How rising inflation affects your mortgage as a contractor

It has traditionally foisted on them shoddier terms than their full-time counterparts get, but the mortgage market is not going to penalise contractors operating through an umbrella or limited company any more severely than permies when it comes to the impact of soaring inflation on mortgages, writes John Yerou, CEO of Freelancer Financials.

Is everybody in?

Yes, lenders are tightening criteria, especially when it comes to their respective ‘mortgage affordability’ calculators. But no, this isn’t contractor-specific. In fact, this tightening is affecting ALL home loan customers, as lenders knows that almost everyone’s disposable income is lessening from the cost of living going through the roof.

When it comes to your existing roof, many contractors will likely be in for a shock when they next come to remortgage. Even contractor-friendly lender Halifax DOUBLED its interest rates in May, and further rises cannot be ruled out. But interestingly, it is being widely recommended by experts that you should consider remortgaging immediately, and take the hit on the chin anyway. We’re rather in agreement and don’t worry, we explain why below.

Not a dig at contractors

The Halifax example is a good starting point. It has long been the go-to mortgage lender for limited company directors and, for the foreseeable, there's little reason to doubt that enviable status will change. And in line with that, the doubling of their rates in May wasn't a dig at contractors; it was symptomatic of an unprecedented cumulative effect impacting all homebuyers and homeowners. Indeed, there's so many external factors affecting the mortgage industry right now, that it was only a matter of time before Halifax raised their mortgage interest rates.

So what are those external factors and what’s their potential impact?

The Bank of England recently raised the base rate of borrowing from 0.75% to 1%, which represented the FOURTH increase in just SIX months. When it rose in December 2021, from 0.1% to 0.25%, some people thought the rise would be unsustainable. If only.

In February, the base rate rose again to 0.5%. The month after, it reached 0.75%. Then, in early May 2022, it hit the dizzy heights of 1%. That might not sound like a lot, but it represents the highest rate for 13 years.

The Bank of England meet on June 16th to discuss what to do next. And it would surprise no one if they raised the base rate again, as those external factors like pent-up demand from coronavirus, the ongoing war in Ukraine, and sky-high food and energy prices, remain prominent.

But contractors -- you can protect yourself from the brunt of potential future rises in interest rates if you act swiftly. And we’d recommend that swift action even if you still have time left to run on your current low interest fixed-rate mortgage. Partly because of the i-word. See the next section, immediately below, for more on this phenomenon.

Inflation

The Bank of England has set chancellor Rishi Sunak a target inflation rate of 2%.

All I can say is 'Good luck with that.' Because in February, inflation stood at 6.2%. In the year to March, it rose to 7% -- its highest in 30 years. In April, it came in at a record-breaking 9%.

There's half a generation of contractors at work right now who've never known inflation so high. Along with increases in National Insurance contributions and council tax, the cost of living crisis will impact everyone.

Will contractors pay more for their mortgage due to high inflation?

The mortgage market has been here before -- interest rates subject to spiralling inflation and seemingly having no ceiling. But that was 30 years ago, long before ‘contractor mortgages’ (as we know and love them) existed today.

Back then, most independent workers were subject to the higher interest rates of the now defunct ‘self-cert’ mortgage. For contractors in 2022, who’ve utilised contract-based underwriting and enjoyed rates comparable with the best on the High Street, the prospect of interest rates rising to 15% (as they did in the early 90s) will be wholly foreign to them.

My guarantee

The only guarantee I can offer contractors is this.

No matter how high inflation goes, contractors will suffer no more than any other homeowner, as long as contractors stick to the tried and tested routes of getting a genuine contractor mortgage through a specialist broker.

But be under no illusion. Absolutely EVERYONE will pay more for their mortgage. And so it’s imperative to lock in a fixed rate -- even if it is slightly higher than the rate you’re on already.

Bricks and mortar

Now for some of other numbers that need to be factored-in.

The cost of the average home rose by 9.9% year-on-year to March 2022. This means the average property value is now £297,524. This rate of rising house prices is slowing, but there are no signs of a reverse in the trend yet.

If you've been looking for a home recently, you'll have noticed a trend at many estate agents. They're listing prices 'IN EXCESS OF.' And most sellers are holding out for — and getting — those higher prices.

However, mortgage borrowing criteria is getting stricter. This has seen some sellers reduce their house prices to accommodate buyers.

It's still predominantly a seller's market out there, but there are exceptions, which only highlights the conflict in the industry.

Many homeowners are remortgaging instead, looking to tie their lender down to a rate that will hopefully avoid any further impact by inflation and the factors affecting it.

It's also worth noting that the cost of heating your existing bricks and mortar rose by 54%. This huge spike in energy bills is a key element for ‘second-steppers’ not to overlook, as it can have a huge impact on disposable income if you’re set to move to a bigger house.

Fixed rates for 2, 5 and 10 years

The fact that many lenders are offering 10-year fixed rate deals below 3% implies that they don't expect inflation to remain high indefinitely.

But nobody can guarantee how much further external factors will force up both inflation and the base rate in an attempt to curb soaring costs.

Everyone's circumstances are different. But we're seeing many homeowners lock in two and five-year fixed rate deals, as we said – EVEN IF THEY HAVE TIME TO LEFT TO RUN ON THEIR EXISTING, LOWER, FIXED RATE. It may well cost more in the mid- to long-term. But with short term rates so unpredictable, this is a safety net many are happy to pay for. There’s untold value in security and peace of mind when all around you is uncertain, rocketing in cost or eroding your bottom line.

Further keep in mind, the mortgage industry is more dynamic today than it's been for some years. Confusion is normal, especially for contractors who've never experienced rising interest rates like those we're seeing now. And don’t let anyone come across as cocksure, because I can almost guarantee you there's a twist or turn we've not factored in yet!

More than ever, lenders are taking a case-by-case approach

If you're unsure of your options, just get in touch. At the very least, we can provide you with alternative scenarios; then, see what best suits you and take it from there. More now than ever, lenders are addressing applications on a case-by-case basis.

Please be aware contractors, if you approach a High Street lender on your own, they will draw on what they immediately know -- the type of business that their underwriters are approving. Should they deem your income as ‘non-standard’ compared to, say, permies or straight-up self-employed people (operating as sole traders), there’s a real risk that they’ll class you as HIGH RISK.

And there are jitters like never before. So expect lenders to chop and change their interest rates. Almost daily, one lender or another is amending their range or criteria based on external factors -- factors wholly out of their control. We believe it’s imperative you use a broker who not only understands contracting (trying to work it out for the first time or explain it to a newcomer to contracting can cause unconscionable stress and delays), but who also can interpret and articulate your income CLEARLY to a potential lender. I can’t stress that enough.

Final thought

As long as inflation is rising, so will the cost of buying a home. Doing nothing really isn’t an option given the multitude of factors that can potentially impact mortgage interest rates. Just don’t leave it too late to lock-in a deal.

Editor's Note: John Yerou is the CEO of Freelancer Financials - a company which has helped thousands of contractors secure mortgages. To have a free consultation and discuss your mortgage options, complete the simple form on our contractor mortgages page 

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