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Mortgages for Contractors

Interest rates, the credit crunch and the impact on contractors

The Bank of England decided to keep interest rates on hold at 5.25% in March. This was in line with expectations. Analysts have highlighted that the Bank faces the threat of a slowing economy at a time when inflationary pressures are rising. In February, the bank cut rates by a quarter of a percentage point from 5.5%, amid signs of a slowdown. February's interest rate cut was the second lowering of UK rates in three months, with the previous reduction coming in December last year. The rate reductions would normally be a sign that mortgage borrowing is less expensive to obtain, but it is important for contractors to consider the wider economic factors of the supply of money. Lenders are starting to adapt to the changing markets and the circumstances they have seen. The availability of credit is likely to reduce steeply and the cost of securing it will increase. How applications are presented to Lenders is now more important than ever. This is particularly important for contractors. Lenders have traditionally treated contractors with more caution than other borrowers. Combined with the credit crunch, this makes it vital to review current and future mortgage requirements sooner rather than later. The impact of the credit squeeze could have a larger impact than the price of mortgage borrowing for some contractors. Contractors working in the financial services sector in particular would have had cause for concern in recent months, with the availability of new contracts and contract renewals predicted to be scarce because of companies going through substantial cost cutting exercises. A new study by SkillsMarket and the Association of Technology Staffing Companies (ATSCo) should help allay any fears that contractors will be first in line for the chop if banks take the axe to IT departments. The proportion of tech contract workers in the financial services sector is already at its lowest level for more than three years. Instead, it points to an 11% rise in rates for IT workers in financial services and a step up in the numbers employed, albeit away from the beleaguered credit space. Ann Swann, chief executive of ATSCo, says: “Strong demand for IT skills in areas such as equities and commodities trading in investment banks is helping to pick up some of the slack on the credit side.” So it’s not all doom and gloom as long as contractors are pro-active in reviewing their own situation in line with what the markets are doing. The credit crunch will make careful financial planning a priority for those who are astute. Whether this applies to contract negotiations or securing a competitive mortgage deal, it pays to think well ahead and plan the next move.

Bank of England Cuts Rate to 5.25% and the benefits of Offset Mortgages

The Bank of England's rate setting committee has cut interest rates to 5.25% from 5.5% in an attempt to stimulate growth in the UK economy. But the Bank of England said that growth needs to slow to keep inflation under control. The decision follows recent rate cuts by the US Federal Reserve, which sliced rates from 4.25% to 3%. Many analysts expect more UK cuts this year, but say inflation fears will stop the UK cutting rates as much as the US. "Inflation at 2.1% in December was close to the 2% target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months," the Bank's statement said. Can an offset mortgage benefit contractors? The offset mortgage market is growing. Offset mortgages work by allowing you to link credit and debt accounts to reduce the interest that you pay. There are a number of reasons for the appeal of offsetting: Generally, offset mortgages offer a competitive borrowing rate In most instances they are very flexible. You can often overpay or underpay on the mortgage By offsetting the interest earned on savings against the mortgage debt, the total cost of a mortgage can be cut dramatically Crucially, interest paid on savings which is offset against a mortgage debt, is tax free. Taj Kang, Senior Mortgage Consultant at Contractor Mortgages Made Easy, notes that an increasing number of contractors are looking at flexible ways of saving money in interest payments on their mortgages. “Offset mortgages are a relatively new innovation. As with any new type of financial product, all providers have a fight on their hands to overcome consumer lethargy and lack of financial awareness. Nevertheless, the simplicity of the offsetting principle - that interest on your savings goes to reduce your mortgage debt - has caught the imagination of contractors – particularly those on shorter contracts with high daily rates.” No surprise, therefore, that the market has grown from a couple of providers seven years ago to about 40 now. And this growth may well be set to continue with market analysts predicting sharp increase in the number of new offset mortgage over the next few years. As an example, someone with a £175,000 mortgage choosing to keep their Individual Savings Accounts (ISA) and current account with the same provider and overpaying £50 per month into a 25-year mortgage could shave off in the region of £80,000 in interest, and knock almost five years off their payment term. Taj Kang highlights the benefits of offsetting to contractors. “In the main, contractors with larger mortgage borrowings and savings are attracted to offset - a reflection of the built-in flexibility for those who can afford to make overpayments and who will reap more of a tax benefit from the offset concept. It is a particularly popular product with contractors who are set up as Limited Companies, as they save for their tax bill. All the time they are saving to pay their tax bill whilst offsetting their mortgage. Because they earn no interest on their savings, they are not taxed. It’s nice to know you’re mitigating tax on the interest earned on your savings, whilst saving for a tax bill.” Given its flexibility, it seems that the popularity of the offset amongst contractors is likely to continue. Taj Kang Contractor Mortgages Made EASY

Interest Rate Changes and Impact on Contractors

What do interest rates have in store for Contractors in 2008? Bank of England policymakers have decided to keep UK interest rates unchanged at 5.5%. The Bank faced a tough decision, having to balance signs of a slowdown in consumer spending against indications of growing inflationary pressures. The minutes of the December Monetary Policy Committee (MPC) meeting show that the vote to cut Bank Rate by 0.25% last month was unanimous. This factor suggests that further cuts in the next few months are almost certain. This is refreshing news for contractors who are looking to take new mortgages or review existing deals in 2008. What is the impact on the contractor’s mortgage? Contractors who are homeowners coming off fixed-rate mortgage deals in the next year will be facing the full ramifications of the credit squeeze. The cost of lending between banks has increased to around 1% above the Bank of England’s base rate and lenders are increasing the cost of their loans. As a result, fixed-rate borrowers with a typical repayment mortgage of £200,000 could see their monthly payments rise by up to £200 a month. Steve Clements, Senior Mortgage Consultant at Contractor Mortgages Made Easy (CMME), is advising those coming off fixed rate deals to be active: “Contractors coming to the end of a fixed rate deal need to give serious thought to remortgaging, or face being put on the lender’s standard variable rate which could be upwards of seven per cent.” “Negotiating contract renewals is now becoming more protracted. This means that forward planning is essential when planning personal finances – particularly when the largest commitment the busy contractor has is likely to be their mortgage.” “An increased number of contractors are looking to switch their mortgage too late in the process, mainly due to hectic work schedules, resulting in excessive amounts of interest paid to current lenders. This can be avoided by switching to a competitive tracker or fixed product. It’s worth looking at these options if the current deal is due to expire at any point in the next 6 months.” “With contractors we understand time is precious and that contract negotiations must come first, but a few minutes spent now reviewing the mortgage could save hundreds of pounds a year.” Potential bargains for First Time Buyer contractors “First-time buyers have not been put off by the recent dip in the property market and are still hoping to secure a good price on their first home. The fact that many sellers are not getting their asking price means that contractors can clinch a good deal at this time of year. We recently helped a contractor negotiate £27,500 off the purchase of a new build property, by explaining that the financial year end for the developer was looming, leaving a lot more room for negotiation on the price. It helps to understand the motivation and pressure for the seller when making an offer.”

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