the dividends? Anyone else had similar or do you end up providing personal account statements also?

all in all, a lot less painful that I thought as they based borrowing all off of the contract and day rate. As others have said 46 x5 seems the usual calculation.

If you are securing your mortgage off your contract - you are essentially borrowing against the turnover rather than your salary and dividends.

I suspect the bank will be looking to see your invoices from your client being paid into your business account in the same way that if you were perm, your salary would be paid into your current account. It will also allow them to see your business outgoings as well such as travel, indemnity insurance, accountant etc.


Hope that helps.

[WTFH]

What can I do to prepare meanwhile, look for solicitor recommendations, try to spend less on credit cards (?) and not apply for new credits etc. ?

1. Sign up with estate agents if there is a particular area you are interested in, they will send you notifications of houses before they hit the open market
2. Pay off any debts you may have.
3. Save up as much of a deposit as you can - not in your company but in an easy-access place. I'd suggest stick £50k in premium bonds.
4. Do you have a property to sell? If so, get it valued, get it on the market, and use the same solicitor/conveyancer to handle both sale and purchase (speeds up background checks, etc).
5. Find a local solicitor/conveyancer. It might cost you a bit more, but it means if you need to visit in person and when you need documents witnessed, it's far quicker.
6. Your mortgage supplier will want a survey done on the house, you'll have two choices, a basic one or a full one. Depending on the age/condition of a house, it may be a good idea to spend the extra for a full survey, it can also be used as part of the price negotiations.
7. Have a list of what you're looking for in a property, what is essential, what is nice to have, and what you really don't want. Work out what/where you are prepared to compromise.
8. Speak to removal firms. If you are going straight from one place to another, that's relatively straight forward, if you're going to be putting stuff in storage, then storage rates can vary, it may be cheaper to store where you are moving to, rather than where you are moving from (for example)
9. Start to tidy, pack, freecycle, charity, etc your current place. Less clutter makes for an easier move.
10. Moving house is very stressful. Try to stay calm, and remember that others in the chain are going through similar stress, so don't be a prat with them.

[Lumiere]

Currently going through a mortgage process. So far, fairly painless. Had to supply a copy of my contract which had 5 months remaining, credit reports and last years submitted accounts. Pre-approved fairly quickly.

upon full submission, they require more details, one being last 3 months bank statements…which I’m a tad confused by as it’s the businesses statements they have asked for….surely it would be my personal accounts they require to see what I am doing with the dividends? Anyone else had similar or do you end up providing personal account statements also?

all in all, a lot less painful that I thought as they based borrowing all off of the contract and day rate. As others have said 46 x5 seems the usual calculation.

That's good to hear.

I am still looking for a suitable house, as I understand agreement in principle from Halifax website is useless .. so I just find a house, get offer accepted, find solicitor etc., book face-to-face appointment with Halifax mortgage advisor, apply for mortgage at the same time, do I miss anything - been a while since I bought a house ?

What can I do to prepare meanwhile, look for solicitor recommendations, try to spend less on credit cards (?) and not apply for new credits etc. ?

[Rik1087]

Currently going through a mortgage process. So far, fairly painless. Had to supply a copy of my contract which had 5 months remaining, credit reports and last years submitted accounts. Pre-approved fairly quickly.

upon full submission, they require more details, one being last 3 months bank statements…which I’m a tad confused by as it’s the businesses statements they have asked for….surely it would be my personal accounts they require to see what I am doing with the dividends? Anyone else had similar or do you end up providing personal account statements also?

all in all, a lot less painful that I thought as they based borrowing all off of the contract and day rate. As others have said 46 x5 seems the usual calculation.

[PerfectStorm]

I spoke to Halifax directly, although on their website they say annual income is estimated based on the daily rate, the advisor told me they look at last 2 years self-assessment numbers instead

They just told me to put day rate * 5 * 46 as income and it'll all get sorted when you progress the application. And, in fairness to them, it was.

[Ketto]

I’m with Natwest since 2022 and have been with Clydesdale recently both based solely on day rate.

