Contractor Mortgages: Why They Aren't Uniform Throughout the EU
Contractor mortgages have always been somewhat unique. Despite their challenges, you might expect contractor mortgages to be pretty standard across the EU. They are not. Getting a contractor mortgage in Germany is far different from getting one in Spain or France. And as long as the UK remains part of the EU, our contractor mortgages will be different still.
It is true that EU regulations bring quite a bit of uniformity to member nation financial services. But individual nations still retain enough freedom to come up with their own ways of doing things. Some are stricter with mortgage lending while others, not so much. Sorting it all out really requires a comprehensive guide to contractor friendly mortgages in the buyer's country of residence
Consider what goes into determining whether a contractor mortgage represents a good risk for the lender:
Property Valuation
Lenders in every country will examine property valuation to determine how much they are willing to lend if they are willing at all. This valuation is applied to what is known in some countries as the loan-to-value (LTV) ratio. LTV represents the amount a lender is willing to loan compared to the value of the property.
Let's say you want to buy a home priced at £100,000. The lender expects you to put down 25%, meaning your deposit will be £25,000. As long as the lender's LTV is no lower than 75%, you are usually good to go. But if it is 65%, you are either going to have to come up with an additional £10,000 or find a cheaper house.
The thing is that a property valuation is different from one country to the next. In some countries, the land is more valuable than the houses that sit on them. In other countries, houses in major cities are significantly more valuable than those in the country.
Borrower Creditworthiness
Here in the UK, the government took steps in the aftermath of the financial crisis to make sure lenders were doing everything they could to guarantee the creditworthiness of their clients. Did you know that Germany didn't experience the same kinds of losses we did here in the UK? That's because German lenders have always been much more conservative in their lending practices.
German lenders are very much interested in the creditworthiness of their borrowers. When it comes to contractor mortgages, they scrutinise borrowers much more closely. They require a lot more documentation, a longer credit history, and so on. It is not unusual for German lenders to require a minimum of three years' worth of tax statements, balance sheets, and other records.
Borrower Age
Another factor that differs across the EU is how lenders approach a borrower's age. If you are a contractor seeking a mortgage in the UK, being 55 years old would not necessarily be a significant hindrance as long as you can prove your income. That is not true in Germany and some other EU countries.
Some countries require lenders to look at pension information for borrowers of a certain age. The thinking is that if the mortgage extends into the borrower's retirement years, there needs to be sufficient pension income to support the mortgage. This can be challenging for contractors whose pensions may not be as generous. Some life-long contractors do not even have pensions above and beyond what the state offers.
Borrower Debt Load
Lenders in some EU countries take a more detailed look at borrower debt loads. They look to see how much money a particular borrower might owe on revolving credit, car loans, and even other mortgages. They compare that debt load to the borrower's income to get a gauge of whether or not the individual can truly afford a new mortgage.
Understand that debt load consideration is given more weight in some countries than others. They certainly carry a lot of weight in the UK. In other countries, lenders are less concerned about debt load as long as the borrower has a history of paying his or her bills on time.
Wrapping It All Up
If you know anything about mortgage lending, you are aware that all of the items discussed in this post are not unique to contractor mortgages. These are things that apply to just about every mortgage offered in Europe. What must be understood is that different factors carry differing amounts of weight from one EU country to the next. In almost every case, they carry more weight in a contractor mortgage scenario.
Contractor mortgages are available throughout the EU. Contractors sometimes have to work a little bit harder to get a good deal, but the deals are out there to be had among those willing to do what is necessary.