11 Nov 2021
Why are we not remortgaging?
Many of us chase the lower premium on our car or home insurance, so…
Securing a mortgage as a contractor can be a daunting task. With irregular income and non-traditional employment, the process can seem more complex than for salaried employees. However, with the right approach, documentation, contractor-friendly lenders who cater specifically to the unique financial situations of contractors, offering flexible underwriting criteria and accommodating varying credit ratings, plus a clear understanding of the mortgage landscape, you can successfully obtain a mortgage.
This guide walks you through the steps to help you navigate the mortgage process as a contractor.
As a contractor, you may face unique challenges when applying for a mortgage. Contractor mortgages are specifically designed to cater to the needs of self-employed individuals who work on a contract basis. Unlike traditional mortgages, these products take into account the variable nature of your income and provide a more flexible approach to lending. Understanding how contractor mortgages work can help you navigate the application process and increase your chances of approval.
Contractor friendly mortgages recognise that your income may not be as predictable as that of a salaried employee. Instead of relying solely on a steady monthly paycheck, these mortgages consider your contract rate, the length of your contracts, and your overall industry experience. This flexibility allows lenders to assess your financial stability more accurately, making it easier for you to secure a mortgage that fits your unique situation.
Here are just some of the unique challenges contractors face when applying for a mortgage.
One of the main challenges you will find as a contractor applying for a mortgage is the fact that your income is not guaranteed in the long term and only agreed for generally a shorter period of time (e.g 3-6 months). This is particularly relevant for those on a fixed term contract, as lenders have specific expectations regarding contract duration and the continuity of work history. It’s our job to evidence to the lender that although your contract is not guaranteed, your income will be sustainable due to the skills and experience you have in your industry. Often this will be done by explaining how long you’ve been in the industry, the previous roles you’ve had and if applicable the previous levels of income you’ve had, this generally allows us to overcome the fact your income may be ‘irregular’ moving forward.
Another challenge you’ll find is that as a contractor you’ll not be classed as a traditional employee therefore some lenders and brokers may not understand how to position your income correctly. Self-employed contractors often face specific challenges in securing a mortgage, such as differing interest rates and borrowing limits based on their income and working pattern. We are able to get our lenders to view you in line with their ‘Employed’ lending policy by using specific parts of their lending policy.
We generally try and keep documentation to a minimum, however as a contractor you may find more paperwork is needed in order to evidence your income. This may include a copy of your current contract, previous contracts covering a specified period of time, payslips (if Umbrella), bank statements evidencing income receipt and maybe a copy of your CV.
For more information on contractor mortgages, why not check out our complete guide to Contractor Mortgages.
The first thing to consider is speaking to an experienced mortgage broker who understands the contractor mortgage space and the criteria set by mortgage lenders. Generally, we’d encourage you to:
Read our latest blog to find out more on how to apply for a contractor mortgage and understanding how much you could borrow.
Depending on how you work/operate will determine how the lenders assess your income. If you are working via your own Limited Company, it can be as simple as annualising your gross day rate to an equivalent salary (subject to meeting other criteria points). If operating through an Umbrella company this can be more complex, with potentially having to take your income after expenses relating to your Umbrella company, typically this will be the Umbrella company margin, Employers NI and Apprenticeship Levy. We would then take an annualised calculation from the income after expenses, or some lenders may use the gross day rate. Learn more about Umbrella Contractor Companies.
When it comes to contractor mortgage affordability, lenders use various methods to assess your income and determine how much you can borrow. Most lenders will consider your average income over a number of years, which helps to smooth out any fluctuations in your earnings. This approach provides a more accurate picture of your financial stability and ensures that you can manage your mortgage payments comfortably.
In addition to looking at your average income, some lenders may use your current contract rate to calculate your affordability. This method involves annualising your contract rate to estimate your yearly income, which can be particularly beneficial if you have a high-paying contract. However, it’s important to note that lenders will also take into account your expenses, debts, and credit score when determining your mortgage affordability. By considering these factors, they can ensure that you can meet your mortgage payments without financial strain.
Finding the right mortgage options really comes down to the broker you are working with. Mortgage providers play a crucial role in lending to contractors, as they have specific criteria and restrictions based on the type of contract work an individual does. As part of our advice process, we will assess a number of documents to ensure the lending amount you require is achievable and to ensure you meet the lenders criteria. The research we conduct is completely free of charge and will include us reviewing your credit report and providing feedback if there are areas that can improve. Alongside this we will conduct affordability checks with our panel of lenders and provide a maximum borrowing figure, along with some initial ideas on the interest rates available and monthly repayments.
