It wasn’t long ago that umbrella contractors struggled to get a mortgage, but now the opposite is true, and the FCA has spoken about their concerns.
In short, what they are saying is that many specialist lenders are not doing enough checks when lending to contractors and the self employed in general, and this is resulting in irresponsible lending.
Their main issue of course is that many contractors may very well end up borrowing money they can’t afford to repay, sending them right into years of debt.
The Mortgage sector manager for the FCA, Lynda Blackwell, spoke recently at the Mortgage Business Expo where she voiced her concerns, specifically around the issue of some lenders only asking for 1 years worth of trading or business records when making their decision
For once I actually agree with the FCA here, because if there is one thing I don’t like to see it’s lenders giving out money without the proper checks needed to determine if someone really can afford to pay back the money.
Let’s face it, 1 year of records for a contractor, freelancer, or business owner is definitely not enough to make an informed decision about whether or not their income is consistent.
It’s this kind of lending that led to the economy crashing back in 2008. Surely we don’t want a repeat of that in 2016? Hopefully, with the FCA now addressing the matter measures can be taken to ensure the same thing doesn’t happen again.
Yes it’s important that contractors have the same kind of access to mortgages as those who are employed in full-time work, but that doesn’t mean they should just get approved with a few basic details.
So what kind of trading records are acceptable? Lynda Blackwell seems to think it should be 3 years, although personally I still think this isn’t enough.
In my opinion, and I’m sure many contractors will disagree with me, I say that a minimum of 5 years records is what the self employed must have in order to get a mortgage.
The reason? We all know that being self employed can be inconsistent, with 1 year being great and the next being totally the opposite, and this happens for a number of reasons, with many different factors at play.
When you have 5 years of trading records then it shows consistency, and gives the lender a better idea of exactly how your income has been and what it should look like over the next 5, 10 and 20 years.
Of course, every situation is different and in some cases a contractor or small business owner may have assets they can secure against the loan in order for the lender to be more confident about giving out a mortgage.
In this scenario 5 years of records are probably not required, but I would guess in 90% of mortgage applications they are.
Let’s just hope that common sense wins the day and we don’t have thousands of contractors in debt and having no way to pay their mortgages in a few years time.