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What the BoE’s 1.75% interest rate means for contractor homeowners

The Bank of England (BoE) last week increased its base rate to 1.75% from 1.25%. This was the sixth consecutive rise in interest rates, taking it to the highest level since the credit crunch in 2008.

But as many temporary professionals are asking us, writes John Yerou, chief executive of Freelancer Financials, what does this significant leap mean for borrowers who are contractors?

Up, up and away
Struggles facing the economy have led to a prediction of 13% inflation by the end of 2022. Economists reckon it could potentially reach 15% in 2023. These figures are far cries from the BoE’s target inflation rate of 2%.

These predictions, against a background of soaring energy bills and spiralling food prices, have forced the BoE’s hand.

Over the last three quarters, the bank’s Monetary Policy Committee has steadily nudged up interest rates from its historic low of 0.1%. This week’s 0.5% increase, however, represents a more forceful move as the BoE grapples to contain inflation.

Additional rate rises by the bank look certain, driven by:

  • the worst credit squeeze on consumer spending in years,
  • severe labour shortages, and
  • spiralling high food, energy, and fuel price hikes.

With the ever-growing economic challenges facing the economy, the question isn’t if increases are coming, rather — it’s when, and by how much.

Get in touch with UK Contractor Mortgages today to discuss your Buy to Let & Residential Mortgage requirements.

Will interest rate hikes curb inflation?
This latest interest rate rise to 1.75% is another blow to economic confidence. It places yet more financial strain on recovery as everyone continues to grapple with rising costs.

The reality is that it all makes the impending recession a self-fulfilling prophecy. How so?

Well, the governor of the Bank of England, Andrew Bailey, has been facing mounting pressure to keep up with the pace of global central banks. Both the European Central Bank and the US Federal Reserve have implemented rate increases of 0.5% and 0.75% respectively. This, in turn, has forced the Bank of England to act similarly to try and rein in rising inflation.

But we now question whether raising interest rates is the best way forward under the current conditions.

The textbook approach (isn’t going to cut it)
Any decent textbook on the topics of economics and finance will tell you that, yes, increased rates are the primary tool for reducing inflation. It reduces demand and helps to bring inflation under control.

And this is exactly what the BoE is doing; it’s textbook. By increasing the cost of borrowing, it’s trying to discourage spending. This theoretically leads to lower economic growth and lower inflation.

But will increased interest rates curb inflation in the traditional manner? In our humble opinion, unfortunately, no. That’s because the challenges we face are, to a great extent, unprecedented.

The catalyst for soaring food, energy, and fuels prices is the exceptional melting pot of global factors we face today:

  • successive covid lockdowns,
  • supply chains crippled (some fatally so)
  • the war in Ukraine, and,
  • worldwide labour / skills shortages.

This mix does not represent the usual backdrop for recession!

Get in touch with us today to speak with the UK’s Best Contractor Mortgage Broker.

Should contractors be panicking yet?
The 0.5% base rate rise and spiralling inflation headlines will leave many homeowners deeply anxious. And while it represents the largest individual hike in nearly 30 years, it wasn’t actually a surprise.

Those contractors old enough to remember the 80s and 90s may view today’s jump as no reason to panic (just yet).

But for the group of homeowners who’ve only ever known a sub-1% base rate since purchasing their home, it will certainly set off alarm bells.

It’s worth reiterating here that rates are low compared to historic levels. But the rise will affect monthly repayments and individuals’ abilities to borrow. So let’s look at the different scenarios.

What does this 27-year high in interest rates mean for UK borrowers and homeowners?
In the short term, the increase will undoubtedly spur another round of mortgage rate increases from ALL major high street lenders, including contractor-friendly lenders.

Interest rates are already 2% higher than they were at the start of the year, despite the base rate only moving up 1.25% over the same period.

Homeowners on tracker rate mortgages or their lender’s standard variable rate will see their repayments increase. Predictably, this group (some 21% of UK mortgagees), will be the first and hardest hit.

Mortgage borrowers on fixed rates will be protected from the immediate effects of the rate rise. But if you’re a contractor on fixed-term deal which expires in the next 12 months, you will need to be prepared. When you come to remortgage, you’ll see a sharp rise in the interest rates available.

What a mortgage broker can do for you in these uncertain times
Over the past few months, our mortgage brokers have played key roles in helping contractors and self-employed clients ‘lock-in’ competitive interest rates for the future. But the landscape on which they’re doing battle is changing.

We’re already seeing lenders tightening underwriting criteria for first-time borrowers, home-movers and further borrowing.

