Buying a home as a contractor can be an exhilarating trip. Even more so when that home is a new-build property. There’s excitement, expectation and, of course, dread. You’ll be the first person to ever live under that roof, more often than not*.
You need assurance that everything — including your mortgage offer — has a solid foundation. You deserve no less than 100% confidence in your mortgage being available when your home is ready.
But we’re finding that this is not the reality of what is happening on the High Street. Mortgage advisers are turning contractors away because they are unable to work out their payment structure. Often, this happens just as the developers are applying the finishing touches to their new home.
So the rollercoaster ride that leads to a contractor mortgage is derailed leaving clients confused, demoralised and often ends in tears. Worse still, this can prove to be an expensive exercise.
Make sure your mortgage adviser understands your payment structure. Moreover, that they know how to package a mortgage application to reflect contract earnings. We can’t help you with the bricks and mortar so, as specialist mortgage brokers, we’ll leave the hard hats and strutting to the adverts.
Where we can help is with arranging the mortgage loan to help you get onto the property ladder. You’re not bound by a developer’s choice. You don’t have to use accounts and pay-slips to prove your affordability. We’ll arrange your mortgage using your gross contractual income. Moreover, you won’t need to find the eye-watering deposits many new-build mortgage lenders demand.
How to make buying a new-build a smooth ride for contractors
For a contractor, new-build mortgages conceal all manner of hidden surprises. If you don’t know the lie of the land, few are pleasant, with pitfalls a plenty. We need to prepare you for your journey into comparative darkness and make sure you see the light at the end of the tunnel. So, here are our 10 top tips to ensure that when your home has been built, your mortgage funds are ready at the same time.
1. Don’t settle for less than your income deserves
Many of the mortgage lenders involved with builders and developers are not contractor-friendly. By that, we mean they don’t know how to assess your affordability using your contract rate.
Instead, they will try to work out how much you can borrow based on your accounts. As a limited company contractor, that’s going to hurt. After your accountants have worked their magic, you’ll find your annual ‘income’ decimated.
Now here’s what you need to understand about lenders who provide genuine contractor mortgages. Most do so only through appointed mortgage brokers. That’s because specialist mortgage brokers know how contracting works. Thus, they can then highlight your true affordability on your mortgage application.
Don’t ever confuse a self-employed mortgage with a contractor mortgage; they’re not the same thing at all.
2. Limited access to the marketplace
In a similar vein, trying to get a mortgage using your contract limits your options. It’s not just a case of a lower mortgage offer. Some lenders won’t offer you a mortgage at all.
The problem, besides the obvious?
As a contractor, in-branch staff may well mark your mortgage application as high risk. But you won’t know that at the time. They may even have offered you a decision in principle based on your earning capacity but, as your contract is short-term, an underwriter unfamiliar with contracting may then reject it. You’ll only get to know that sometime after an in-branch advisor has sent your application to head office.
Again, rejection like this can tug both your heart and purse strings. Make sure your mortgage lender or mortgage broker has comprehensive knowledge of contract-based underwriting.
3. Deposits: no flat rate
In the main, new-builds attract larger deposits than for existing properties. For flats, expect to have to find 25% and for houses 20%.
The theory behind this stance is simple. Lenders believe that those buying brand new properties are willing to pay premium rates. There was a time when investing in property was ‘as safe as houses’ but today, a brand new home can devalue the moment you get the keys, just like a new car. A bigger deposit protects lenders from this phenomenon. It gives them a plumper cushion if you can’t keep up the monthly payments.
4. What’s a new build when it’s not a new-build?
There’s then an even deeper issue that affects all homebuyers, not just contractors. No two mortgage lenders take the same approach to new build mortgages full stop. They can have different, yet distinct, interpretations of new-build. For some, the term means a brand new home either under construction or one in which no one has yet lived. Others deem a new build to be any property built within the last 5 years, irrespective of occupancy.
