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Bank of England to suspend market operations for State funeral

The BoE said CHAPS will be closed on 19th September, in line with its normal bank holiday arrangements.

CHAPS handled around 174,000 payments each day, in the year to February 2021, with an average payment value of £2.1m. That works out at around £367bn each working day.

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CHAPS is used by banks and large corporations to settle high-value money market and foreign exchange transactions, by companies to pay taxes, and by solicitors and conveyancers to settle property transactions.

The Bank’s Real Time Gross Settlement (RTGS) service, which underpins large transfers between bank accounts, will also be closed.

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Back in 2014, RTGS collapsed for most of a day, putting thousands of housing market transactions on hold.

Last week the BoE said the sale of corporate bonds held by the Asset Purchase Facility will be delayed by a week, to 26 September, following its decision to delay its next interest rate decision by a week (to 22nd September).

Source: London Loves Business

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Fall in UK house prices ‘should be taken with a pinch of salt’

A fall in house prices in July 2022 should be taken with a pinch of salt, a contractor mortgage brokerage today warns.

Freelancer Financials, which specialises in mortgages for contractors, sounded the cautionary note this morning, following the Halifax recording the first property price dip in 13 months.

The limited company-friendly lender found that average house prices fell between June and July by 0.1%, while the annual rate of price growth over the same period eased from 12.5% to 11.8%.

The first of its kind since June 2021, the 0.1% fall takes the average property price tag to £293,221, down £365 on the previous month’s record-high, Halifax said.

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‘Stimulated’
But it is probably unfair to compare today’s house prices with 2021’s — when the stamp duty holiday “stimulated the market,” according to Freelancer Financials’ John Yerou.

“Plus, there is usually a seasonal drop-off in the summer months of July and August,” continued Mr Yerou, the brokerage’s chief executive.

“This fall in prices is only fractional …[and] comparing 2022 with pre-pandemic levels, in 2019, demand is still up.”

Similarly, despite the fall of just 0.1% on a monthly basis, house prices remain more than £30,000 higher than this time last year, observed Halifax’s managing director Russell Galley.

‘Bigger houses, biggest price gains’
The lender signalled that contractors looking to move up the property ladder will probably benefit the least from the tiny price fall, because the gains in the values of larger homes are still strong.

Price gains for “bigger houses” even outpaced those for smaller homes in July, with the price of a detached property inflating by £60, 860 (+15.1%), versus £11,962 (+7.7%) for flats.

“Although this fall in house prices seems to indicate that the housing market is cooling off… [it[ should be taken with a pinch of salt,” cautioned Freelancer Financials’ Mr Yerou.

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‘Drivers of buoyancy remain’
“We shouldn’t read too much into any single month”, agreed Mr Galley of Halifax.

“Leading indicators of the housing market have recently shown a softening of activity, while rising borrowing costs are adding to the squeeze on household budgets against a backdrop of exceptionally high house price-to-income ratios.”

Galley added that some of the “drivers of the buoyant market” of late, such as extra funds saved during the coronavirus pandemic and changes to how people use their homes, remain.

However Halifax says the “extremely short supply” of homes for sale is serving to “underpin” property prices at a high level.

‘Negotiating power gradually shifting’
At Freelancer Financials, Mr Yerou shared his outlook with ContractorUK: “Several indicators point to activity in the market continuing to cool from the lofty heights of the last two years.

“It is likely that the impact of interest rate rises will gradually trickle through, but right now they’re not having a serious impact on the property market. Yes, demand has lightened a fraction and negotiating power is gradually shifting to buyers, but until the imbalance in affordable properties is addressed, house prices will remain stable.”

By Simon Moore

Source: Contractor UK

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Why contractors don’t normally need the Bank Of Mum & Dad to buy a home

Amid research showing that the ‘Bank Of Mum and Dad’ is doing a brisk business, it’s worth pointing out that in our experience, the number of first-time-buyer contractors utilising a limited company but requiring help from BOMAD is minimal, writes John Yerou, CEO of Freelancer Financials.

Contractors and the Bank Of Mum & Dad

Or at least, it’s minimal among contractors compared to their permie counterparts. Nearly all limited company contractors manage to save a minimum of 5-10% deposit without family help. The majority of PSC contractors who do get help from BOMAD are those who are trying to put down larger deposits — to get more favourable interest rates.

But how did we get here? How did we get to the Bank of Mum and Dad, potentially even propped up by the Bank of Auntie (‘BoA’), lending to those in need of a home loan? And why does it matter if you’re reading this as a limited company director who might need to open an account with BOMAD or even BoA?

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As safe as houses?

Well, following the 2007/2008 financial crises, the UK became home to tens of thousands of mortgage prisoners. These were homeowners who’d bought at the crest of the property market boom only to see it bust and shower them with shortcomings.