Applications are taking far longer to process because of increased ‘due diligence’ (whether that due diligence is necessary or not). And affordability calculators are changing every week, shrinking the window of opportunity even for borrowers who may have previously considered themselves well-heeled. These dynamics are making it tougher and more challenging to place mortgage applications.

Our brokers are having to demonstrate incremental creativity and tenacity to pair and select the most suitable lenders. Even so, we retain our ethos of matching clients to lenders whose products and services meet their specific needs. This ensures the underwriting teams we deal with take a common-sense view of the bigger picture — as far as affordability checks go.

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

The current backlog at lenders: sorry, lenders but you’re not helping yourselves!
Another problem mortgage brokers face when base rates increase is that lenders almost immediately start withdrawing their current products.

Moneyfacts has recently reported that the average shelf-life of any single mortgage product is 17 weeks. That represents the shortest shelf-life on record. This lack of notice creates mayhem for mortgage applications in the pipeline that haven’t been secured.

Many of our clients have seen this coming, however. In recent weeks and months, our brokers have been receiving calls from clients with over 12 months remaining on their fixed term. They’ve been demanding urgent reviews in order to lock in a competitive fix rate; so concerned are they that interest rates are spiralling out of control.

If you’ve not acted yet, it’s not too late. No matter how difficult market conditions become, there are always options available through the right channels. We can help people achieve their homeownership dreams, irrespective of how they are employed. Yet contractors please note, the earlier you engage a mortgage broker’s service, the greater the options and support you will receive.

Moving forward, flexibility from lenders is going to become increasingly important. In the current climate, using rigid tick-box practices for underwriting will fail to serve the needs of many self-employed property buyers. Our goal is to ensure that, even for those most complex of income structures, we find wiggle room — with at least one lender!

Housing market
Over the last couple of years, we have seen extraordinary demand for property purchases. Low interest rates that have made getting a mortgage a lot easier have supported this trend.

But last week’s 0.5% interest rate jump will slow house price growth. Potential homebuyers will become more hesitant over fears of rising interest rates and inflation. However, we don’t foresee a crush or drop in housing prices as we did after 2008, just a cooling-off period. This isn’t a bad thing!

We will see a power shift though. Up until recently, all the negotiating power has been with the sellers. This might start shifting to buyers in the coming months as dwindling interest forces property owners to sell at more reasonable prices.

Behind the headlines…
It was inevitable that mortgage interest rates would increase eventually. They were never going to remain abnormally low forever.

In the short-term lenders will tighten their affordability calculators and underwriting criteria until the dust settles.

And although most lenders have accommodated specialist income such as that of limited company or umbrella contractors in more recent times, independent professionals may find more barriers than their permie peers in the interim.

Nonetheless, our belief is that the fundamentals of the economy are fine. So ignore the scaremongering from some quarters.

Keep in mind, the circumstances affecting today’s surging inflation and cost of living have been brought on by Covid lockdowns creating temporary labour shortages and production issues. The current supply cannot meet the demand – it really is as simple as that. The invasion of Ukraine has also exerted a serious impact on inflation, affecting energy and fuel prices. While serious, none of these aren’t permanent fixtures.

We should also recognise that lenders increasing interest rates isn’t always a response to a change in the cost of funds alone. Sometimes, like now, it’s a response that will help them manage their service levels.

Time after time this has occurred in the past, notably when banks are struggling to cope with the volume of applications. They push up rates to make them less attractive to borrowers. They’ll then reduce rates once they can resume service levels!

Many banks are still understaffed and struggling to cope with application volumes. Swathes of their staff still work remotely, another factor making applications take nearly twice as long as before covid.

What contractor mortgage-holders should do next
One of the key ways to determine where lenders’ interest rates will go (next) is to look at SWAP rates.

SWAP rates are what lenders pay to financial institutions in order to acquire fixed funding for a specific duration. This could be anywhere between one to 10 years.

The cost of this SWAP rate will then be used to price up mortgage products for lenders to secure a profit margin. At the time of writing, current three, five and ten-year money funding is all lower than two-year funding rates, which implies that rates will peak — but start to come back down again.

As a contractor with a mortgage, what your next move is will depend on your current home loan small print and its associated fixed term. We’ve outlined different scenarios for remortgaging on our blog for you to consider. Alternatively, ask us about your current situation and our brokers will outline the avenues open to you. But do ask, and at the risk of repeating myself — act.

By John Yerou

Source: Contractor UK

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Mortgage affordability test scrapped by Bank of England

Mortgage borrowing rules have been eased after the Bank of England scrapped an affordability test.

The “stress test” forced lenders to calculate whether potential borrowers would be able to cope if interest rates climbed by up to 3%.

