All You Need To Know About Contractor Mortgages
As a contractor, there are no specific mortgage products aimed at your employment type, however, most mortgages are available to everyone, with your employment type affecting only how the mortgage application is assessed by lenders.
Contract and freelance workers in the UK have typically found it more difficult to secure a mortgage than other applicants, given the less stable nature of their employment. In recent years, however, Mortgage Lenders are more receptive to contract workers and other types of Self-Employed income.
How much can a Contractor borrow for a mortgage?
Whilst the way that your income is assessed for the purposes of the mortgage application process will be different if you’re a contractor, the mortgage loan will still be based on the same criteria as it is for other borrowers.
Lenders offer a multiple of your annual income, typically between three and five times, with the exact multiple depending on your overall affordability and your credit score.
How is a Contractor’s income assessed for a mortgage?
As those employed in contract roles are considered to have a less stable income, lenders often like to establish an average annual income over the duration they see fit, usually three years, to minimise some of the risk involved in lending. In this scenario they will use your SA302 forms for the desired period to calculate this.If you work in an industry where your annual income varies dramatically, most lenders will only consider the most recent year’s earnings, regardless if this is higher or lower than your average earnings.
It’s important to note that if you’re not actively employed in a contract role, despite having previous income, your mortgage application will not be accepted at that time, so it’s highly recommended that you wait until you are under your next active contract, before applying.
Getting a mortgage when you are paid a daily rate?
It’s not uncommon for contract workers to be paid a day contract rate. If this is your situation then some of the more specialist, contractor-friendly lenders are happy to calculate your average annual income using your day rate times by your number of working days per year. To take advantage of this, however, you will usually need to have had a contract in place for at least the year prior to your application.
Getting a mortgage as a new contractor
It’s more difficult to find a mortgage as a new contractor, unless you are in a professional career, such as a doctor or solicitor. Newly qualified doctors, for example, may be able to get a mortgage before they start their first contract.
For other professions, it’s unlikely that you will be able to find a mortgage deal before you have a few years of experience contracting in your chosen industry, however, specialist brokers are often able to find deals with independent lenders, so it’s worth seeking advice before you dismiss the idea entirely.
How do you strengthen your mortgage application as a contractor?
As a higher-risk borrower, anything you can do before you apply for a mortgage, to improve the stability of your financial position, will help to convince lenders that you’re a solid applicant. The following can help to achieve this:
- If possible, obtain written contracts from clients for evidence of stable work availability
- Keep accurate records of your income/expenses
- Save for and offer a larger deposit
- Work on improving your credit score
- Minimise your leave and any gaps between contracts in the 12 months prior to your application
- If you have a partner with a PAYE income, you could consider a joint application
How mortgage affordability is assessed for a Limited Company?
As a Limited Company Director, lenders use your personal salary and dividends payments to calculate your average annual income. It is possible to find lenders willing to consider retained business profits alongside this in some cases, but this is not common.
How can a Mortgage Broker help if I’m a Contractor?
The value of using a Mortgage Broker is usually their ability to find deals that you wouldn’t otherwise have access to. This means that you can save money, and in many cases, time, as brokers are often willing to manage much of the administrative aspect of your application on your behalf.
We can assess your individual circumstances to determine your chances of acceptance and advise you how to strengthen your application. Our goal is to save you time, stress and in some cases the disappointment of a rejected mortgage application.