Reply to: Mortgage Broker

[Freelancer Financials]

Relevant Earnings for Mortgage Lending Purposes

Net = Net of Tax, Before Dividends are paid.

So Net profits are not likely to be minimal.

Relevant Earnings for Lending Purposes:

Let’s look at the following scenario:

An IT Contractor with 100% shareholding has Gross Earnings of £100k:

Drawings from the company:
Salary - £15,000
Dividends - £25,987.50
combined salary and Dividend Drawings - £40,987.50

Company Expenses
Travel & Subsistence: £ 2,000.00
Freelancer Insurance: £ 600.00
Pension: £ 7,200.00
Relevant Life Insurance:£ 360.00
Mobile Phone Expense: £ 500.00
Stationary Expense £ 500.00
Home Office Expense £ 750.00
Salary: £15,000.00

Total Expenses: £26,910.00

Net profit (before tax) = Gross Earnings - Total Expenses
= £100,000.00 – £26,910.00 = £73,090.00

Net Profit (before tax) = £73,090.00

Corporation Tax (at 21%) = £15,348.90

Net Profit (after tax) = £57,711.1

Retained profits (retention profit) = (Net Profit after Tax) less (dividend)
= £57,348.90 - £25,987.50 = £31,361.40

Relevant earnings may be defined as any of the figures below depending on each lenders interpretation of relevant earnings:

1. Net Profit (before tax) combined with Salary: £73,090 + £15,000 = £88,030
2. Net Profit (before tax): £73,090
3. Drawings: £40,987.50
4. Salary: £15,000

Now this is a problem when lenders look at a contractor’s accounts for assessing how much they should lend. Each lender will have their own criteria for determining relevant earnings and will apply a multiple of 3 to 4 times this figure. However standard lending practice is to broadly define relevant earnings as drawings, but if correctly presented, through the correct channels there are a number of lenders who can be persuaded to use a contractors combined net profit plus salary figure.

Don’t be surprised to hear that there are a number of banks that will only use the salary figure as relevant earnings. “Smalldog” hit the nail on the spot when he said:

“any contractor that runs their business properly is going to have minimal net profits so how does that work, 3.5 times net profit...ok so I can get a mortgage of about £50k, yep it doesn’t work for contractors...they don’t know our business....

[Hex]

any contractor that runs their business properly is going to have minimal net profits so how does that work

Net = Net of Tax, Before Dividends are paid.

So Net profits are not likely to be minimal.

[smalldog]

Hi Lumiere, your correct.

First Direct stopped using mortgage brokers and IFA's from January 2008. You can only apply to them by phone or internet. Which means that you have to deal directly with some customer service representative over the phone who is more than likely, inexperienced and doesn't have a clue how to deal with you. This is not just my opinion but that of many contractors who have applied, been let down and come to us. The problem with lenders like First Direct is that they have a simplistic view of what qualifies as relevant earnings for lending purposes. The standard criteria used for assessing contractors makes it difficult for the majority of contractors to apply to First Direct.

Let me tell you what the typical lending criteria is for First Direct:
They will ask for 3 years accounts, and use a multiple of 3.5 times your Ltd company net profits. If you don't have 3 years accounts, they will sometimes consider two years accounts as long as you can show them a current contract with a minimum of 6-12 months left to run. The problem with this type of lending criteria, is that in most cases, contractors accounts do not always reflect their full potential earnings.

However, if you're a contractor with 3 years accounts and sufficient net profits which fit with First Direct's standard lending criteria (and their mortgage deal is good) go ahead.

A good Contractor specialist mortgage broker will have direct contact with key people within the lenders Head Office underwriting teams and hopefully, like ourselves, will be able to base your earnings on a simple multiple of your contract rate alone.

This means that you don't have to rely on the traditional method of using accounts, which will not fully reflect the total earnings that you have at your disposal, for income verification on a mortgage application.

John

any contractor that runs their business properly is going to have minimal net profits so how does that work, 3.5 times net profit...ok so I can get a mortgage of about £50k, yep it doesnt work for contractors...they dont know our business....thats why you need a specialist, someone who can read between the lines...

[ASB]

Barclays always has a number of different schemes running. Some of their deals have minimum loan size restrictions.

They currently have two offset deals one is for a minimum loan size of £150k and the other has no minimum. Both deals are at 70% LTV.

You're right, First Direct and ING are direct only. Don't know much at all about ING's lending crieria as they're relatively new to mortgage lending in the UK. I have heard that they require 3 years accounts. I would really like to hear views from any contractors that have recently applied for a mortgage with them.

I agree that for several months First Direct and HSBC were providing some very competitive deals. I was surprised to hear that some contractors have got away with just one years accounts, what I can confirm is that I rung them the other day to check their criteria and they asked for a minimum 2 years accounts with 1 years projected income from the accountant.

The good news is that many of the other lenders have started to get their act together and are now competing with Fisrt Direct.

