Contractor Mortgages Explained

Introduction

There are numerous benefits to being a self-employed contractor but many worry that their employment status will make it difficult to get a mortgage. There are a number of commonly held myths about contractor mortgages that can add to those concerns.

We are here to bust those myths and make the process as easy as possible. It’s true that for some people getting a mortgage can be a struggle, but that will generally have more to do with their personal credit status than their employment status. Successful contractors quite often earn more than their permanently employed counterparts, meaning that they have potentially been able to save a larger deposit and can afford higher monthly mortgage payments.

There are also options for contractors who haven’t been contracting for a long time. Our friendly and professional mortgage brokers are experienced in working with contractors and have access to thousands of deals. They can work with you to find the most appropriate mortgage for your needs.

Common Myths About Contractor Mortgages

Myth 1: As a Contractor You Will Be Charged a Higher Rate of Interest

In most cases, contractors will be able to access the same mortgage rates as everyone else. Lenders may charge higher rates for several reasons but being a contractor is unlikely to be one of them.

Contractors often earn more than permanently employed staff and may, therefore, have been able to save up a large deposit. This could mean that the Loan To Value (LTV) ratio is lower with the result that more attractive interest rates may be available.

Credit rating is another factor that can affect the interest rates available. Many contractors have strong credit ratings due to a combination of higher earnings and a good history of previous credit usage. Having a good credit rating, regardless as to your employment status, may give you access to more attractive interest rates.

Myth 2: Contractors Need Years of Accounts to be Able to Get a Mortgage

It is true that some lenders are better options for contractor mortgages than others. However, there are many mortgage lenders in the market who are sympathetic to mortgage applications from contractors and won’t insist on at least three years of accounts being available.

There are lenders that will arrange a mortgage without any accounts, just based on your contract itself. One lender actually will lend based on the contract, even if you have not started the role yet. Our mortgage brokers have excellent knowledge as to which lenders will be most appropriate and the qualifying criteria. They can work with you to ensure that your application is made to the most appropriate lender for your personal financial position and needs.

Myth 3: Contractors Must Be Able to Put Down Larger Deposits

You may have heard that contractors will be asked to put down much larger deposits than permanently employed applicants. Some contractors have heard that they will need as much as a 40%, or even 50% deposit in order to be able to get a mortgage. The reality is that mortgages offered to contractors are offered on the same basis as mortgages for those permanently employed when it comes to deposits. If a mortgage deal requires a 5% deposit for an applicant that is permanently employed, it will only require a 5% deposit for a contractor making an application for the same mortgage deal. Of course, the larger the deposit you have, the more likely it is that you will have access to better deals as the LTV ratio is lower, but this applies to both contractors and employed status applicants.

Myth 4: Contractors Are Considered a Higher Risk

Many lenders are sympathetic to contractor applications and those lenders understand that contractors are no higher risk than permanently employed staff. If you have a good credit rating and meet the deposit and affordability requirements, you likely to be considered normal or even low risk. If you don’t have a good credit rating, you may be considered a higher risk, but this will be as a result of your credit status, rather than your employment status. The good news is that even if your credit rating isn’t great, there are likely to still be options available to you. Working with one of our specialist mortgage brokers will help you to identify the right product to meet your needs and circumstances.

Myth 5: Applications for Contractor Mortgages take Much Longer to Be Approved

If you fulfil the required criteria, there is no reason why your contractor mortgage should take any longer to be approved than if you were employed. You may have heard stories about the vast amounts of paperwork and references you will be required to produce which make the process longer. This is when working with a mortgage adviser that really understands mortgages for contractors can save a great deal of time. Our advisers will target lenders that cater for contractors and your income type. The criteria you may have to fulfil may be surprisingly simple.

The Path to Getting a Mortgage as a Contractor

The process for getting a contractor mortgage can be relatively straightforward but if you haven’t had a mortgage before or have had a mortgage previously but only when you weren’t self-employed, it can seem quite daunting. The type of contract work, how long you have been contracting, your level of income, whether you are a single or joint applicant, your personal credit history and the size of your deposit will all be taken into consideration. However, most of these are also considerations for getting a mortgage for non-contractors. There are some key areas which can be different when making a mortgage application as a contractor.

How Much Will a Contractor Be Able to Borrow?

This will depend on several factors including how long you have been contracting, your outgoings and your income. To work out what they may be prepared to lend, mortgage lenders will carry out an affordability assessment. Depending upon the lender, they may require evidence of your earnings history for a specific period and some might want to see up to three years’ of accounts, but others will not. You can borrow upto 5x the value of your contract. Our mortgage brokers can discuss your personal situation with you and advise on the best options available to meet your requirements.

Assessing Your Income as a Contractor

Fixed Rate Income Contractors Many contractors have agreements for fixed daily, weekly or monthly rates, rather than being paid strictly according to the hours worked. In some industry sectors, this is very common. If this is your position, lenders who specialise in mortgages for contractors may work out your annual income on that basis. To do this they may require you to have a long-term contract on that rate. If you are on a monthly rate, the calculation performed by lenders is likely to be as simple as just multiplying your monthly rate by 12. However, if you are on a daily or weekly rate, they will adjust for holidays, bank holidays and other potential time off. This is likely to mean that they will work out your annual earnings based upon between 46 to 48 working weeks a year.

Long Term Contractors

If you have been a contractor for a number of years, it is likely that lenders will use an average of your income from recent years when working out how much they would be prepared to lend. This method will usually be applied if your income is fairly consistent from year to year. However, if your income varies quite significantly from year to year, then a lender is likely to either take the most recent year or the lowest earnings year in recent years. Our mortgage brokers will be able to discuss with you the way in which your income is likely to be calculated by lenders and which lenders are likely to be most sympathetic to your current status and requirements.

Limited Company Contractors

If you operate as a Limited Company, the calculations lenders use to carry out your Affordability Assessment will be different. Mortgage lenders are likely to consider only dividends and salary, rather than total earnings. If this could be a problem, our mortgage brokers can work with you to find a lender that is able to offer specialist underwriting so that your full accounts can be considered.

Getting a Mortgage with a Joint Applicant

If you are planning to buy with someone else who is not a contractor, this could work in your favour. Mortgage lenders can be more willing to lend if one of the applicants is in full-time employment. However, whilst this can help to soften the impact of a variable income from a lender’s perspective, you will need to be able to demonstrate a reliable pattern of earnings.

How Can You Strengthen Your Position as a Contractor?

There are several things you can do to strengthen your position from a potential lender’s perspective. Their stance on lending is always about the potential risk. If you can reduce that risk, you will be a more attractive proposition.