Life as a contractor can often involve having to go through a lot of tough times. Often you end up wanting things that seem very hard to attain; take for example, a mortgage. When you intend to get a mortgage to keep your business afloat or to go for an expansion of some sort, you are faced with many different opinions of people and ambiguities that you don’t seem to get your head across. In times like this, you don’t know whether to hire an expert to look over your situation and suggest a way out for you or to just go with your instincts and submit the application yourself. This article focuses on sharing some of the important details that can go a long way in making the life of a mortgage searching contractor a lot easier. We first begin by listing down some of the pitfalls and some of the opportunities that get available to a person when they are looking to land an IT contractor mortgage.
There are two sides to almost every story in the world and the mortgage business is no different. Firstly, when you actually start getting a comparatively better income, you actually have a lot more options available to you and you can enjoy putting the money to good use and to actually cause the amounts of earned capital to raise too. This will present you with an opportunity to actually go out in the market and get a better house for yourself as your salary package is definitely going to get better. In addition to that, you could even go the extra mile and purchase up another property for yourself which you can rent out and add another asset to your list. Because your earnings will now be a lot more enhanced, you will be blessed with the ability to actually make substantial repayments of your loan annually instead of going with the normal 25 year and term that most of the borrowers have to go through.
A lot of contractors aren’t fortunate enough to be able to land a mortgage of a substantial stature. The search is long and frustrating and the banks and institutions from the “high street” are known for basing their maximum lending capacity on the salary solely. If it all was left to their normal lending policy then you might have high dividends and a meager salary but still can end up spending your life in a garage, post-IR35. The rudimentary issue with this is that despite IR35, the mortgage firms are often aware of the contracts that are predominantly short-term in nature and they fear about not getting an extension on it or the possibility of a rejuvenated contract. Apart from this, the ones that accommodate people more on their income and other factors won’t be much competitive when it comes to flexibility and interest rates.
It’s not all gloom and sadness for the contractors though. There are a lot of lenders even in the world of today that treat the contractors in a friendly way and provide a flexible way of repayments. A contractor can even go big-time and borrow as much as 4.5 times of their annual contract rate and might only have a trading experience of a single day.You can even get a mortgage by making a small deposit although if you are looking for a better deal, then you would have to pay at-least 10 percent up front.
At this point, a tip is worth mentioning. Where it’s good to keep shopping and finding out the perfect fit for yourself, you have to be extra careful while applying for the loan until you are completely sure that the company is going to make you the offer and lend you the money without having any doubts. Whenever you apply for a mortgage, the company is going to go ahead and conduct a credit search and if the lending company finds some applications against your name (whether successful, in process or unsuccessful) to another lender then your application could pretty much get declined just because of this activity.
That being said, we recommend hiring a mortgage broker to get mortgage help that would be worth all the money that you put in. A mortgage broker is somebody that knows exactly what they are doing when they are trying to land you a self-employed mortgage deal so if you are able to get one within your budget then it’s definitely the right thing to do. This could be one of the biggest financial decisions that you will make during your life so if you spend some time and hand over the work to an expert, then things could end up being right for you. Yes, you might have to pay quite a substantial amount of money for the easy mortgage attainment but when everything ends up being put into its place, then you will love your decision and have no regrets whatsoever. In addition to the usual benefits, a mortgage broker also has some intangible values that thy bring to the table like efficiency, legal knowledge etc. and trust us, in a matter that includes intricacies of the highest order, you will want to have somebody watching over you.
Now that you know some of the possibilities of getting a mortgage, you should probably want to know what repayment methods you should actually choose. Read on the next section to know:
There are actually 4 types of mortgage repayments that you can make. Let’s go through each one of the:
When you choose a repayment mortgage that’s also often known as a capital and interest, then the amount that you will owe will reduce steadily across the whole loan term. It’s believed that the repayment mortgages are the least flexible if you intend to move home during the early years of getting the mortgage; this is because there will be lesser debt repayments in the initial stages. This factor in turn also needs to get balanced with the secure knowledge that your mortgage’s guarantee of repayment towards the end of the term. It’s also worth mentioning that it doesn’t rely on any investment performance.
There is an alternative option via which you can choose to pay the interest to your lender and actually make contributions to a separate investment that will in turn be added for the repayment of the loan. The investment can be a simple Individual Savings Account or it can be an endowment plan as well that will give you the possibility of getting a profit in addition to what is needed for the loan repayment without the inflexible guarantees that a repayment method normally has. When you land an ISA mortgage, you become completely flexible when ti comes to increasing or decreasing the contributions to the investment that is tax efficient and you can actually make redirections to your investment to a separate provider every year. When we are talking about a residential property then these loans are often very rare but if you are looking for a “buy to let” mortgage then they are more easily attainable.
