Getting a mortgage as a contractor can be a challenge as lenders have different ways of calculating how much you could borrow and therefore the mortgage available could be vastly different from lender to lender. Using a contractor mortgage broker that specialises in helping contractors can save a lot of time, money and stress.
Many clients approach us as they have been declined by their bank, however, we have a large panel of lenders, some high street based, that can provide mortgages to contractors.
What is a Contractor Mortgage?
Let’s start with what a contractor is first – so this is someone who offers their skills and expertise for a contracted period of time – like 6 or 12 months for example. At the end of the contract, the contract will terminate and the services provided will stop. Generally the contractor will then move onto another contract within another company or the existing contract may be extended.
How do contractors get paid?
Employed Fixed Term Contract – This is where the contractor is employed on typically a day rate for X period of time. In this situation the contractor will be provided with payslips in which National Insurance Contributions and Income Tax would have been deducted at source.
Contractor mortgage as a Sole Trader – In this situation the contractor would generally issue an invoice on typically a monthly basis to the firm which has contracted in their services and this invoice is paid without any deductions. The Sole Trader contractor would then submit yearly accounts and pay any taxes that are due.
Contractor Mortgage through a Limited Company – Here the contractors company would typically issue an invoice to the firm which it has been contracted to work to be paid on a weekly or monthly basis. This invoice is paid to the Limited Company and then the limited company would pay the contractor as a salary &/or dividends. The Limited Company would have to provide yearly accounts and pay relevant taxes due and the contractor would also have to submit a yearly tax return for the income they have personally received.
How long do you need to be a contractor for to get a mortgage?
Typically lenders want to see that you have experience as a contractor and can provide a CV of previous contracts that you have had in place. Additionally lenders generally would like to see at least 3 months plus remaining on the existing contract, However if you don’t fit with this please still get in touch as we may be able to help still.
How do lenders work out how much you can borrow as a contractor?
When finding a mortgage for a contractor this can be a challenge as lenders will underwrite the mortgage differently, for example:
Day Rate Calculation – some lenders will base the clients income using their daily rate of pay x 5 days per week and then 46 weeks in the year (assumed 6 weeks for holiday etc) to get the annual income, Let’s look at an example:
If you are earning £450 per day as a contractor x 5 days in the week x 46 weeks of the year working – This would give you an annual gross income of £103,500. Now lenders that calculate affordability using the day rate will take £103,500 and typically times this by 4.5 to give a potential mortgage borrowing of £465,750. (this is just a guide and does not factor in any outgoings).
Accounts Calculation – Net Profit – Some lenders will use the income declared on your accounts once expenses have been deducted (the Net Profit figure).
Accounts Calculation – Salary & Retained Profit – Some lenders will use the salary you have taken plus use the Retained Profit in the business when working out how much you can afford to borrow.
Additionally some lenders will insist that you earn a minimum income to qualify. As you can see – it is not straight forward and knowing how lenders underwrite these cases can save a lot of time.
How long does a contractor mortgage typically take to arrange?
The timeframe to organise these types of mortgages is typically the same as a standard mortgage providing you know exactly how lenders will underwrite these clients. The key is knowing what the lender will require you to provide to underwrite and provide the mortgage required. Experience is key.
What documents need to be provided?
These are the typical documents that lenders require for these cases:
Copy of the current contract.
CV detailing your contract history and experience.
3 months personal bank statements to understand how you manage your accounts and your outgoings.
3 months business bank statements.
Last 2 Years accounts.
Proof of Identity such as a Driving License or Passport.
Lenders always have the right to ask for additional information throughout the underwriting process.
Range of contractor Mortgages
If you are a contractor you can still take out these finance products:
Shared Ownership Mortgages – Where you buy a share of the property and rent the remaining.
Help to Buy Mortgages – Where you want to buy a new build property. You put down a 5% deposit, the government will give you an equity loan of 20% (40% in London) and you take out a mortgage for the remaining.
Bad Credit Mortgages – If you have in the past had bad credit such as CCJ’s, defaults, missed payments there are specialist mortgage lenders that can help you.
Home Mover – If you want to sell and buy a new family home being a contractor should not hold you back.
Remortgages – If you want to remortgage for a better rate or raise money for home improvements or debt consolidation this is certainly possible.
How do I speak to a contractor mortgage adviser?
You can call us up directly or if you complete the above enquiry you will have the option to schedule a telephone appointment with a specialist contractor adviser. We are here to help and please ask as many questions as you wish.
The mortgage rates offered to employed applicants or contractors are the same. How to calculate the borrowing capacity is different, so it is worth speak to a broker to fully understand the amount you can borrow.