PPOR Mortgage - Contractor

I'm on the market for a new job and a new house. The reason for the new job is to be able to buy the new house (I'm underpaid where I am).

I'll be looking to borrow up to $650k for a purchase up $900k (< 80% LVR). I've been working in my industry (IT) for 10+ years. I have a wife (not working) and 2 dependants (both under 3, hence the wife not working).

I've been given a lending scenario which will see me able to buy what I want with my projected new income. I'm almost at the limit though. I'm also considering an opportunity which will see me go on a 12 month contract (daily rates, PAYG). This will provide me with an equivalent salary of around 25k more than my projected permanent salary (after super, leave etc. is accounted for). My mortgage broker has indicated that this shouldn't be a problem, as I've been in the industry for a long time. He suggested any contract with less than 6 months duration would be an issue, but otherwise I'd be ok.

I'm currently looking into whether to try and buy with a long settlement, then sell our current PPOR, or to sell first. Either way seems to have some risk, and I'm concerned that transitioning to a contractor at the same time might compound the risk. That's why I'm here for a second opinion. It's not that I don't trust my mortgage broker, but the impact will be massive if he's wrong.

The scenario I'm looking at is:
1. Secure contract - Give 4 weeks notice
2. Start seriously looking. Potentially purchase whilst still in notice period at current role
3. Put existing house on market with shorter settlement than new purchase
4. Cross fingers

As per this thread (PPOR - Buy First/Sell Later), still tossing up whether to buy or sell first (maybe I shouldn't have made 2 different threads?)


My questions are:

1. Does transitioning to a contract pose a problem for a mortgage application, considering I have been employed in this field for 10+ years? Does it help that I'd be earning more than was required in a perm role to get the loan I need?

2. Is there anything that can be done to partially or fully guarantee that a bank will lend to me in this scenario? I'm assuming that at best I can get a pre-approval prior to either buying or selling, so I essentially need to start rolling the dice before I'm certain I can get the new loan.

 

Change jobs. Get pre approval, sell and buy.

Your way isn't too risky, but the application does say "are you aware of any future changes to your financial circumstances".

So it's not really kosher to get an approval based on a job you are leaving.

 

I've seen cases where people got a pre-approval, left a job, purchased and an employment check was done by the lender 3 days prior to settlement. The lender subsequently found out they'd changed jobs.

In this case they got away with it, but it was touch and go, we were lucky. I'd advise against changing jobs if you're in the process of purchasing.

These days lenders aren't too bothered about contractors, especially in IT. They'd want to see at least one payslip and probably the contract, but if you've got the employment history in the same field they're quite accepting.

I would advise against contracting under and ABN. This would be considered as self employed. Lenders may start asking for tax returns which cover the new employment arrangement, which can mean waiting a very long time before you can buy. Do the contracting under a PAYG relationship, lenders won't accept invoices as proof of income.

 

Thanks guys. To be clear, I'm not talking about being dishonest. I wouldn't actually get approval for the mortgage on my current wage. It's all down to my new wage, so the bank will have to know about it.

 

Peter, to clarify, as I understand, there's 2 forms of contracting: Fixed Length, and daily rate. I would be going for daily rate contracting, but I'd be a PAYG employee of the contracting agency. So no ABN etc., but the contract is likely to say $x per day, not $x per annum.

Is this the type of scenario you're talking about with lenders not being too concerned about contracting?

 

Most lenders will require at least 6 months as they deem you as a 'casual payg contractor'. Sometimes you can get away with less if you can support annualised income with a previous PAYG Summary/NOA. I would say that you would at least need 3-6 months as you are relying on the new wage to service the loan but there may be a couple of lenders out there who will consider less.

 

That will be a problem. I'm hoping to move a lot quicker than that. Ideally I'd like to buy (or be ready to buy) whilst still in my notice period at my current job. Waiting for 1 - 2 payslips will be a little annoying, but I can accept that. But 6 months?

My broker seems to think it own't be an issue, and they (most likely CBA) will annualise out the first payslip.

 

Hourly, daily or annual rates don't matter. Some contractors choose to invoice their employer, then they manage their own super and tax. They do this because they can claim a few extra deductions more easily (mobile phone, fuel). The problem is they're now considered self employed and all the lending baggage that goes with that.

If you're receiving a payslip, the employer pays your super and income tax on your behalf, it's a lot easier to get finance.

The CBA policy is that they will go off a single payslip if they can see consistent employment history in the same field and the employment contract. It's one of those policies that does make me a bit nervous because it's going to get hit very hard in their credit scoring system and there's few alternatives if it does fail.

 

Most banks don't like to annualise over a first payslip for a 'casual payg contractor'. As you are paid daily and are not paid sick leave etc, some banks may not annualise over a full 52 week period. However, like Pete stated CBA are one of the more lenient and would be my first port of call too as it is written in policy where with other lenders you will be pushing for a policy exception.

 

I must've misread your initial post, I thought you were starting before you had the new role.

 

Other than CBA, are there other lenders who are as generous with IT Contractors?

Basically, the wife has found the dream home that she just has to have, and no other house will ever compare. Auction is in 2.5 weeks. Best case scenario I'll have been in my new contract role for 1 week prior to this; worst case I'll be 3 weeks away from starting.

We've got the cash for the deposit, and have a lending scenario with CBA that will cover the cost, but I know it's risky without actually having pre-approval. Would love to know that there are backup options, hopefully at around the same rate.

Adding to the risk; we don't yet have our house on the market. We're about 2 weeks away from being ready. So if we're successful at auction, we'll be laying down the 10%, without pre-approval, and without having sold our current PPOR. I know it's risky, but I'm trying to determine how risky....

If we're able to line up simultaneous settlement (our current PPOR will sell quick), but settlement is delayed on our current PPOR, is bridging finance a viable option (particularly for contractors)? Is it worthwhile getting bridging finance early on in the piece, just in case? How long does it typically take to arrange?

EDIT: I don't think I was correct in my term 'simultaneous settlement'. Ideally, we'd settle on our current PPOR 30 days prior to settlement on new. The plan is to hopefully buy at 120 days settlement, put our current PPOR on the market immediately, selling 4 weeks later at 60 days settlement, and have around 30 days in the between.

 

For interest, what spot checks do lenders do on employment? Do they call or email the employer, ask for further payslips or bank statements?

 

@RickProp they look up the employer's number in the phone book and call them, asking to speak with HR. They generally don't use the number we provide as that could be to someone who's been influenced by the borrower.

 

The old Vandalay Industries trick

 

@Peter_Tersteeg Hoping you have some input from me on my questions above . I really appreciate your advice. I wasn't sure if my questions got missed with the following posts about employment checks.

 

Sorry I overlooked the rest of it...

There are plenty of lenders that are fine with contractors, but if your existing property is already held by the CBA then that's the obvious place to start. Trying to get another lender involved in a buy-sell scenario with limited time can be quite messy.

Bridging finance might be one solution, but there might be others as well. It all depends on your serviceability and equity position. If it can be helped, I prefer to avoid bridging finance if possible as it tends to be a bit more expensive and more complicated than the alternatives. A simultaneous settlement is always the ideal outcome if you can make it happen.

You're welcome to call and discuss this if you wish.

 

Thanks Peter. I'll give you a call tomorrow to discuss.