They thought, like many, that property investment was as safe as houses. But one global slump later, they found themselves in negative equity with outstanding mortgages greater than the value of their homes. To a lesser extent, there’s a real possibility of that happening again, post-covid. But that’s an aside to perhaps consider further down the line.

Mortgage prisoners removed many homes from the marketplace — their owners becoming stuck until house prices rose again. But even then, the sharp rise in the price of housing stock in the run-up to the crises made owning a home all but impossible for the younger generation or other first-time buyers.

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Extraneous factors fuelling the fire

Running alongside this phenomenon was rising EU immigration and successive governments failing to meet affordable housing targets. Tag on post-bust ‘Responsible Lending,’ which introduced stricter lending criteria, and the restrictions imposed on young borrowers formed a formidable, often unsurmountable barrier.

That interest rates plummeted to historical lows and Stamp Duty holidays became de rigeur didn’t matter. If you couldn’t afford the deposit — and at one point, you couldn’t get a mortgage with less than 15% — the first rung on the property ladder was out of reach.

Even if by some chance, young individuals and couples managed to find a home, afford and save a deposit, it was only the first stepping stone across a raging river. But such is the Brit way of life, from this adversity a solution came to prominence — the Bank of Mom and Dad (BOMAD).

Are you a limited company director needing a loan from BOMAD?

Since the pandemic, lending criteria have become protracted, for everyone, not just the self-employed.

One area that lenders’ mortgage advisers seem more interested in than ever is where a potential borrower found their deposit. These advisers on behalf of the lenders ask us, so we in turn have to ask our clients!

Now, we don’t just deal with contractors. We secure mortgages for all — sole traders, freelancers and even employed people referred to us by their contractor friends. And this is where we see a sharp difference in BOMAD borrowers.

Yes, we deal with contractors earning £50,000 a year. But they’re somewhat the exception. Many of our contractor clients earn upwards of £300/day. To get a mortgage with Halifax (unless they’re an IT contractor), they have to earn at least in excess of £75,000 a year.

This puts contractors in, typically, a higher income bracket than many other young people, even than permies who do the same job. This means they can save a lot harder, especially if they’re working through their own limited company (or Personal Services Company). Thus, contractors’ reliance on BOMAD is greatly reduced compared to the national average first-time buyer.

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Almost half of other first-time buyers use the Bank Of Mum & Dad

That contractors are more likely to go it alone bears out in our figures, too. Only around 5-10% of higher-end contractors lean on relatives for help with a deposit. In contrast, getting on for 20% of permies or sole traders/freelancers get help from their families to buy a home.

Across the industry, it’s expected that almost half a million borrowers will have borrowed from BOMAD in the three years up to 2024 — almost half of all first-time buyer activity. So a total of (roughly) £25billion families will have forked out to help their offspring move out.

Why BOMAD matters (answer: the lenders are interested in the source of your deposit)

One reason lenders ask where the deposit has come from is to help determine the applicant’s mortgage affordability.

If the money is a gift from parents, either from their savings or they’ve released equity to donate to their offspring’s cause, all well and good. But if that money has to be repaid, it’s as well to understand that the buyer can afford to repay both the mortgage and the BOMAD loan from the outset.

Banks need to know this in order to make an informed decision. But it’s a good exercise for the benevolent parents as well. The last thing anyone wants is rifts in the family due to money issues, especially where siblings may feel the impact of one of them welching on repaying back into the inheritance pot.

BOMAD stigma in the banking industry

With so much transactional cash involved, we understand why the financial authorities want to keep tabs on such activity. And that’s part of the reason, I guess, why people only mutter that they’ve borrowed from relatives rather than proclaim it.

It’s this stigmatism that large sections of the industry want to see eradicated. And, due to the current economic forecast, it may well become the norm that first-time buyers are expected to get help from relatives. And the more open we can be about the often-taboo subject of money the better off we’ll all be.

By John Yerou

Source: Contractor UK

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Union urges contractors to follow Kier lead on sick pay

Campaigning by Unite has secured sick pay of up to £100-a-day for Kier workers.

Union bosses are now calling on other contractors to follow suit and boost their terms beyond the statutory rate which can be as little as £16 per day.

Unite regional officer for the construction sector Malcolm Bonnett said: “Unite has been campaigning hard to end the discrimination on sick pay for construction workers so we’re delighted by this victory.

“Statutory sick pay in the UK is the lowest in Europe so it was vital we persuaded the employer, a wealthy business, that they had a duty to pay when workers are ill.

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“From here, we build further. Unite is determined that other construction employers act to end sick pay discrimination, too.”

A Kier spokesperson said: “At Kier, we recognise that our people are our greatest asset and our teams have been working hard to provide industry-leading policies and measures to support our people.