Removing the test may help some potential borrowers get loans, such as the self-employed or freelance workers.

But other rules such as strict loan-to-income limits will not make it easier for most people to get a mortgage.

The withdrawal of the affordability test was announced in June but has come into effect on Monday.

Get in touch with UK Contractor Mortgages today to discuss your Buy to Let & Residential Mortgage requirements.

“Scrapping the affordability test is not as reckless as it may sound,” said Mark Harris, chief executive of mortgage broker SPF Private Clients.

“The loan-to-income framework remains so there will still be some restrictions in place; it is not turning into a free-for-all on the lending front.

“Lenders will also still use some form of testing but to their own choosing according to their risk appetite.”

In other words there will not be an immediate impact for borrowers as lenders will not need to change the way they assess loans.

However, some may well change their own rules in the future.

Mark Yallop, chairman of the Financial Markets Standards Board, said although the change would make it “slightly easier” for some borrowers to get a mortgage, he did not think with would have a significant impact.

“The biggest constraint on new mortgages is the ability of borrowers to afford a deposit,” he added.

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What was the scrapped test?
The mortgage affordability test was introduced in 2014 as part of a widescale tightening up of the mortgage market to ensure there were no repeats of the mis-selling scandal that partially contributed to the 2008 financial crisis.

The rule was put in place to ensure that borrowers did not become a threat to the financial stability of lenders by taking on debt they subsequently might not be able to repay.

Lenders had to not only work out if borrowers could afford a mortgage at the rate they were being offered, but also work out how they would be affected if interest rates soared by 3%.

Borrowers who could not prove they could cope with such an eventuality might have been turned down for a loan on that basis, even if they could easily afford a mortgage at the existing rate.

For that reason the test was seen by some as a barrier for some borrowers.

“The rule change could have a positive effect on borrowers who have been disadvantaged when it comes to getting on the property ladder,” said Mr Harris.

For example, some potential first-time buyers who have been comfortably affording rents far higher than potential mortgage payments have failed affordability assessments.

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

What checks remain for borrowers?
There are some key protections in place to help ensure that borrowers don’t take on loans they may not be able to afford.

The main one is a loan-to-income “flow limit” which limits the number of mortgages that lenders can grant to borrowers at ratios at or greater than 4.5 the borrowers’ salary.

In short, it is very rare that a lender will consider a higher loan-to-income ratio because of the restriction.

After a review of the rules in 2021 the Bank of England’s Financial Policy Committee judged that “the LTI flow limit is likely to play a stronger role than the affordability test in guarding against an increase in aggregate household indebtedness and the number of highly indebted households in a scenario of rapidly rising house prices”.

“The change in the affordability rules may not be as significant as it sounds as the loan-to-income ‘flow limit’ will not be withdrawn, which has much greater impact on people’s ability to borrow,” said Gemma Harle, managing director at Quilter Financial Planning.

The FCA’s Mortgage Conduct of Business responsible lending rules also require a wide assessment of affordability.

By Simon Read

Source: BBC

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The ‘gig economy’ is not the home buying hurdle you may think – Whitear

One of the most common misconceptions among the self-employed is that securing a mortgage to buy a home is fraught with obstacles, therefore making it extremely difficult or practically impossible to get onto the property ladder.

Despite this sometimes being the case in the past, the market has evolved significantly to make it easier for those with a self-employed status or irregular income to obtain a mortgage.

In fact, catering for the borrowing needs of the self-employed has become vitally important as this demographic represents a strong proportion of UK population. This was highlighted in April 2022 figures from Statista which showed that there were approximately 4.21 million self-employed people in the UK.

Get in touch with UK Contractor Mortgages today to discuss your Buy to Let & Residential Mortgage requirements.

Multiple incomes
Traditionally, a self-employed status has been commonly used to refer to freelancers, contractors and sole traders, yet it can also extend to company directors, individual partners and anyone not in a salaried employee position. In addition, the emergence of the gig economy – where people earn an income per project or task – means that those earning multiple incomes can also fall under the self-employed umbrella.

And this is an area which is enjoying an impressive growth spurt.

According to ‘Fuelling the Global Gig Economy’, a report produced by Mastercard, an estimated 7.25 million are predicted to be working in the UK gig economy by the end of 2022. Which means that understanding and catering for this growing demographic is more important than ever.

Get in touch with us today to speak with the UK’s Best Contractor Mortgage Broker.

Tailored underwriting
For intermediaries looking to secure a mortgage for a self-employed client, one of the most important elements to consider is whether a lender can assess each application on its own merits rather than adopting a one-size fits all approach. This is because the fluctuating nature of self-employed income levels means no two applicants are the same, so tailored individual underwriting rather than the use of a blanket automated underwriting system can prove crucial.

