PAYE Versus Fixed Term Contract for Mortgage Application

[northernladuk]

When I had an offset mortgage, I would draw down from myCo and put it into the savings account and then repay before year end, and take it out again in the next financial year. Possibly not technically correct and you do have to have the discipline to not spend the cash. You can knock a few years off the mortgage term if managed well and, as eek says, build up an emergency buffer.

Yeah using DL. Used to be OK until they tightened up on bed and breakfast loans. Not worth the hassle once they did.

[Martin@AS Financial]

This is a really good question.

The main challenge here I would say is the 6 month gap. As a general rule, banks do not like to see too many breaks in your contracting history. However, with a good reason and plenty of experience within your industry, an underwriter may be persuaded to take a view.

You just need to give them comfort that when a project finishes, you can quickly source your next role. which is where the industry experience comes into play.

[ladymuck]

When I had an offset mortgage, I would draw down from myCo and put it into the savings account and then repay before year end, and take it out again in the next financial year. Possibly not technically correct and you do have to have the discipline to not spend the cash. You can knock a few years off the mortgage term if managed well and, as eek says, build up an emergency buffer.

[Smartie]

Yeah this. They are still around but not the golden goose they used to be. Rates tend to be higher with a pretty poor LTV, Barclays are something like 6.6% at 75%TLV but with the lower(ish) mortgage rates you aren't saving a lot. They were great when mortgage rates were up around 15% but now they are 5% or so there isn't much saved.

There are a handful still available, repayment or interest only.
Depends on LTV but I picked one up a year ago from Yorkshire BS at 4.74%.
Interest rates tend to be higher than standard mortgages, maybe 0.5% or a bit more but keeping savings in it can completely offset this.

There are multiple advantages:
1. Keep a warchest if you're freelance - pay no mortgage interest on savings but easy access when needed.
2. Avoid savings interest tax. A 4.74% tax free return isn't bad if you're in higher or additional tax bands.
3. Avoid keeping large amounts in you SIPP in cash where returns are poor. If the market crashes the cash can be fed back into the SIPP or an ISA.
4. The interest only version keeps outgoings low which is useful if you're out of contract. While working you can build savings to pay it off.
5. Borrow on an interest free credit card for a year or two to add money to your savings. Pay it off before the end of the deal.

[hobnob]

I agree with the advice that other people gave about Freelancer Financials. I'm remortgaging at the moment, and they've been very efficient. Their website is terrible, possibly because the parent company (Mortgage Quest) is trying to do a "one size fits all" approach, and I almost walked away based on their questionnaire. However, I spoke to one of their brokers on the phone who reassured me, and it's all gone smoothly since.

NB They asked me for various documents, including:
* Current contract
* Contracts covering the last 12 months
* Latest 3 months (or 12 weeks) payslips

The OP mentioned a recent gap, i.e. you might not be able to produce all these documents. You might be better off waiting until you've got a continuous year (i.e. you might get better deals that way), but the broker can advise on that.

I'm going with Nationwide. They defined my income as day rate x 5 x 52, which is higher than I actually get but I'm not complaining!

[eek]

Yeah this. They are still around but not the golden goose they used to be. Rates tend to be higher with a pretty poor LTV, Barclays are something like 6.6% at 75%TLV but with the lower(ish) mortgage rates you aren't saving a lot. They were great when mortgage rates were up around 15% but now they are 5% or so there isn't much saved.

It depends I look the idea of having £200,000 available in a hurry if I need it rather useful (my offset mortgage has been completely offset for about the last 10 years).

[northernladuk]

They were all the rage in the late 90s.

Yeah this. They are still around but not the golden goose they used to be. Rates tend to be higher with a pretty poor LTV, Barclays are something like 6.6% at 75%TLV but with the lower(ish) mortgage rates you aren't saving a lot. They were great when mortgage rates were up around 15% but now they are 5% or so there isn't much saved.

[ziggystardust]

If you can afford it, go for an offset repayment mortgage, then when you have extra money, you can put it into the offset account, which will reduce your mortgage quicker.

I haven't heard of an offset repayment mortgage so will certainly look more into this.

[WTFH]

Speak to mortgage brokers and go through your figures with them. Yes, it will cost you a couple of hundred pounds, but that is a fraction of a percent of the cost of the property, and I would suggest that paying professionals is a bigger long term saving than trying to do it yourself or taking direction from randoms on the internet.

Remember that the bigger the deposit, the more options you will get on mortgages. If you're struggling to get a 5% deposit, or whatever, then you need to look at how you can save a bit of money to increase that deposit.
If you can afford it, go for an offset repayment mortgage, then when you have extra money, you can put it into the offset account, which will reduce your mortgage quicker.

[Smartie]

I would have a word with a specialist mortgage broker such as freelancerfinancials.
For a few hundred quid, they will find you the right deal, answer your questions and deliver the application in a contractor friendly manner.
Usually, from memory, you need at least a 6 month contract and the mortgage available is a multiple of the rate so £500 a day might get you as much as £500k+ loan.
So, longer and bigger is better.

[northernladuk]

Different lenders have different criteria. In the old days of outside IR35 some wanted 6 months left on the contract, other wanted no breaks in last two years etc so it could be different from lender to lender. I could be wrong here but seems you are technically employed I don't think they'll mention contracts or contract length. You'll be straight affordability like other employees. I don't think either of those will make a difference. The break might be the only issue but then people are out of work. It happens so shouldn't be a problem.

It is a complex area though so I'd suggest giving Freelance Financials a call who specialise in this. For clarity I'm with them and I had a similar issue last remortgage. I say similar I was outside IR35 in the past year and then inside so not quite the same as you but complex enough. They dug out a number of providers and got a rate the equivalent to the standard offerings.

[ziggystardust]

I am looking to apply for a first time mortgage but, now being faced with the dilemma of taking a 6 month PAYE role via a recruitment agency or another 12 month fixed term contract direct with an employer, I'm unsure which would make me more of a risk to a lender. Although I have been contracting for a few years now, I have had a recent gap of 6 months, with previous contracts being mainly Inside IR35 roles.

I took the offer of the fixed term contract (with pension and benefits) but there is no room to build a warchest, and I have signed the contract. Sod's law, an interview came up on the inside role and I've been told the client is now likely to offer.

Would I be less likely to get a mortgage approved on the short term contract even though the income would of course be higher? Fixed term is closer to home with less hours but the flip side is no money for a warchest and still no guarantee that it will go the full year or either one of us could gives notice of a week in those first 3 months. Plus, having signed and due to start the FTE role next week I'm not sure if it's too late to pull out.