Another anomaly is building conversions. Some class older buildings which have been converted by developers into flats or homes as new build.
5. Dangling carrots: avoid them if they smell rotten
In an ideal world, developers want houses sold before they have finished building them. To that end, you must beware of dubious tactics on site to get you to part with your cash.
Incentives are one such carrot you may see dangled before you but beware. Some incentives may be are bona fide but others are not altogether so wholesome. A developer will offer an incentive in one hand but take it away with the other. ‘Cashback’ is a perfect example. Here’s what I mean…
6. The Cashback Catch
…developers or lenders look to entice buyers with 10% cashback incentives but the deal may mean you can only borrow 90% of the value after your deposit. This leaves you looking for an unexpected 10% when you have probably already maxed out your credit.
This is how the scenario could play out if you’re not careful. Imagine your new build property will cost you £200,000 upon completion. Through us, you could get that mortgage with only a 10% deposit. That means the balance of your mortgage is £180,000. And that’s it; no ‘cashback’. A straightforward mortgage so you know where you stand, which we like.
Now here’s the same situation, but with a 10% cashback deal. The cost of your home is still £200,000, but the effect of the cashback means it’s worth £180,000. Statute dictates that mortgage lenders must implement responsible lending guidelines. This being so, they may only offer you a 90% LTV mortgage on that £180,000.
7. Watch out for completion deadlines
A lot can happen in six months, especially for contractors but it’s not your contract we’re concerned about here. Rather, it is the maximum duration of a new build mortgage offer that could sting you. If your new home isn’t planned for completion within six months, you’re limited even further. Most High Street lenders restrict their mortgage offers to bein available for six months.
With our connections, we can get extended completion deadlines for new builds. And the even better news? That’s still with the mortgage lender who asks for only 10% deposit.
8 Do you have reservations?
Affordable housing is a huge hot potato in parliament, often delegated to local councils. The responsibility of housing local residents is likewise an issue devolved to borough councils. Section 106 even encourages developers to build affordable housing and house local residents. Yet some lenders get cold feet if the home you want to buy is in the vicinity of either.
Both the Halifax and Leeds building societies have open minds where Section 106 restrictions are in place. The two contractor-friendly lenders will consider new-build mortgages, where other lenders are inflexible. Contractors should contact the local council to check what government schemes are available. Help to Buy Equity loans and shared ownership may be available in the locale.
9. Halifax again rises to the occasion
In big cities, land comes at a premium. When there’s no ground left to build on, the only way is up. You only have to look across any city skyline to see it pockmarked by high rise flats and apartments. In many instances, you’ll see cranes too, heralding more blocks on the way.
Yet building homes in such close proximity deters many mortgage lenders. They limit the number of storeys against which they will offer new build mortgages. Halifax will consider a contractor’s mortgage application for a high rise flat, on one condition. That being that a surveyor’s appraisal must be positive in their assessment report. Other contractor-friendly lenders are adopting this approach, too. If your new-build flat is one of many storeys, make sure that the lender you approach is okay with this.
10 Lender limitation rule to development block exposure
You know the phrase, “Don’t put all your eggs in one basket”? Well, our last tip for contractors looking to buy a new build is along those lines.Many lenders restrict their lending per development block. They will approve no more mortgages if they are lending against 25% of the block already. If you’re one of the last to buy there, you may find your mortgage options limited further.
And do be careful. Developers know this and may try to sell the last few unoccupied flats at a discount. If such a discount tempts you, do your homework before signing on the dotted line. Get a firm mortgage offer, not just a decision in principle.
As an option, we have contractor-friendly lenders in our arsenal who have no such rule. They set no limit on the amount of plots per development they will lend against.
And that’s it — ten tips that will help protect you in your hunt for a new build home.
Always remember: you’re a contractor earning good money. Don’t let developers boss you around. Don’t settle for a mortgage lender pushing you down the self-employed route.
You can buy a new build home and by using your contract rate. Don’t settle for anything less.