Why do lenders penalise contractors?

Back in 2008, the financial market suffered one of the worst recessions in living memory, as various pillars of the financial services industry reached breaking point across the globe. A recession which various areas of the financial services industry have still never recovered from.

Much was made of the impact of the housing markets role in these problems, notably the sub-prime market which for many years had been a scarcely unregulated arena.

Prior to the crash, with banks and financial institutions largely in a financial haven, products began to appear on the market aimed at those either without a deposit, with irregular income patterns, or with historical credit issues, with many of the usual, traditional affordability checks being completely ignored.

Lenders even took to offering higher than 100% mortgages, in fact in some instances lending up to 130% of the property’s value, to help with moving costs or relocation costs, using a combination of secured and unsecured loans within one package.

The impact of this once rates began to rise was of course disastrous, with many people having taken on such loans already stretching themselves to become homeowners rather than renting. Even a small increase in interest rates led to significantly increased repayments, which soon became unaffordable, leading to repossession rates amongst the highest on record.

One of the side effects of this period was the creation of a grey area when it came to mortgage candidates. An area which encapsulated all applicants who were unable to follow the ‘standard’ process of obtaining a mortgage, namely a good credit score, large deposits, and a regular provable income.

The area which attracted the most critique within this field globally when the dust settled was undoubtedly the raft of mortgages granted to those with historical credit issues, who resorted to products on offer from specialist Lenders with higher rates than were available on the High Street. These products often included the much-maligned self-certified mortgage where no physical proof of income was needed. These have not been available in the UK for many years.

It was unscrupulous mortgage brokers using the loophole of self-certification for people who should never have been able to borrow as much as they did in the first place. The upshot of this as far as Contractors are concerned, was that products specifically designed for people in their position were withdrawn from the market almost overnight.

Thankfully, those days are now over. While there is still no such thing as a self-certified mortgage available to UK borrowers, there are now bespoke products available to Contractors based on the gross value of your contract rather than the usual method of either employed or self-employed criteria.

The truth is that it was simply a lack of understanding of how Contractors work and pay themselves that led to the creation of this enormous area of doubt within the market, leaving contractors with the raw end of the deal despite having virtually everything else in their favour.

Now, Contractor friendly banks will assess you based on your own merits as a Contractor.

To find out how much you could borrow based upon the gross value of the contract with bespoke mortgage products, get in touch with us. 

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