How to get a Contractor Mortgage
Although there is no particular mortgage product intended for contractors, many lenders have now adapted to give contractors more access to mortgages, due to a continued rise in contract and freelance work.
Some specialist lenders offer dedicated mortgage deals to those working as a contractor in professions such as doctors, dentists, and teachers.
How much can a Contractor borrow for a mortgage?
The fact that you are a contractor alone, should not affect the amount of the mortgage loan you’re offered. The main factor in calculating your loan value is affordability. This will be gauged by subtracting your expenditure from your typical annual income.
As a guide, most lenders are willing to offer a loan of around four and a half times your annual income however this varies greatly from lender to lender and your personal circumstances. We can help you to calculate what lenders will be willing to lend you based on your contractor income arrangements.
How is a Contractor’s income assessed for a mortgage?
As a contractor, the likelihood is that your earning will be sporadic. Lenders need a stable figure to calculate your loan and will therefore usually use an average of your earnings over a few years. Many lenders will also want information on your working history, alongside your SA302 form in order to establish a clearer picture of your long term earning potential. The length of time in your current contract, how often it has been renewed and how long remains on the contract can all be factors that can impact how much a lender would be prepared to lend to you.
If your income varies dramatically from year to year, lenders will sometimes just use the most recent year’s earnings or the lowest of the two for their calculation. Unfortunately, this means that you might be able to borrow less than someone with a more stable income.
It’s possible to find competitive mortgage rates for contractors with some lenders. The best rates will be obtained from those lenders who are more sympathetic to the needs of contractors. These are more likely to be independent specialist lenders than those on the high street.
Getting a mortgage when you are paid a day rate?
Contractor friendly lenders are often willing to use your standard day rate, multiplied by your annual working days in order to establish an average annual income. You will ordinarily need to demonstrate that you have at least a twelve-month contract in place, in order to benefit from this method.
Getting a mortgage as a new Contractor
It can be more difficult for those new to contracting to secure a mortgage, as mortgage lenders will struggle to define your long term earning potential. Most contract workers will need at least two years of accounts available before they are considered for a mortgage.
There are some professions in particular where a lack of accounts is overlooked by lenders. A qualified doctor, for example, can sometimes obtain a mortgage before their first contract has begun.
Some contractor schemes, such as the CIS (Construction Industry Scheme) may have more standard options as may be treated as employed by some lenders.
How do you strengthen your mortgage application as a Contractor?
Lenders consider contractors to be particularly high risk, therefore anything that you can do to improve the appearance of your finances before you apply for a mortgage, will increase your mortgage options.
Some things you could do to enrich the trust of a lender are:
- Offer a larger deposit where possible
- Obtain documented contractual agreements with your clients where possible
- Ensure that you have strong financial management, preparing full income and expenditure records ahead of your application
- Take steps to improve your credit score where necessary
- Ensure there are no significant gaps in employment (including holidays) between contracts, in at least the year prior to your application
- Apply for a joint mortgage with a partner in more traditional employment (PAYE)
- Consider using a guarantor on your mortgage application
How mortgage affordability is assessed for a Limited Company?
Those contractors operating as limited companies will experience a slightly different application process. Unlike sole traders, only your salary and dividends will be used to establish your affordability and therefore calculate your loan amount, rather than the total business income. There are certain lenders able to use share of net profit instead of dividend if you have been leaving money within the business as retained profit.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
How can Yellow Brick Mortgages help if I’m a Contractor?
More traditional high street lenders, such as banks are rarely able to offer the most competitive mortgages to contractors. They also tend to have stricter criteria to satisfy. As Mortgage Brokers we can provide you access to specialist lenders who are better placed to help contactors and offer them competitive interest rates.
We can assess your individual circumstances in order to determine whether your application will be accepted and can advise you on how to improve your chances, if necessary. This can save time, stress, and lasting issues caused by rejected mortgage applications.