The reason why sometimes you get a better deal throgh a broker is because lenders from time to time offer special exclusives through particular networks that brokers are members of. But equally they sometimes offer direct only deals, it is referred to us dual pricing. All brokers are against dual pricing.

By the way not all brokers charge a broker fee. Those that don't simply rely on the introducer commission that they receive from the lenders. There are also brokers that charge a broker fee but reimburse the client the introducer fee they receive from the lender. We give clients the choice.

I wasn't trying to suggest the introducer fees were in any way unreasonable. You are after all in business not altruists. I think it is, however, good that you will give your clients a choice. After all, for everybody who approaches you I suspect a fairly small number actually result in a loan being written.

I do struggle with the dual pricing, at the point it happened (about 10 years ago) I was buying an additional property, a lot of lenders were reluctant but A+L were prepared to offer me their SVR - 2.5% for 2 years. 2 year tie in and some costs. The estate agents were badgering me to try their broker so I eventually capitulated. He could do the same deal but with £500 cashback and no fees, a bit of a no brainer really. Also he got a fee then of 300 - which he split. I basically ended up 1k better off simply for signing the form in his office.

His view was that the dual pricing existed because the lender was effectively outsourcing a lot of their underwriting. I'm surpised that brokers are in general against dual pricing - surely it's one of the competitive edges you have? For the main market if all you can offer is the same as many of the search engines why would anybody use you? I guess the answer might be simply "we specialise" and I can appreciate that. After all most contractors often don't tick the "I'm a normal case" box. Certainly - and especially in this market - anything even vaguely out of the ordinary can be a huge challenge.

I ended up with FD, base + 2.39 offset (think they have pulled this now). It was right at the time for 130 on 180 with an earnings multiple of less than 3 (I'm permie these days). As rates start to rise it may well be that better deals are available, but there is always the cost of change. If you have access to something that may be cheaper - allowing for costs, feel free to PM.

[Freelancer Financials]

I think the Barclays deal only works if you're borrowing quite a lot? Though it might have changed, I think it was 200k loan and 60% LTV to get a decent rate.

For my particular circumstances a few months back FD were miles better than anything a broker could get (130k on 180k). ING were close. But both are of course direct only now and fairly picky. Previously I've had much better deals through a broker than I could get myself. Ultimately of course the broker has to be paid for their work - but one time the best deal I could get myself was obtained by a broker on better terms from the same lender. And they split the introducer fee. It can be a very strange market.

Barclays always has a number of different schemes running. Some of their deals have minimum loan size restrictions.

They currently have two offset deals one is for a minimum loan size of £150k and the other has no minimum. Both deals are at 70% LTV.

You're right, First Direct and ING are direct only. Don't know much at all about ING's lending crieria as they're relatively new to mortgage lending in the UK. I have heard that they require 3 years accounts. I would really like to hear views from any contractors that have recently applied for a mortgage with them.

I agree that for several months First Direct and HSBC were providing some very competitive deals. I was surprised to hear that some contractors have got away with just one years accounts, what I can confirm is that I rung them the other day to check their criteria and they asked for a minimum 2 years accounts with 1 years projected income from the accountant.

The good news is that many of the other lenders have started to get their act together and are now competing with Fisrt Direct.

The reason why sometimes you get a better deal throgh a broker is because lenders from time to time offer special exclusives through particular networks that brokers are members of. But equally they sometimes offer direct only deals, it is referred to us dual pricing. All brokers are against dual pricing.

By the way not all brokers charge a broker fee. Those that don't simply rely on the introducer commission that they receive from the lenders. There are also brokers that charge a broker fee but reimburse the client the introducer fee they receive from the lender. We give clients the choice.

[ASB]

Good choice Kaiser78. Woolwich Barclays have excellent offset mortgages.

The top three lenders for offsets currently are:

Woolwich (Barclays)
Scottish Widows
First Direct

John

I think the Barclays deal only works if you're borrowing quite a lot? Though it might have changed, I think it was 200k loan and 60% LTV to get a decent rate.

For my particular circumstances a few months back FD were miles better than anything a broker could get (130k on 180k). ING were close. But both are of course direct only now and fairly picky. Previously I've had much better deals through a broker than I could get myself. Ultimately of course the broker has to be paid for their work - but one time the best deal I could get myself was obtained by a broker on better terms from the same lender. And they split the introducer fee. It can be a very strange market.

[Freelancer Financials]

I did it all through Barclays in the end as theirs was a tracker product - done and dusted in 3 weeks, including the ISA transfers for myself and Mrs K78. Seemed to offer more flexibilty than the IF product from what I recall.

Good choice Kaiser78. Woolwich Barclays have excellent offset mortgages.

The top three lenders for offsets currently are:

Woolwich (Barclays)
Scottish Widows
First Direct

John

[kaiser78]

Hello again,

Intelligent Finance (IF) Offset mortgage was the perfect choice for this. It's a real shame that when Lloyds TSB acquired the HBOS group which IF was part of, they decided to close the IF brand for new business. We took so many contractors to them.