In many cases, the mortgage products on offer to self-employed clients are to the same as those for employed borrowers: it’s how the loans are assessed that varies.

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

Strategies vary
Different companies have varying strategies on managing balance sheets, cash flow and the distribution of profits and dividends, which is why individual assessment by the lender is necessary. A manual underwriting process can provide lenders with the ability to look beyond a more ‘basic’ overview of incomes and creditworthiness for such borrowers.

Affordability is all about what the future will look like based on past performance and this is an area where specialist lenders and such an approach can make a real difference.

Traditionally, two to three years’ worth of audited accounts were required on application, with net profits and director’s remuneration plus dividends considered as income for those running a limited company.

However, different lenders have differing approaches. For example, at Foundation Home Loans, we consider a minimum of one year’s accounts, and where a company director owns 20 per cent or more of the company shares, they will be classed as self-employed.

Self-employed lending
Mortgages for the self-employed are a particularly important area for brokers to market because of the lingering misconceptions around them. In our own borrower survey, 62 per cent said they believed it was significantly more difficult to secure a mortgage as a self-employed person, although only 14 per cent had been turned down because of it.

A range of competitive and responsible lending options remain available to this essential component within the UK work force. It will be mortgage intermediaries who open those doors for those clients the specialist lending marketplace who will continue to lead the way in delivering the types of solutions which can make a real difference for the self-employed population.

By Mark Whitear

Source: Mortgage Solutions

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“Mortgage accessibility for self-employed only becoming harder”

External factors worsening affordability for the group.

Self-employed borrowers have always had to jump over extra hurdles in order to get a mortgage product, however this has only become more difficult given the current state of the financial market.

The cost-of-living and energy bills crisis have both impacted affordability, combined with the pandemic, rising inflation, base rate increases and the war in Ukraine – with the latter having affected fuel prices.

As such, people are paying more for the same, with wages not having increased in line with rising inflation, this has resulted in affordability for the self-employed having declined significantly.

“Self-employed borrowers have always found it disproportionately hard to get a mortgage compared to their counterparts with more traditional income streams,” according to Matt Harrison (pictured), sales director at finova.

Get in touch with UK Contractor Mortgages today to discuss your Buy to Let & Residential Mortgage requirements.

For example, he explained that in most cases, a self-employed applicant needs to show two or more years of company trading accounts as evidence of income, while an employed applicant may need just three months of payslips.

“This has only gotten harder following the COVID-19 pandemic. The way the pandemic impacted the economy has made it especially hard for people who are self-employed to borrow money,” Harrison said.

Early on during the pandemic, many mortgage lenders began to withdraw from the specialist market, or made significant changes to their self-employed criteria. This made it increasingly difficult for self-employed borrowers to access products and left them stranded, unable to buy unless they accepted much higher rates.

Harrison explained that government support for self-employed workers was not as clear cut as the furlough scheme, and many who accessed the Self-Employment Income Support Scheme (SEISS) grant are now finding that this has impacted the amount they can borrow, or which lenders they can use. The last date for making a claim was also September 30, 2021 – meaning the after-effects of the pandemic are still being felt by the self-employed, without a scheme currently in place to help support them.

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According to the Office for National Statistics, there are 4.8 million self-employed people in the UK, which makes up 15.1% of the workforce, a stark increase from 3.3 million in 2001.

With the number of self-employed on the rise, finding solutions for their house buying needs is only becoming more and more important, Harrison outlined.

“As well as more complex income requirements, a lack of education on situations specific to the self-employed can make it harder for these borrowers to secure a mortgage. Take incorporation relief, for example,” Harrison said.

He explained that to be eligible for incorporation relief an individual must be a sole trader or in a business partnership and transfer the business and all its assets, except cash, in return for shares in the company. In order to work out the amount one must pay Capital Gains Tax on, you must deduct the gain made when selling a business from the market value of the shares received.

Get in touch with us today to speak with a specialist Contractor Mortgage Advisor.

“There are many ways self-employed people release income in tax efficient ways, which means that communicating the company outgoings to the underwriter can be increasingly complex, especially when there may be spousal company shareholdings, umbrella companies or director loans,” Harrison said.

According to Harrison, these complex requirements are then compounded by the other typical peculiarities that come up in a mortgage application.

“To deliver the best service, brokers need to put in additional time and care researching, packaging and presenting a self-employed borrower’s mortgage application to make sure the lender does not need further information, therefore increasing timescales in what can already be a lengthy process,” Harrison concluded.

Source: Carpenter Surveyors