A verification scheme, originally launched in September 2011 but now increasingly used by lenders, could cause problems for contractors applying for a mortgage or remortgage.
HMRC works with lenders to clamp down on false income declarations
Implemented by the Council of Mortgage Lenders in partnership with the Building Societies Association and HMRC, it aims to combat mortgage fraud. It allows lenders to contact the taxman to verify income declared on the mortgage application with the borrower’s tax returns.
Simply put, if the figures don’t match, the applicant could face an investigation.
This could cause very real problems for freelancers who may innocently use their gross contract rate after approaching a lender directly or dealing with a mortgage adviser who may lack specialist knowledge of working with contractors.
The annualised gross contract rate will almost certainly not match the income figure shown on a tax return so it is imperative that borrowers exercise caution when deciding how to apply for a mortgage.
In its first year, the scheme considered just 386 cases referred to it by lenders. Within five years – in 2017 – it was looking at almost 11,000 every year
Interestingly, according to the fraud prevention agency CIFAS, mortgage fraud cases increased by 5% between 2018 and 2019, with almost half of the fraudulent cases being carried out by 31-40-year-olds.
Scheme highlights the importance of using a specialist mortgage broker
Veteran IFA and long-term Contract Eye contributor Tony Harris says it is more important than ever to use a mortgage broker who understands how freelancers and contractors work.
The key to avoiding problems with this initiative is to ensure you approach the correct lender.
If you intend to use the gross contract rather than traditional company accounts or umbrella company payslips, it is vital that you apply to lenders who specifically welcome contract-based income underwriting.
You needn’t pay any more in terms of interest rate by approaching the correct lender, and there are still contractor mortgage specialists who charge none of the usual broker fees for their advice.
You mustn’t get this wrong because the repercussions could be severe with HMRC now involved.
High-street lenders are not always the best option
Harris highlighted the importance of choosing contractor-friendly lenders
As an example, we help contractors from the first day of their first contract, but we need to be very selective about which lender we use and would never approach a high-street branch with their application.
You need to ensure that your application lands on the desk of a key decision-maker at the lender’s HQ. This person already appreciates your employability as a freelancer and is happy to base affordability on the contract alone.
Scheme helps create a safer environment
On the plus side, this initiative could help wipe out mortgage fraud by those exaggerating incomes and providing fake payslips, etc., which could lead to a safer lending environment and ultimately boost the lenders’ confidence in the housing market overall.
However, to avoid falling victim to the consequences of this initiative, it appears more important than ever that contractors talk to a specialist.
To learn more, read our guide to contractor mortgages. To find out how much you can borrow or for other questions, contact our trusted mortgage partner, Broadbench, using the form below.
Please use this article as a guide only. Always seek professional advice when considering your mortgage options.
