With the number of self-employed contractors and freelancers jumping significantly in the last decade, how has the mortgage market reacted to this seismic change in the British workforce? According to research carried out by Aldermore Bank and reported in the Guardian, 30% of self-employed homeowners believe that they have a harder time getting a mortgage than their full-time employed colleagues (source: The Guardian).
There is, however, no truth to this widespread belief. The number of specialist contractor mortgage lenders means that the market is actually healthy and full of competition. Contractors make more than employees (source: Contractor Calculator) – half of IT contractors earn more than the average UK salary over a 90 day period (source: BM Magazine). And contractors pay less in tax too (source: People Management).
It’s good to know that, for a contractor getting a mortgage, lenders will fight to provide you with the best contractor mortgage rates. What makes it seem harder is the fact that there’s much more of a carry on proving how much you actually earn. In this article, we debunk many of the widely-held beliefs about contractor mortgages and we share with you the information you need to know when we’re helping you prepare to apply for a mortgage.
Contractor mortgages – how much can I borrow?
The amount of money you’ll be able to borrow for a contractor mortgage depends on how much you earn and on your contractor status. Whatever income your contractor mortgage specialist provider decides to use in assessing your application, you will normally be able to borrow up to 4-5 times your post-tax income as long as the mortgage company believes that you won’t struggle to meet the repayments.
So, what are the current contractor mortgage requirements (sub-contractor mortgages included)?
10% deposits are normally fine however you’ll pay a higher level of interest if you use the smallest possible deposit. According to IT Contracting, the rates you’ll be charged drop significantly if you can raise a deposit of 20%, 25%, or more.
If your other half (whether married, in a civil partnership, or neither) is a full-time employee with a stable vocational history, this will give lenders more comfort. You may be offered up to 4.5 to 5.5 times your joint salary.
Although, unlike in previous times, the information contained on your credit report is not the be-all-and-end-all factor influencing whether your application will be accepted, they still do form part of a lender’s decision-making process. Contract Eye recommends that you keep up to date on all current credit accounts and that you appear on the Electoral Roll.
Contractor mortgages – how your income is considered
Now that we know that you can borrow between 4-5 times your individual income (slightly higher if it’s a joint application), how do mortgage companies work out what your income is to base their decision on how much they’ll lend you? It depends on your contractor status, whether you’re on day rates, and the paperwork you have to back up your assertions.
Contractor mortgages if you are a limited company contractor
If you are a limited company contractor, your income may be assessed in one of two different ways. The most common method of calculation is adding up your salary and the dividends you’ve paid yourself over the last two to three years. A less common method is to take both your salary and the retained profits within your limited company into account.
Your mortgage provider will dig around your limited company accounts in an attempt to understand your underlying profitability and they will discount “funds set aside to pay company tax, VAT or income tax (as not counting) towards your personal assets.” (source: Which?)
Umbrella contractor mortgages
Umbrella contractor mortgages have been tougher to secure mortgages for in general. Being an umbrella contractor is like walking a line between being a self-employed person free to control their own time and a traditional employed person.
Some brokers allow you to use a current contract to calculate a level of general income by annualising your rates. If you’re an umbrella contractor, please get in touch and share your situation with us – we’re sure we’ll be able to help.
Sole trader contractor mortgages
For sole traders, there are two methods of assessing your income. If, over the last two to three years, your income from contracting has increased, they will normally take an average of your salary over that time. However, if your income has decreased, they will be more likely to use your income over the last tax year on which to base your application.
Contractor mortgages – day rates
Mortgage companies do consider contractors on day rates. Speaking to FT Advisor, Rob Barnard, sales director at Pepper Money, says that, in common with many of his competitors, his company uses “either the 12-month average day rate times five days per week times 46 weeks, or the current day rate times five days per week times 46 weeks – whichever is the lesser amount”. Contractors basing their mortgage application on their day rates will need to be able to show 12 months’ trading history to a potential lender.
What paperwork will you need for a contractor mortgage?
Make sure your paperwork is up to date and that you have as much of it as readily available as possible. For limited company applicants, have your bank account statements and tax statements (personal and corporate) ready. Invoices and evidence of the contract work you’ve completed will help your case as will successfully demonstrating that there are not long gaps between contracts (except by choice).
During any contractor mortgage application, involve your accountants as much as you can. More often than not, the evidence submitted by an accountant on behalf of their client for a contractor mortgage application tips the balance in your favour. And we say that from experience.
Contractor mortgage rates of interest
When applying for a mortgage for a contractor, Lend 4 will package your deal for presentation to specialist contractor mortgage providers with the aim of securing an interest rate (either fixed or variable) close to or better than the standard employee mortgage.
Where to find contractor friendly mortgages
There are plenty of specialist contractor mortgages available. You can either approach a lender direct or via a broker. Brokers like Lend 4 generally know the “borrower profiles” of each individual lender – in other words, they will know, based upon the information given on your application, which lenders will want to work with you and which ones won’t.
We would generally recommend a specialist broker like Lend 4 rather than trying to do everything yourself. It will save you a lot of time and we genuinely believe that you’re more likely to get a better interest rate because we make lenders compete for your business.
Help with your contractor mortgage through best contractor mortgage broker Lend 4
Getting the right contractor mortgage for you will involve time, stress, and paperwork – just like with the mortgages your full-time employee friends find for themselves. Try to secure the best deal for yourself and make sure that, if possible, your mortgage allows you to overpay without penalty – this will save you a lot of money when you have bumper years. Contractor mortgages made easy with Lend 4 – phone 03330 161 444 , email firstname.lastname@example.org . Ask us about our special IT contractor mortgages if applicable.