September 4th, 2014
The Bank of England base rate has been held at 0.5% again this lunchtime. The real question, however, will be about how many members of the nine-person committee voted to put rates up today, and how this will further compound stringent mortgage affordability checks that are on their way.
The minutes for last month’s meeting revealed that two members voted for an increase in the base rate to 0.75%. It could be argued that this relatively small increase of 0.25% wouldn’t affect most contractors’ existing mortgage payments too significantly, so why the panic?
However, there would be a knock-on impact on how affordability is assessed for new borrowers. Contractors could be penalised particularly hard due to certain tax efficiency measures they typically employ, which have the effect of reducing the income that lenders will use for a mortgage application.
Next month will see further rules brought in for mortgage lenders around affordability to factor in future rate rises. Lenders will have to assume that any new borrowing is being taken on a rate that is 3% higher for the first 5 years of the mortgage, to ensure that they can afford the debt following the inevitable rate increases.
Any base rate increases in the meantime will mean that the affordability threshold increases further still. The probable outcome will be more mortgage applications that result in shortfalls in requested borrowing, and also more declined applications.
Andy McBride, Business Development Director at specialist broker Contractor Mortgages Made Easy, examined the impact of the rules on contractors looking for a mortgage in the near future, and advises that all is not lost for the freelance community.
“Any contractor looking at the relentless new rules around mortgage lending may well assume that they are heading for disaster if they apply. However, contractors actually have an advantage, as long as the lender understands how they work.
“Whilst lenders are applying more punitive affordability requirements on mortgage applicants’ incomes, this only affects a contractor adversely if the lender pigeon-holes the contractor as ‘employed’ or ‘self-employed’. This inappropriate classification will mean that some of the contract income is being ignored, bringing about the possibility of the dreaded ‘unaffordable’ decision on the mortgage.
“However, if the application is presented to the lender on the basis of a skilled professional who can obtain future contracts based upon their skills and experience, alongside evidence of their current contract assignment; much of this risk can be managed.
“Very simply, if the whole gross contract rate is not annualised and used by the lender, a decline is not only a possibility, but a probability as the base rate heads for an increase.”
Article By:Taj Kang, Business Development Director at Contractor Mortgages Made Easy
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