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Sole director contractors warned they could be limited to unaffordable mortgage rates

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Mortgage lenders including Santander have announced that they are changing their affordability calculations on 6 April, taking into account not just rising energy bills and household expenditure as per the revised ONS data, but also the increase in National Insurance and dividend income tax rates.

Tighter affordability could see a lot of people who have bought big properties at exceptionally low rates end up struggling to remortgage, according to a NewsPage report.

“Ever more stringent affordability calculations could be another nail in the coffin for Sole Director Contractors who have also been under pressure from IR35.

Affordability calculators are a useful tool for lenders to maintain competitive product pricing and control volumes at the same time. Of course, they will argue they are being responsible and reacting to increasing household costs.”

Jonathan Burridge, Founding Adviser at We are Money

Lewis Shaw of Shaw Financial Services said that now that lenders are starting to tighten their belts, the market could easily see a scenario where over-leveraged borrowers with big mortgages may struggle to remortgage as lenders’ affordability models are adjusted in line with tax rises and the cost of living crisis.

“Business owners who pay themselves in dividends will be at particular risk, being squeezed from every direction,” said Shaw. 

Graham Cox of Self Employed Mortgage Hub says when the time comes to remortgage, it’s possible overstretched business owners could be left stranded on unaffordable SVR rates.

Cox explains, “It depends on whether their existing lender is willing to provide a new deal. Nonetheless, if house prices go into sharp reverse, which is a distinct possibility, we’re looking at negative equity, repossessions, and a whole world of pain.”

Contractors and freelancers are encouraged to consider going through a mortgage broker who has industry ties with underwriters that understand and appreciate how contractor income works and their track record of paying their mortgages.

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IR35: All IT contractors deemed “employed” under Halifax mortgage criteria; Plus Expert Application Tips For Contractors

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