One of the greatest attractions of working for yourself is choosing when to work and when to take a break.
As a contractor working as a self-employed sole trader or a director in your limited company, you work hard for your clients during the contract period. So when a contract comes to an end, it’s not unusual to take some well-deserved time out before starting your next project.
A break can be as long as you want it to be – so you might take the six week summer holidays off with the kids or decide to do something life-changing like trekking in the Himalayas for a month.
However, a longer break may be unplanned, especially if a client defers your start date by six months. It could take weeks to clinch another contract to bridge the gap.
This is all well and good if you’re not planning on moving home anytime soon, but if you’re about to apply for a mortgage, long periods of inactivity between one project and the next could throw a spanner in the works.
Read on to discover how to increase your chances of securing a mortgage offer if you have gaps in your contract history.
Why Do Gaps In Employment Affect Contractor Mortgage Applications?
Mortgage lenders are risk averse, so they need to feel sure you’ll be able to afford the repayments on your mortgage.
The contractors they’ll most want to lend to will have had a series of regular, fixed-term contracts of at least 12 months, be mid-contract when they apply, and only have short-term breaks between contracts of a maximum of six weeks.
They will use your day rate multiplied by the number of weeks you’ve worked in a year to calculate your gross contract and to assess how much to lend you.
However, if you have long gaps between your contracts, your income will be sporadic and the total amount you’ve earned in a year may not be enough to secure the amount of money you’re hoping to borrow.
It’s important to explain why you’ve had gaps in your contract history so a lender doesn’t assume you’re unable to secure regular contract work.
Bring In A Specialist Mortgage Adviser To Help You
An Adviser who is used to dealing with contractors and specialist lenders will understand how you work and give you the best advice about proving yourself as a borrower.
They also have access to contractor friendly lenders who have a range of mortgage products and interest rates you can choose from to suit you. These mortgage lenders are different to high street banks and building societies because they prefer to deal with specialist brokers rather than with you directly.
A specialist Mortgage Adviser will prepare your mortgage application for you, guide you through the mortgage application process and submit your application to the lender on your behalf. They will be happy to explain any gaps in your employment directly with the lender.
They are really useful to have on your side because they keep up to date with the latest mortgage deals and will pass these on so you can take advantage of the best mortgage rates and mortgage loans.
How Long A Gap Is Acceptable?
The way providers consider gaps in employment differ from lender to lender.
While most lenders will consider a six week break to be an acceptable length of time between contracts, anything longer may raise questions about your ability to make the repayments on your mortgage.
Be upfront about why you’ve taken longer breaks between contracts. You may have a genuine reason, like taking maternity or paternity leave, or recovering from an operation.
These types of gaps will have been planned months in advance, and you may have saved up a financial cushion to cover your financial responsibilities during these periods.
There will be some lenders who are prepared to accept exceptional circumstances like these as a good reason for longer periods of inactivity.
Can I Prove My Income In A Different Way If I Have Gaps Between Contracts?
If you can’t use your day rate as a reliable method because you have too many gaps in your contract work, if you are a director, you can use your limited company accounts to prove your income.
This will include your basic salary and dividends you’ve drawn down during the last financial year. Some lenders will insist on the last two to three year’s worth of company accounts, while others will be happy to accept your latest set of accounts.
Alternatively, if you’re a sole trader, you can submit your SA302 forms. The SA302 is HMRC’s tax calculation based on your annual income which shows how much you earned and the amount of tax you owe for that financial year.
What documents will I need?
The documents you will need to include in your application are your SA302 forms, your SA100 tax return, and the HMRC tax overview. To shore up your application you can add your accountant’s certificate.
High street lenders and specialist mortgage providers will always want to see your last three month’s worth of business bank statements.
Will Gaps In My Contracts Affect A Buy To Let Mortgage Application?
A lender may not be as concerned about gaps between contracts for BTL contractor mortgage applicants.
They are likely to be more interested in the amount of rent your buy to let (BTL) property will realise, as this is the vehicle for repaying the BTL mortgage.
However they will view you as a potential landlord in the same way as a contractor who is a first time buyer or home mover applying for a residential mortgage.
A contractor mortgage lender will also expect to see proof of your income, details of your self employed history, credit rating, bank statements and identity documents.
Undertaking a complex mortgage application where you need to explain gaps in your employed history can be daunting if you go it alone.
Choosing to work with a specialist contract mortgage adviser can save you valuable time by getting you ready to apply for your mortgage in advance. The more prepared you are, the more likely you are to secure your mortgage at the first time of applying.
We can show you how much you could borrow now by using our mortgage calculator. We can also work out how much you would need to pay in the future if you were to move onto a variable rate or if the Bank of England increased the baseline interest rate.
Only approach Mortgage Advisers that are authorised and regulated by the financial authority and registered in England.
Remember a mortgage is secured against your home or property and could be repossessed if you do not keep up the mortgage repayments.