They are not without a catch though. The main drawback that this method has is the complete accessibility to the capital and it can actually be smothered for other reasons as well rather than being allowed the growth for the repayment of the mortgage. The premium flexibility might mean that once your budget gets tighter, this payment could become your first casualty. A better and an approach with more discipline would include endowment route attraction. With the presence of this option, the set payments will be maintained to a singular provider with the possibility of additional benefits getting provided that will actually lead to the payments of premium and mortgage interests when it comes to illness and this will all be added in the form of one singular policy. There are some regular reviews that get taken place in order for this policy of repayments to stay on track.
Another option available to contractors is to take on a pension based approach. In this, you make contributions to your “pension mortgage”. This helps you in many ways as well. You end up benefiting from the tax relief that you would normally have to deal with regarding your contributions to a retirement vehicle and can also take a huge sum from your retirement plan to pay off the loan that might be troubling to you at the time. What is happening is this: The government subsidizes a part of your mortgage and you end up getting increased pension during your retirement life. This is a byproduct of the mortgage choice that you made. Just like the endowment and the ISA route, your investment performance is again going to prove crucial for the loan settlement.
After discussing the 3 possible venues, it doesn’t really depend which option you end up choosing; what’s important is that you make your loan arrangements through a credible lender that will give you the possibility of repaying lump sums from the mortgage across the whole time period. With an ISA mortgage and a repayment complemented by some endowment policy loans, you would be able to cause your loan term to get shortened exponentially. On the other hand, if you continue to make investment contributions/funds knowing that your potential profit will be a lot more provided the eventual settlement that is in need of debt ends up getting reduced; then this is also a viable option.
Now let’s actually look how we can go about our search of a lender. What things we need to know and what things we absolutely can’t ignore:
Finding a good lender to get the mortgage from is as important as getting an actual mortgage. You won’t be able to get your message across to the lender with aplomb if they don’t understand the technical intricacies of the contracting world. So there should be an adequate balance of experience and technical prowess present.
The first thing that you need to ask your lender is how they actually plan on recalculating the pending mortgage upon which the interest will be charged. Many of the good lenders in the high street will make the calculations for the outstanding amount only once throughout the whole year and you will have to a lump sum of money during January and it would normally have an interest for 11 months until the lender actually recognizes that you have stopped owing them this sum. If we consider other businesses, this could end up being termed as extortion but because the world of mortgages is laden with surprises, this appears fair to most. So ideally you should go for a lender who makes recalculations after the end of each month or even daily so you might be able to benefit from these payments and not the lending party.
Some lenders have cumbersome loyalty clauses. These lenders often offer rates that catch the attention of contractors to get you in their offices but will end up insisting you to stay with them even after you have spent a long time and the rate has raised to be an uncompetitive one. If you decline then you can end up facing penalties that can even go as much as 8 percent of the total loan you might have agreed upon.
Another key thing while choosing a lender is to check out their experience and history. They will go through your history extensively so it’s only fair that you return them the favor and try to find out whether their ex-clients have had a satisfying experience with them or not. IF you get a great deal just to find out that the lender uses outdated calculators and written ledgers to get their applications processed, then in the longer run, you could end up in serious trouble. The speed with which the applications get processed and the repayment calculated is as important as actually getting a good deal. So, if you have to make a trade-off, you should go for a lesser deal but one that has lightning fast processing times.
Always have your eyes open for compulsory insurance clauses. Some lenders will end up insisting you to take their home insurances, pet plans, unemployment cover insurances and other plans but these in house products rarely have any good to offer to you. They will cost you a fortune in the longer run and the deal won’t end up being good with you and will have a variety of strings attached.
If you are aiming at a proposition of “purchase to let” then you need to avoid the costs that often amount up excessively and the rates that can pile up as well. The rates that you pay should not be greater than the residential rates that you find in an ordinary market and you shouldn’t ideally have to pay any huge fees for administration either. The buy to let or purchase to let doesn’t have a representation of any additional work for the lending party and ideally you shouldn’t be coerced to increase the margins of their profit.
To conclude, we would say that the more time you spend thinking and planning the attainment of a mortgage as an IT Contractor, the better are your odds of getting a good deal that helps you more than it does the lending bank.