Contractors – Why cheapest doesn’t always mean best.

With mortgage interest rates at their lowest level ever, the temptation is strong for those with mortgages coming to the end of initial rate periods to jump on the lowest rate available and lock in. Especially with the economy slowly but surely recovering from lockdown restrictions and inflation levels increasing.

As with many things in the financial services industry, however, the devil is in the detail. That means that it is not always the best solution to merely go for the lowest initial rate. With almost all mortgage products on the market, there will be various fees attached. Often, headline grabbing low rates are coupled with fees that mean when comparing the best option out there, cheapest doesn’t always mean best.

“Many of our clients see headline rates and naturally want to try and get a piece of the action” said Steve Clements, Senior Consultant at Professional Contractor Mortgages. “In reality however, just a small amount of analysis can reveal that actually, going for the lowest rate blindly, can end up costing potentially hundreds more over the initial term.”

Many lenders offer two or even three variations on a product, with varying levels of interest rate and arrangement fee. Often, especially in the current climate, the rush to avoid exorbitant lender Standard Variable Rates (SVR) at the end of current deals, means borrowers are blinded by the rate.

“Because of such a wide range of products on the market, the difference between the lowest rate available and one several down the list can often be as low as 0.1%” continues Clements. “The arrangement fees however can differ by often several hundred pounds, meaning that while the low rate in theory saves you £100 per year in interest per £100,000 of borrowing, an additional £500 or more in arrangement fees can very quickly negate any benefit over that period.”

There are far more factors to consider than just interest rate and fees, however, with fewer and fewer borrowers fitting the traditional standard lending criteria, and the cost of an application going wrong can be even more severe.

“Choosing the wrong lender and being declined a mortgage could find you in the position of being a mortgage prisoner, stuck with your current lender until such time passes that we can overcome the roadblock” adds Clements. “While initial rates are unprecedentedly low right now, lender SVR’s continue to remain anywhere between 3% and 5% and even beyond. That means even six months stuck on the lenders variable rate could easily cost thousands in excess interest payments.”

For Contractors, obtaining a mortgage can be difficult when going directly to the bank, as mortgage underwriting teams are faced with enormous backlogs at present, due to a combination of low rates on offer, and a race for many to take advantage of the Stamp Duty holiday deadline at the end of the month. This means that often, the underwriters who deal with direct business, have seldom dealt with contractors and the various methods of renumeration.

“Now more than ever, a ‘right first time’ approach is so important for Contractor Mortgages” concludes Steve. “Even one small mistake that can be easily rectified can add several weeks onto the underwriting timescale. If an underwriter tries to assess Contractor Income incorrectly, however, that could be a fatal mistake.”

With traditional underwriting methods based around predominantly employed or self-employed income, the key to unlocking the borrowing potential for contractors lies in income assessment. At Cleerly our team have spent decades dealing exclusively with Contractors and can ensure that you are assessed based on your contract rate, rather than either trading accounts or pay slips.