Contractor Mortgages Made Easy

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Contractor Mortgages Made Easy

Matt Grix and Rob Gepp from Yellow Brick Mortgages discuss everything you need to know about Contractor mortgages.

What exactly is a contractor mortgage?

Contractor mortgages aren’t really any different to any other mortgages. There are no particular products intended just for contractors, it’s really about how lenders have adapted to give contractors more opportunity to get a good mortgage deal.

That’s due in part to the continued rise in contract and freelance work. Contractors come in many forms, from self-employed freelancers to people on fixed term contracts, CIS workers, IT contractors and more.

Getting the right deal is all about finding suitable lenders who understand how contractors’ income works.

Which banks give mortgages to contractors?

The majority of lenders offer some type of contractor mortgage, but they vary depending on the type of work you do. One lender might have a fantastic policy for an agency worker, but they might not be so good for a CIS contractor. So it’s really about finding the right lender for your type of contract.

That’s where speaking to a mortgage adviser can be beneficial, to identify the perfect mortgage deal for your situation.

How much can contractors borrow on a mortgage?

Contractors are offered the same loan amount as anyone else – with most lenders willing to offer around four and a half times your annual income. The total will vary from lender to lender and your personal circumstances will have an influence as well. A broker will help you work out what mortgage lenders will accept as your income total and therefore how much you can borrow.

Some specialist lenders offer dedicated mortgage deals to contractors, depending on the industry sector that you work in.

How do contractors get a mortgage?

The first step is to speak to a mortgage adviser. As a contractor, generally most lenders will treat you as self-employed, which means they will look at the last two years’ income figures.

There are some exceptions to this, though. For certain types, such as IT contractors, lenders can take a different approach. Rather than looking at previous years, they might look at the gross value of the current contract, which can be really beneficial and might let you borrow more.

How is a contractor’s income assessed for a mortgage?

This can vary depending on the type of contractor. Many are assessed on a self-employed basis as above. However, two of the biggest industries for contracting are IT and construction, and for these professions some lenders will use the gross value of the contract. Alternatively they’ll look at your day rate or take an average income over the last three months.

In these situations you don’t necessarily need to have been in a contractor role for one or two years, which is required if you’re assessed on a self-employed basis. In the construction industry, if you’ve been in the role for three months but have previous working history in the same field, then lenders will just look at your current income.

How can I strengthen my mortgage application as a contractor?

The key is to be really tight with your paperwork. Lenders can consider contractors as quite high risk, because contracts can finish unexpectedly so there is less stability than in an employed role. It helps if there are no significant gaps in employment between one contract and the next – certainly in the 12 months leading up to a mortgage application.

You should also make sure you have documented contractual agreements with your clients. A lot of lenders will want to see invoices and bank statements, so make sure that you have all the details ready.

Check that your credit file is in order, with no late payments etc. Consider whether you could put down a larger deposit, as this will make you more appealing to a lender. You could also look to apply for a joint mortgage with someone in a more traditional employed role with PAYE, because that also boosts the lender’s confidence.

How is mortgage affordability assessed for a contractor running a limited company?

Lenders vary in their approach, but if you’ve got a limited company set up they will usually look at the salary and dividends taken out of the company. Typically they look at the last two years and take an average of both.

If your income has gone down in the most recent year they will generally use a lower figure.

How does a joint contractor mortgage work?

The contractor’s income will be assessed in line with how their contract is set up, whether that be as a CIS contractor, a freelancer etc.; and the partner’s income will be assessed in the normal way. The lender will request three months’ payslips for them to confirm their PAYE income.

Having that second person on the application brings permanence to the process and could tip the underwriter’s decision in your favour.

What documents do I need for a contractor mortgage?

You will need the standard documents: proof of ID, bank statements, and then the additional documents will depend whether the lender sees you as a self-employed individual or whether they’re assessing your contract based on the day rate or gross value.

For a self-employed individual, you will need the last two years’ tax calculations – your self assessment SA302 form.You can get these from your accountant or by logging into HMRC

If the lender is assessing your day rate or the gross contract value, then the lender will want to see three months’ payslips and potentially a copy of the contract.

How can a mortgage broker help?

Talking to a mortgage broker is essential to get a suitable contractor mortgage, because every lender is different and assesses contractors’ income differently. You could get a completely different lending result from one mortgage provider to the next.

That’s where our expertise comes in – we make sure that you satisfy a lender’s criteria and you get the best possible result. We’ve also got access to specialist lenders that contractors can’t access direct.

We look at contractors’ individual circumstances to find the most competitive deals that will mean they can achieve their home buying goals. We’re here throughout the process to help and support you. We help people in all sorts of complex situations to get the mortgage they want.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

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