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“In the last 12 months, we have launched improved family-friendly policies, our new and enhanced standard for sick pay for all and we have become signatories of the Real Living Wage.

“All of these actions reflect the plans we put in place as a result of our strategic review. They form part of our Performance Excellence culture and underline our focus and commitment on doing the right thing.”

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By Grant Prior

Source: Construction Enquirer

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What HS2’s £9.5millon IR35 tax provision means for contractors

Yet another public sector body looks to have fallen foul of IR35.

This time, it’s High Speed 2 (HS2) – a government-funded arm of the Department for Transport – that is readying itself for a £9.5million tax bill.

If confirmed, this latest IR35 calamity in the public sector would take the cost of non-compliance in government departments well past £270m, writes Seb Maley, CEO of Qdos.

As revealed in HS2’s annual accounts, the £9.5m has been set aside in the event that HMRC confirms that mistakes have been made following the introduction of IR35 reform in the public sector in 2017.

A public sector IR35 problem of a different kind
But HS2’s IR35 problems look to be slightly different from those experienced by the likes of the Ministry of Justice, Defra and the Home Office, to name but a few. Instead of incorrectly assessing the IR35 status of contractors engaged – which has been an issue for the aforementioned departments – confusion looks to have arisen with regard to a consultancy providing contractors to HS2.

“During 2020, internal checks and additional HMRC’s guidance highlighted some cases of workers who were engaged through other suppliers that had not been appropriately reviewed”, the accounts state.

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Them, not us
Put differently, HS2 didn’t carry out IR35 assessments or issue Status Determination Statements (SDS) to contractors engaged via a third-party, given it took the view that this third-party was responsible for determining status.

If the third-party supplied a genuinely outsourced provision of labour, this would be true and HS2 wouldn’t be required to carry out IR35 determinations. But if the third-party is merely providing contractors, the buck stops with the end-client – in this case, HS2.

This is why HS2 has allotted £9.5m, ready to settle up with HMRC, should the tax office find that not only has the high-speed railway organisation misunderstood its responsibilities under IR35, but potentially also engaged contractors under the wrong IR35 status.

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Wider implications of HS2’s potential IR35 slip-up
Eye-watering tax bills aside, the worry is that it could see another public sector body take a needlessly risk-averse approach to IR35. That’s been a ‘strategy’ adopted by far too many organisations due to a lack of understanding with regards to how the revised off-payroll rules can be implemented compliantly because contractors can, in fact, be engaged outside IR35.

It’s my view that banning contractors would jeopardise the entire HS2 project. Giving contractors ultimatums – ‘work inside IR35 or via umbrella companies’ – will result in significant skills gaps, as contractors opt to work elsewhere with businesses offering genuine contractors the opportunity to operate outside IR35. In a space which relies heavily on specialist skills and the need to engage these skills in a cost-effective manner, transferring all contractors onto the payroll increases costs dramatically.

HS2 is risk-averse on IR35 anyway
With that being said, it’s not as if HS2 has a habit of engaging contractors outside IR35. Its accounts show that just 20 of the 294 contractors engaged between April 2021 and March 2022 operated outside IR35. That’s a figure which is at odds with the 86% of more than 32,000 contractors that our IR35 contract review business has assessed on behalf of businesses which, after a rigorous assessment, in our view belong outside IR35.

Focusing on how the contractors were supplied to HS2, which as I mentioned was via a third-party consultancy, above all else, it highlights just how important it is that both the end-client and the consultancy understand which party is responsible for determining IR35 status, along with their wider obligations under the reform.

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The ‘contracted out’ conundrum? It spells o-p-p-o-r-t-u-n-i-t-y to HMRC
So will we see more of this – not just in the public sector – but in the private sector too?

Don’t rule it out. Engaging contractors via a third-party means there is a slightly different consideration for end-clients which, as I previously outlined, is whether or not the provision of labour is genuinely outsourced or not. HMRC will be well aware of this — of course, and could well scrutinise these arrangements on a wider scale.

Added to this is the economic landscape and the pressure that HMRC is under to raise tax revenue for the Treasury. Going forward, I expect the tax office to ramp up IR35 compliance activity among businesses generally speaking, but also focus on these specific areas where confusion can easily arise, which presents an opportunity for HMRC.

By Seb Maley

Source: Contractor UK

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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.

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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!

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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.

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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.

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“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.

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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.

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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.

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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.

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“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

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Ensure your contract keeps you out of IR35

What can contractors and freelancers learn from HRMC’s win against Sky Sports presenter Alan Parry? Here are tips to make sure you stay out of IR35.

Earlier this month Sky Sports pundit Alan Parry lost his IR35 appeal against HM Revenue & Customs over a £356,000 tax bill. The football commentator, 74, contested an HMRC claim that the contract held between his own company, Alan Parry Productions Ltd, and BskyB over the five years to April 2019, amounted to an employee relationship, rather than self-employment.