[Lumiere]

if you go to a specialist broker, you'll spent £750-1000 for them to tell you "Halifax, Clydesdale or Nationwide"

Their exclusive rates are a sham.

I spoke to Halifax directly, although on their website they say annual income is estimated based on the daily rate, the advisor told me they look at last 2 years self-assessment numbers instead

[PerfectStorm]

if you go to a specialist broker, you'll spent £750-1000 for them to tell you "Halifax, Clydesdale or Nationwide"

Their exclusive rates are a sham.

[Lumiere]

Lumiere It depends on what you mean by 'create problems' and how hung up you are on rates.

Assuming you use a broker, it won't stop you from getting a mortgage but it might well mean you end up having to settle for a slightly more expensive lender.

As others have mentioned above, do use a good broker, they're worth their weight in gold.

Problems = not passing lender's criteria, not being offered enough, higher rates indeed.
Higher rates is not a major issue as long as I can overpay with money from previous house sale within a year or so.
Used broker last time, I just want to avoid the situation of spending days on providing information and documents they need and then finding out I can't get a mortgage because of recent pension contributions.

[Lumiere]

You'll likely end up with a Halifax mortgage.

Affordability is based on 48 x 5 x day rate.
Requires at least 4 weeks remaining on your contract.

Very very laid back approach to contractors (arguably too generous imo), but never had an issue when getting a mortgage.

Thanks, this is what I am mostly looking for.

Affordability = annual income I assume, and then you can generally borrow 3.5-4 times that ? So for e.g. £500 rate = £120K income = £475K mortgage with 25% deposit needed, based on Halifax calculator. Were rates competitive, different if direct/broker ?

Will check Barclays and brokers too (that questionnaire though, last time it felt like I confessed to a priest, published my life's memoir and had an interview in MI5 at the same time)

[fiisch]

You'll likely end up with a Halifax mortgage.

Affordability is based on 48 x 5 x day rate.
Requires at least 4 weeks remaining on your contract.

Very very laid back approach to contractors (arguably too generous imo), but never had an issue when getting a mortgage.

[sreed]

My Ltd has been heavily contributing to my SIPP (using past 3 years' allowance) which I think will leave us with minimum dividends this tax year - £2K divs + 10K salary x 2 people ?

Is it going to cause problems when applying for mortgages later this year (SIPP <> income ?), or there are some providers who look at the current contract's rate instead for affordability ?

How understanding are high street banks of contractors nowadays, still advisable to go through specialist ? It's been a while ..

Lumiere It depends on what you mean by 'create problems' and how hung up you are on rates.

Assuming you use a broker, it won't stop you from getting a mortgage but it might well mean you end up having to settle for a slightly more expensive lender.

I was in a similar position (ltd co dir with very low NP in latest year due to large employer pension contributions) at my last remortgage.

The lender my broker eventually ended up with was Clydesdale (owned by Virgin) which was about 0.75% more expensive than the cheapest at the time (High street bank) that I would have been able to access if my circumstances were that of a 'normal' contractor that didn't make excessively large pension contributions. My mortgage being around 300k, that will cost me an extra 10-11k over the 5 year fix.

There's some luck involved in the rate you get as well. For instance in my case Clydesdale wasn't competitive at the time but as per my broker it does offer super competitive rates at times. So it's possible that if I'd applied at another time I wouldn't have had to pay a premium because of my circumstances.

As others have mentioned above, do use a good broker, they're worth their weight in gold.

[Martin@AS Financial]

As a contractor, when it comes to securing a mortgage, you are in a really fortunate position as your income can be assessed in 3 different ways.

1. Certain lenders can use the gross value of your day rate contract subject to certain criteria. The benefit to you here is that it allows you to work in a tax efficient way whilst essentially borrowing against your turnover.

2. Salary and dividends (most lenders)

3. Salary and net profit (certain lenders)


Hope that helps.

[Dactylion]

Maybe not Problems - but challenges :-)

As many have mentioned - the mainstream box ticking players "don't understand/don't care"

But there are plenty of others that do.