I agree that your mortgage requirements were very specific. To have an offset mortgage linked to an ISA savings account, the ISA has to be set-up with the same lender. That means that if your ISA is set-up with a different provider, you have to transfer it over.

I wonder how many contractors are using Intelligence Finance offset mortgage? They recently made an announcement from 1st April 2010
You'll no longer be able to:

1. Apply for additional borrowing on your mortgage
2. Switch your mortgage to another Intelligent Finance mortgage product
3. Take your existing mortgage loan to a new home (regardless of amount)

That's a real shame.

John

I did it all through Barclays in the end as theirs was a tracker product - done and dusted in 3 weeks, including the ISA transfers for myself and Mrs K78. Seemed to offer more flexibilty than the IF product from what I recall.

[Freelancer Financials]

Moi ? I knew what type of mortgage I wanted (offset mortagage using ISA cash savings accounts as the offset). Given the very few places that offer this I was telling the broker what was available instead of him advising me. And when he did take up the application on my behalf he dragged his heels and I was always having to chase him. It was just easier for me and less time consuming to sort it out directly. Job done !

Hello again,

Intelligent Finance (IF) Offset mortgage was the perfect choice for this. It's a real shame that when Lloyds TSB acquired the HBOS group which IF was part of, they decided to close the IF brand for new business. We took so many contractors to them.

I agree that your mortgage requirements were very specific. To have an offset mortgage linked to an ISA savings account, the ISA has to be set-up with the same lender. That means that if your ISA is set-up with a different provider, you have to transfer it over.

I wonder how many contractors are using Intelligence Finance offset mortgage? They recently made an announcement from 1st April 2010
You'll no longer be able to:

1. Apply for additional borrowing on your mortgage
2. Switch your mortgage to another Intelligent Finance mortgage product
3. Take your existing mortgage loan to a new home (regardless of amount)

That's a real shame.

John

[Jeebo72]

er I use first direct and they are brilliant... you really can do this yourself. Also remember that indie financial advisors make money some how ... instead of paying them, ask for this (fee) as a discount from the suppliers. ... it's all very easy.

[kaiser78]

You sound a little difficult to please kaiser78! Why would you go direct when a specialist mortgage broker is prepared to do the work for you, save you the time, and not charge you a broker free?

You sound like an interesting challenge!

John

Moi ? I knew what type of mortgage I wanted (offset mortagage using ISA cash savings accounts as the offset). Given the very few places that offer this I was telling the broker what was available instead of him advising me. And when he did take up the application on my behalf he dragged his heels and I was always having to chase him. It was just easier for me and less time consuming to sort it out directly. Job done !

[Freelancer Financials]

Mortgage Broker

e.g when lender offers a good deal and is not prepared to work with mortgage brokers, like First Direct ?

Hi Lumiere, your correct.

First Direct stopped using mortgage brokers and IFA's from January 2008. You can only apply to them by phone or internet. Which means that you have to deal directly with some customer service representative over the phone who is more than likely, inexperienced and doesn't have a clue how to deal with you. This is not just my opinion but that of many contractors who have applied, been let down and come to us. The problem with lenders like First Direct is that they have a simplistic view of what qualifies as relevant earnings for lending purposes. The standard criteria used for assessing contractors makes it difficult for the majority of contractors to apply to First Direct.

Let me tell you what the typical lending criteria is for First Direct:
They will ask for 3 years accounts, and use a multiple of 3.5 times your Ltd company net profits. If you don't have 3 years accounts, they will sometimes consider two years accounts as long as you can show them a current contract with a minimum of 6-12 months left to run. The problem with this type of lending criteria, is that in most cases, contractors accounts do not always reflect their full potential earnings.

However, if you're a contractor with 3 years accounts and sufficient net profits which fit with First Direct's standard lending criteria (and their mortgage deal is good) go ahead.

A good Contractor specialist mortgage broker will have direct contact with key people within the lenders Head Office underwriting teams and hopefully, like ourselves, will be able to base your earnings on a simple multiple of your contract rate alone.

This means that you don't have to rely on the traditional method of using accounts, which will not fully reflect the total earnings that you have at your disposal, for income verification on a mortgage application.

John

[Lumiere]

Why would you go direct when a specialist mortgage broker is prepared to do the work for you, save you the time, and not charge you a broker free?

e.g when lender offers a good deal and is not prepared to work with mortgage brokers, like First Direct ?

[Freelancer Financials]

Mortgage Broker

Have a look directly - I tried Contractor Money and they didn't come up with anything I hadn't already seen myself, helpful as they were though.

You sound a little difficult to please kaiser78! Why would you go direct when a specialist mortgage broker is prepared to do the work for you, save you the time, and not charge you a broker free?

You sound like an interesting challenge!

John

[kaiser78]

Which broker is flavour of the month? Used ContractorMoney in the past (and happy with their service) but they've not replied to my recent enquiry so keen to look elsewhere.

Any recommendations?

Have a look directly - I tried Contractor Money and they didn't come up with anything I hadn't already seen myself, helpful as they were though.