In this latest guest blog from CMME, learn all about how you can get the best mortgage rate available to you as a freelancer, how to work out your income, the impact of IR35 and more.
It has been an unprecedented year, particularly for freelancers like yourself, but you have made it halfway through 2021 and it is natural to be thinking about making your first move on to the property ladder – especially if your mortgage plans were derailed due to factors beyond your control.
A joint 2020 research on self-employed homeownership with mortgage experts CMME revealed that 72% of respondents are looking to become homeowners to invest in their future. This doesn’t come as a surprise considering the challenges the self-employed have been faced with, but there may be light at the end of the tunnel for future homeowners with historically low interest rates available on the market right now.
What are mortgage rates and why are they important?
Although mortgage rates might not be your main priority when you’re thinking about stepping on to the property ladder, they are a really important step of your application to consider because the better your mortgage rate, the less money you waste unnecessarily each month. Because after all, you will have dedicated yourself fully to your craft as a freelancer, working around the clock to turn your passion into a success and your mortgage should do the same. You’re probably wondering how to get the best mortgage rate as a freelancer.
Let’s go back to the basics.
Mortgage rates are impacted and influenced by the Bank of England’s rate which was slashed in March 2020 in an emergency response to the Coronavirus pandemic and remained at that historic low ever since. This means borrowing is potentially more affordable.
So, if you are thinking about becoming a homeowner and are seeking the best mortgage rate available for your individual needs as a freelancer, you can benefit from historically low rates from as low as 0.83%*.
Barriers you may encounter as a freelancer
The joint study with CMME also showed that 96% of respondents were required to provide more paperwork when applying for their mortgage because they were self-employed.
You may face bias as a self-employed professional if you approach a high street lender as many will have very little understanding about the freelancing landscape which means that their standardised procedures do not accommodate freelancers.
For many people, a mortgage is their biggest financial commitment, so it is important to consider your individual needs and ensure your mortgage rate meets them as you will likely be locked into your deal for a fairly considerable amount of time.
Mortgages typically begin on a promotional fixed rate for 2 or 5 years, however, it is important to note that when this introductory rate comes to an end, your lender will automatically move you onto their Standard Variable Rate (SVR), which is often higher than your promotional rate. Needless to say, that is something you will want to avoid so keeping track of your renewal date once you obtain a mortgage is key.
Let’s talk about your deposit
The average deposit requirement is usually in the region of 10%-25%, however, from 19th April 2021, first-time buyers are able to benefit from various help-to-buy schemes.
The mortgage guarantee scheme was designed to help buyers with lower deposits move forward with their mortgage plans by offering 95% mortgages with just 5% deposits up to a property value of £600,000. The scheme, which is accessible to both first-time buyers as well as existing homeowners is now in full swing and available until December 2022.
The impact of gaps between contracts
You might be wondering whether significant gaps between contracts will have an impact on being approved for a mortgage?
Different lenders will have their own approach to breaks in contracts, though many will take an open approach to this if they can see a clear view of the client’s history leading up to the gap and an acceptable explanation. You will however be required to show a new contract is in place at the point an application is submitted.
It is worth discussing this upfront with underwriters before an application is submitted as every lender will take a different view of the length of the break in work.
How do I work out my income as a freelancer?
Most lenders will have a slightly different criteria when working out your lending potential, especially when discussing a new mortgage. While the calculation method may again differ depending on the rate you are paid (daily/hourly/monthly), there are various ways you can calculate your income to establish your overall borrowing potential:
- hourly rate
- daily rate
- annualised salary
Simply follow this formula to calculate any of the above:
Hourly Rate x Working hours, per day = Daily Rate
Daily Rate x 260 days (working days) = Annualised Salary (Before tax)
Post-IR35: how do I determine my role?
IR35, the bane of your life in 2021. With the recent implementation of IR35 legislation, you may have some confusion when it comes to your mortgage application and determining your current role. Here’s what you may be classified as:
- Umbrella employee
- Umbrella Contractor
- Sole Trader
The reality is that you might face bias in any of these roles if you approach a high street lender as most lenders have little understanding about the freelancing market which means that their standardised procedures do not accommodate freelancers.
Our partner CMME specialises in providing mortgage advice for independent professionals, with access to some of the most competitive rates on the market. So, however you choose to work, CMME will fight your corner and ensure the right mortgage deal is available to you.
Your property may be repossessed if you do not keep up repayments on your mortgage.
*Mortgage rate accurate as of 10/08/2021