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Contractor Mortgages – How To Get A Competitive Deal
Working as a contractor can be a highly rewarding career giving you variety and, often, good rates of pay. But does it make you a riskier prospect when it comes to mortgages?
What is a Contractor Mortgage?
While there are no mortgage products specifically for contractors, some mortgage lenders are more likely than others to accept contractors as customers.
So a contractor mortgage is essentially any mortgage open to a contractor.
How much can a Contractor borrow for a mortgage?
Generally, lenders offer around four times your annual income in total mortgage value. A few might extend this to 4.5 or even five times your income.
With a joint mortgage, the bank or building society will add your incomes together to work out the total mortgage offer. This is often particularly appealing to First Time Buyers.
It’s important to be pragmatic when buying a property and make sure you can afford the repayments on your mortgage. If you’re unable to meet the monthly amounts, your home may be repossessed.
How is a Contractor’s income assessed for a Mortgage?
Mortgage lenders calculate how much to loan you based on the monthly payments they believe you can comfortably manage. There are two ways a lender might assess you for a mortgage deal.
One way is to base your income on your day rate, as long as you have a long term contract in place. The lender looks at your daily contract rate and the number of days you work each week to calculate the total income. They will make allowances for (unpaid) holidays as part of this.
The other approach is to view you as self-employed. If you’re a sole trader you’ll usually be asked for evidence of tax calculations from your most recent self-assessment and tax return. This information includes a figure for your total income over the tax year.
For limited company contractors, you will normally need two or more years of accounts, certified by a qualified accountant. These should state the salary you’re paid by the limited company and any dividends. The greater the total, the more you stand to receive in your mortgage loan.
If you only have a year’s accounts or less, you might find it more difficult to get a mortgage. Lenders will see you as high risk, as it’s hard to predict what your earnings might be in the months and years to come.
Seek mortgage advice if you’re in this situation, as there will probably be ways to improve your chances.
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How do you strengthen your mortgage application as a Contractor?
Lenders are essentially seeking reassurance that you have a good and steady income. If you have been successfully contracting for a few years, with all the necessary records in place, you should have nothing to worry about.
However, if you have large gaps in between your contracts or your income has been a bit erratic over the years, you might end up with a mortgage offer that’s less than you’d hoped.
There are a few things you can do to make sure you’re an appealing prospect to mortgage lenders:
- Contribute a good deposit. If you can put down 15-20% of the property value or more, you have a better chance of favourable interest rates.
- Check the details of your credit score. As with any loan, your lender will look at your credit rating. A low score could hamper your mortgage chances.
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- Demonstrate a strong business pipeline. Show evidence of long term contracts or new agreements in the application process. It also helps to show clear records of operating expenses, as long as these prove that you generate good profits.
- Minimise time off in the months before you apply for a mortgage, and take dividends from the company to boost your visible income.
How can a Mortgage Broker help if I am a Contractor?
If you’re a contractor, Mortgage Brokers can be a very helpful source of information and advice. Good brokers know the market well and will be able to recommend lenders who take a positive approach to contractors.
Brokers compare mortgage rates, fees and offers on your behalf. That means you can make an informed decision about the deal that will suit you best. Your broker will also talk you through the documents and details you should submit to get your application approved.
We are highly experienced in helping contractors find suitable mortgages. Our friendly team is on hand to explore the options with you.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
We may charge a fee of up to £395 for mortgage advisory services and administration.
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