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Contractor Mortgage
Hemat Natha talks us through mortgages for contractors.
Are there specific mortgages for contractors?
There are no specific mortgages just for contractors. Each lender has their criteria or policy of how they actually treat people in this field.
The two main types of contractors we deal with are, Construction Industry Scheme (CIS) contractors, and IT contractors. Construction Industry Scheme contractors get paid a gross amount, and National Insurance is taken off at source. Then there are IT contractors – or anyone on a day rate. We’ve dealt with a couple of clients on accountancy contracts and actuary contracts too.
Each lender has their own policy on how they assess contractors who are not on typical employment contracts. These are not zero hours contracts, short term contract, or agency workers, or people on probation – listen to our other podcast for those. Contractors are treated differently, as we’ll see.
Do all mortgage providers lend to contractors?
I did a bit of research before coming to talk to you and counted 65 lenders that lend to varying types of contractors. There were only two on my search that didn’t have any criteria for contractors – and that’s because they are new banks who haven’t got these criteria in place yet. But I’m sure they are going to want to bring out an offering in due course.
How much can contractors borrow on a mortgage?
We know that the amount of borrowing depends on the size of mortgage that you want, the deposit you have, your financial commitments, credit rating and how many dependents you have.
For contractors, lenders determine borrowing based on the contract rate, and how long your contract is for. Generally speaking, contracts have a daily rate, and the lender will multiply that by five if you’re working five days a week, then by 48 weeks or 52 weeks for the year. That will confirm the affordability.
We do all of that for you. We determine the best route for a contractor depending on how you are paid. Some contractors are paid into a business account, or a personal account if they’re a sole trader. They might have a limited company or the contracts might be arranged through an umbrella company.
How do contractors get a mortgage?
We will just start by having a conversation with you. We’ve found plenty of contractor mortgages for our clients – some were actuaries working two days a week on £1,200 a day. The highest contract we worked on was someone getting £2,500 a day!
We’ll ask you how long you have been contracting for, how long your current contract is, what the end date is etc. We’ll use your CV to show your track record. Then we’ll ask you for a set of documents and explore what you want from your mortgage. We’ll go away and do some research and present you with your options.
If you’re a First Time Buyer we’ll hold your hand throughout the process. If you’re remortgaging we’ll explore whether you want to borrow any additional money or do a like for like remortgage to better your rate. We’re here at every step to get you what you need.
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It doesn’t cost anything for a chat, it’s free and we never charge a fee until we’ve got a mortgage offer. So pick up the phone and let us take it from there.
How is a contractor’s income assessed for a mortgage?
Most people want to borrow the maximum amount of money that’s available. In that case we multiply your day rate by five, and some lenders will multiply that by 52 weeks for an annual figure.
We’ll go to those lenders if you want to max out your borrowing, as others multiply by 48. Some use 46 and some even 41. We’ll also look at who’s the cheapest within that selection.
There are a few rare occasions where the daily rate might not meet affordability criteria, but there are ways around that.
If you’re a limited company contractor and you have two years’ accounts, we can also use the net profits of the limited company and the salary you take from the company. We’ll compare that with the day rate calculation and see which gives us the better borrowing total. So there’s a lot we can do to get you the most appropriate mortgage deal.
What documents do contractors need to apply for a mortgage?
There’s a comprehensive list of documents that we ask for, because we want to give you the most thorough assessment of your options. We will always attempt to get the lender who is cheapest by true cost.
We’ll look at your company accounts and two years’ tax returns, two years’ tax calculations and the SA302 which is confirmation of the tax paid on a yearly basis.
Your CV will show us if you’ve had any gaps in between contracts, and we’ll use all that information to maximise the affordability. We’ll also need to see bank statements to verify your income, plus ID documents and also your credit report.
How do you strengthen your mortgage application as a contractor?
Speak to us as early in the process as possible. Even if you are currently employed and are looking to go into contracting, we can explain what it will mean. There are lenders who will accept that scenario. We can confirm affordability before you arrange your first contract. People choose contracting because it can increase your income.
Make sure that your current contract is up to date and that your CV doesn’t have a huge array of gaps. Try to avoid lengthy delays between contracts. A week or two is not a problem, but we don’t want it to stretch to two months. Lenders want to see 12 to 24 months of contracting history, ideally where your contracts are being renewed.
We do sometimes find that contractors are overstretching themselves. Don’t overlook the tax you have to pay on your income, and be realistic. Do speak to us if you’re considering a switch to contracting. We’ll verify what you can and can’t do, confirm the numbers and guide you through that process.
What about contractors buying property with another person?
There’s no difference – and as we said at the start of the conversation, we will always search for mortgage lenders who are cheapest by true cost. We look at the monthly payments, the fees the lender charges and interest rates.
Then we’ll work out the affordability. The other person can be employed or self-employed – we’ll just do the same thing. We’ll request the documents applicable to their type of employment, look at their credit reports and make recommendations accordingly.
We’ve seen lots of weird and wonderful things: unusual property types and different income types. We’ve worked with a chef, receiving the majority of his income as tips, buying with a contractor. That’s why I love my job!
Your home may be repossessed if you do not keep up with your mortgage repayments.
There may be a fee for mortgage advice. The precise amount will depend on your circumstances, but will be agreed with you before proceeding.
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