February 27th, 2014
When most Freelancers hear the letters ‘MMR’, most will think of having to drag their children into the surgery for a mandatory injection. The recent Mortgage Market Review, also known as MMR, has been touted by the Government as something similar to a shot in the arm for an ailing mortgage market.
But what does it really mean for Contractors looking to take the plunge and move in 2014? Mark McBurney, Senior Consultant at Contractor Mortgages Made Easy delves a little deeper.
“The guidelines that MMR have thrown up will certainly benefit the industry in the long term, of that there is no doubt. Whether it is to eradicate less scrupulous Mortgage Brokers, or increase transparency so that Contractors don’t have to rely on back-door self-certified lenders, MMR has so far been a welcome moment of clarity in a usually murky area”.
So far the regulation has forced banks to actually assess affordability for a potential loan in all cases, rather than rely on credit scoring systems that announce the application is low risk, abandoning due diligence in the process. This has gone a long way to reducing fraud, but means that the qualification bar is inevitably higher for those who can prove income in a manner that is acceptable to the lender.
Under MMR, affordability assessment is the number one priority for any bank considering lending, and the same affordability assessment is now one of the few instances where a Contractor has an advantage over their employed counterpart.
Those lenders who will consider mortgage borrowing on the basis of contract value are already assessing income on each case on affordability, putting Contractors ahead of the game. This is one area in which going directly to a bank will likely cause problems post-April, as they tighten up income assessments.
“Many lenders will refer to the tried and tested route of 2-3 years of limited company trading accounts when looking to verify affordability. However, those lenders who are willing to assess income on gross contract value, and there are more of them already than there were last year, will potentially be able to define earnings at a much higher level than average salary and dividend draw. This means that the largest hurdle for any mortgage applicant after MMR, affordability, is now one of the easier things for a professional Contractor to overcome.”
Mark gives a valuable insight into how relevant lenders today may assess the income of a Contractor, versus the traditional methods of reverting to personal taxable earnings only.
“A fairly typical average salary and dividend draw for a limited company contractor is in the region of £45,000 per annum. That same contractor may be billing for £400 per day, so on the assumption that they work for 46 weeks of the year, their true income is actually £92,000 per annum, which is what a contractor-friendly lender is willing to use. Affordability is rarely an issue for those Contractors looking to borrow within sensible limits via this latter method. If a fairly conservative borrowing calculation of ‘4 X income’ is used, it means borrowing £180,000 versus £368,000.”
Whilst new financial regulations are rarely the most exciting news at the start of a new year, 2014 brings the hope that many of the UK’s freelancing professionals may actually be in the box seat for a change.
Article By: Taj Kang, Business Development Director at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager
Tel: 01489 555 080