By Tony Harris, MD of Specialist IFA ContractorFinancials
With its continuing pessimism about the housing market, the press offers little reassurance to those looking to gain a foothold on the property ladder and secure their place by re-mortgaging. In this article, we assess the property market to see whether there is some positivity amidst the doom and gloom for freelancers and contractors.
According to some commentators, we should all expect to see the base rate rise to 3%. The Resolution Foundation has warned that by 2018, over 2 million homeowners could be facing mortgage repayments that will eat up at least one third of their monthly disposable income.
Potential or existing homeowners should not ignore these warnings when looking for a new mortgage. In practice, most borrowers are taking advantage of fixed-rate mortgages, which protect borrowers from interest rate rises for a few years and are easily the most popular type of scheme.
If people on fixed incomes are worried about the future, what hope is there for freelancers? In the aftermath of the Mortgage Market Review (MMR), there is widespread concern that mortgage lenders will reject potential borrowers who have a variable or unpredictable income, especially if they have an interest-only mortgage or have very little equity in their home.
This is a particularly important consideration for contractors because the margin for error in any mortgage application will be that much higher. Furthermore, in an era where credit ratings have taken on so much importance, a failed application may seriously dent your score and the chances of securing a mortgage through another route may be considerably reduced.
Fortunately, most borrowers are not fools and neither are lenders. A mortgage adviser will ensure that your mortgage repayments are within your budget and will even stress test your application by calculating repayments at rates of, for example, 7%. This should avert a financial crisis that neither you nor any reputable lender would wish to encounter. To further brighten the picture, interest-only schemes are still available and many lenders continue to offer loans up to 95% of the value of a property. So it is not all doom and gloom for the first-time buyer.
House price stability
The IMF believes that the UK is at risk from rising house prices because they threaten households with increasing levels of debt that “could be more vulnerable to income and interest rate shocks.” As a result, the IMF is putting pressure on the Bank of England to take action to prevent the bursting of a potential property bubble.
The IMF suggests that a limit should be set, restricting the amount of high loan-to-income lending that banks are allowed to offer. It has also called for measures to make it more expensive for lenders to provide mortgages that they consider exceeding standard borrowing, increasing the risk weighting that is applied by the regulator. If implemented, this will inevitably result in higher mortgage rates as banks try to recover their costs from customers.
The IMF also recommends that steps be taken to calm the property market by either shaking up the Help to Buy mortgage guarantee scheme or even shutting it down early. However, in the Queen's speech recently, the government promised support to Help to Buy and discounted any rumblings that the scheme would be axed.
The UK property market seems to be calming down. Since the introduction of MMR in April, new borrowers now have to comply with more rigorous affordable-lending rules. Mortgage applicants have to provide more detail about their income and expenditure and this in turn has resulted in substantially longer processing times as lenders sift through all the extra paperwork. Such delays in mortgage processing have put some mortgage deals at risk and there is growing evidence that lenders are getting tougher. Lloyds and NatWest have refused applications for loans of £500,000 or more by applicants who are seeking to borrow four times their income. Some lenders are also ruling out mortgage terms longer than 25 years in order to avoid censure by the regulator.
Options for freelancers
Anyone would be forgiven for thinking freelancers have little chance in the property market. In fact, the prospects for property ownership look bright thanks to a buoyant contract market. The number of freelancers looking to step onto or up the housing ladder has more than doubled compared to last year. Lenders are undoubtedly experiencing some service issues in light of the changes brought in by MMR, but this seems not to have prevented many contractors from getting on to the housing ladder.
To ensure that your application is successful and to keep your credit profile clean, make sure you have all the relevant paperwork to hand when you meet your lender:
• A copy of your current contract
• Photo ID
• Three months' personal and company bank statements
• Two utility bills from the last three months
Be prepared to wait. The average for mortgage processing is now around 6 to 8 weeks, assuming all the information is presented correctly from the outset. If you are under pressure from your vendor’s estate agent, your mortgage adviser should be able to give you an idea of how long your chosen lender will take to process your case and even speak to the estate agent on your behalf to provide reassurance. Most people are in the same boat, so if the estate agent threatens to show new potential buyers round your chosen property, you can be sure that would only delay the sale further. We expect things to improve in the months to come as lending staff adjust to the post-MMR landscape and their speed and ability to process mortgages improves.
If you are seeking to buy a home rather than invest in a property, then you can rely on bricks and mortar. As a freelancer, you should be able to become a freeholder or leaseholder and, providing you do not over estimate your ability to make repayments in the short-term, you should be financially better off in the long-term.