Under IR35 rules, a set of tax laws which govern off-payroll freelancers, if a contractor is deemed to be a “disguised employee” for tax purposes, and not genuinely self-employed, they must pay PAYE and national insurance contributions.

HMRC’s IR35 win came down to how tightly worded Parry’s contract was, giving BskyB more control than it needed, according to Parry’s lawyer Chris Leslie.

Commenting on the case, Dave Chaplin, chief executive of tax compliance firm IR35 Shield, told the Financial Times that contractors and employers should be aware that “the contract is king”.

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What the Alan Parry case means for freelancers
HMRC’s win against Alan Parry will no doubt be uncomfortable reading for freelancers. Once again it brings into sharp focus, HMRC’s intent on tax equality and its use of the off-payroll rules. While a fair tax system is a good thing, the legalities are difficult to navigate.

If there is one thing to learn, it’s that you must also take responsibility for managing a status determination of inside or outside IR35 yourself and avoid any reason for doubt in the contract. Quoting Chris Leslie, the lawyer who represented Parry, Parry’s contract contained ambiguity which gave Sky “more control than was needed or wanted”.

This word “control” should be the biggest learning from this. You must ensure you are the controlling party, not the hirer, so take responsibility for generating a contract to reflect it. As the Parry case shows, standard company contracts won’t work when it comes to IR35.

Instead, they must reflect the work you will undertake, how you will do it – e.g. with your own equipment in your own working hours, and that you have the right to substitute yourself for another professional.

Substitution clauses are a helpful way to show you are operating as a business and not as a quasi-employee, as Lorraine Kelly successfully argued when she proved she was instrumental in determining who covered for her when she was on holiday.

Here are some other things you can do to ensure you stay the right side of the law:

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Recognise that off-payroll represents a risk to a client
They want and need to get it right, because they don’t want a tax bill for getting it wrong. It’s true that when off-payroll first came into the private sector, there were some companies that were so concerned about getting determinations wrong that they banned contractors altogether. The world has moved on, as the impact of not having access to flexible contingent skill hit home.

Despite seeing some blanket use of inside IR35 contracts to manage the risk, it’s starting to become the anomaly.

Overall, the decision to engage contractors and freelancers has been good news not just because it opens options for work, but because it’s highly likely that a company will be ready to discuss the arrangement and create a contract which clearly falls outside IR35. But you need to be informed to do this and understand the nuances of the legislation.

There are three specifics to prioritise:

Mutuality of obligation
People who get a contract right are using statement of works to set out exactly what they will do by when. This also meets another HMRC test called “mutuality of obligation” (MoO) whereby you show that you are not like an employee and paid simply for being at your client’s disposal, instead you are paid to deliver a specific piece of work.

Overall, being savvy about how MoO helps determine a status will help you get into a position where you can confidently negotiate – there’s evidence that the more informed you are, the more likely you will secure an outside status determination which will hold with HMRC.

Many self-employed professionals find it helpful to undertake their own assessment of all the rules first, so they can adjust their approach to working with a client and create a watertight seal.

Understand being in business on your own account
In the high-profile Kaye Adams case, Kaye demonstrated that she was in business on her own account, and this was pivotal to being deemed outside IR35. Things that will help you show this are to have multiple concurrent clients, a dedicated office, and even employees.

Show you are not part and parcel of the organisation
Working practices are critical to compliance. If you behave like an employee, then you will be treated like one, giving HMRC more justification.

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Quick wins to stay out of IR35

Quick wins to avoid scrutiny are:

  • Develop a brand, and have a dedicated website and social media presence
  • Trademark your company name
  • Invest in your own phone, computing equipment, printer etc
  • Invest in yourself through training and memberships to professional bodies
  • Ensure you have things like professional indemnity and liability insurance.

Things to avoid to stay out of IR35

For all the do’s there are also a lot of do nots. Here are just a few of the things that can get you into hot water:

  • Going to company training and social events
  • Getting involved in appraisals or any HR matters
  • Accepting performance bonuses open to employees, or take advantage of things like gym memberships
  • Being misrepresented as an employee – make sure it’s clear you are a contractor or associate on your ID badge, email address and org charts
  • Taking on new work before you have adjusted the terms of the existing contract
  • Taking days off with permission – you should inform your client you’re not available
  • Working the same working pattern as staff

These things combined with knowledge and understanding, and following good practices and behaviours, will stand you in good stead when it comes to running an IR35 status assessment with a client. The way you conduct business and engage with them should be clear and correlate to an outside determination.

James Poyser is CEO of inniAccounts and founder of OffPayroll.org.uk

By James Poyser

Source: Small Business