Advising on contractor mortgages – what brokers need to know
Temporary and contract staff placements are on the rise, with the rate of growth of these jobs accelerating to a seven month high in November, according to the latest Markit/REC Report on jobs1. With many workers attracted to the flexibility that contract work offers, brokers should be well prepared to deal with an increasing number of this type of client coming through their doors. In our latest blog, we explain the key things you need to know about professional contractor mortgages, and how you can best advise clients looking for this type of product.
What is a contractor?
A contractor should not be confused with a Pay as You Earn (PAYE) candidate or sole trader. While a contractor is in dependent of the client they work for and their pay roll, they tend to only work for one client and are usually hired on fixed term contracts. They are also usually specialists in their chosen field and as such can charge premium rates for their services. As such, contractors are typically common in sectors such as IT, accountancy, banking and engineering, among others.
What legal considerations should be made when dealing with a contractor?
There are a number of legal issues to take into consideration whe n advising a client who is a professional contractor. The first is if the client is using an Employee Benefits Trust, which takes income from the contractor and sets it aside, usually offshore, to be paid to the contractor in the future. While similar to a pension, this trust is a way of offsetting tax allowance, and while technically legal will not be accepted as income by many lenders.
Another consideration is whether the client is working offshore. When applying for a mortgage with Leeds Building Society, a contractor can work offshore, but any income must be converted to sterling and paid into a UK bank account.
Furthermore, the income must go through a Ltd company or Umbrella company that is UK registered and the contractor must be a UK taxpayer when applying for a mortgage with Leeds Building Society.
What means must the contractor have in place to apply for a mortgage?
Because of the perceived risk, the income requirement for a professional contractor mortgage will usually be higher than that of a client on a permanent contract. At Leeds Building Society, contracts from the client will also be required to cover a 12 month period with at least one renewal or recontract, and there can only be a maximum gap of six weeks between each contract. The last three months of business and personal bank statements will also be required, and income will need to be calculated on a maximum of 46 weeks. Other documentation may be required.
What else should brokers be aware of when submitting an application to Leeds Building Society?
Brokers should add notes to the Decision in Principle (DIP) to confirm that the application is for a contractor, and include the dates and day rates (including number of days contracted to work) in the last 12 months. As usual, brokers should ensure upfront packaging is correct and all the minimum requirements submitted together to improve the speed of the offer being issued. For more information about professional contractor mortgages at Leeds Building Society or to speak to one of our team about general enqu iries or specific cases call 03450 50 5555. We may monitor and/or record your telephone conversations with the Society to ensure consistent service levels (including colleague training)