Choosing the right mortgage lender is crucial when applying for a contractor mortgage. Not all lenders are contractor-friendly, and some may have stricter lending criteria than others. It’s essential to research and compare different lenders to find one that meets your needs and circumstances. Consider factors such as interest rates, fees, and repayment terms when selecting a lender. You may also want to consider working with a specialist mortgage broker who has experience in contractor mortgages.
A specialist mortgage broker can provide valuable insights into which lenders are more likely to approve your application and offer favourable terms. They can also help you navigate the complexities of the mortgage market, ensuring that you find a lender who understands the unique challenges faced by contractors. By working with a broker, you can save time and effort and increase your chances of securing a mortgage that suits your needs.
Working with a mortgage broker can be highly beneficial when applying for a contractor mortgage. A specialist mortgage broker can help you navigate the application process and increase your chances of approval. They can also provide guidance on the best lenders and mortgage products for your situation. When working with a mortgage broker, be sure to provide them with all the necessary documentation, including bank statements, tax returns, and proof of income. This will help them to assess your affordability and find the best mortgage deal for you.
A mortgage broker can also offer personalised advice based on your specific circumstances, helping you to understand the lending criteria and what you need to do to meet them. They can liaise with lenders on your behalf, ensuring that your application is presented in the best possible light. By leveraging their expertise and industry connections, a mortgage broker can make the process of securing a contractor mortgage smoother and more efficient.
Once we’ve provided you feedback and established, we can assist, we will prepare for the mortgage application where we will send a full list of documents that will be required (such as ID, bank statements, property details form etc). If you are looking to purchase a new property it will be once we’ve provided feedback when you go away and find your new home.
We will review every document you send us thoroughly to ensure these are going to be satisfactory to the lender and to ensure we get the right outcome. We have over a decade’s worth of experience and know exactly what the underwriters will be looking for, so we will iron out any issues at this stage.
As with any mortgage application, you will undergo a number of underwriting checks done by the specific lender we apply to. These will involve the lender checking your contract(s), bank statements, payslips (if umbrella) and a number of other financial checks to ensure you’re eligible for the mortgage we’ve applied for. The lender will also undergo a valuation on the property to ensure it’s suitable for lending against.
The affordability checks the lenders will undertake are exactly the same as any other mortgage. Typically lenders will lend between 4.5x-5.5x your gross household income as a loose calculation. However, if you have debts such as personal loans, car finance or credit cards this can then start to reduce the amount you can borrow. Affordability is very much on a case by case basis, therefore it’s important to get advice from a broker to give you an accurate borrowing amount.
Try to Our Affordability CalculatorThe deposit requirements for contractor mortgages are generally no different to ‘standard’ mortgages. We have options with lenders who can consider as little as 5% deposits subject to credit score and underwriting.
Yes, if you have another applicant looking to join you on the application this is acceptable, and their income can also be included alongside yours (if applicable) provided they also meet the lenders criteria.
Firstly, we’ll ensure you meet the criteria for what the lenders deem as a ‘Contractor’. Providing you meet this criteria, we will use your contract rate to calculate your income. Some lenders use different calculations, but below are some examples:
Day rate x Number of days worked per week x 48 weeks (to allow for time off throughout the year).
£300 x 5 x 48 = £72,000 per annum.
Hourly rate x Number of hours worked per week x 48 weeks (to allow for time off throughout the year).
£40 p/hour x 37.5 hours x 48 = £72,000 per annum.
Yes. We do not ask for any accounts to evidence your income.
We have some lenders who can consider what’s known as a ‘day one’ contractor, which effectively means we can consider your income straight away with no contracting history. Most lenders will require 2 years industry experience prior to you contracting to give them confidence that your income is going to be sustainable.
No. Most lenders will need to see at least 4 weeks remaining on the contract at the time you make your application. This can depend on the lender we apply to, but the remaining term on your contract will be discussed prior to application.
Usually, your contract will only be for a period of 3-6 months, so we understand that having 6 months remaining would be impossible in most cases!
In most cases yes. We work with lenders who can consider gaps, we use our relationship with the lender to get them to take a view outside of their ‘normal lending criteria’. They look at a number of different variables: How long was the gap? Why was the gap taken? How long have you been back in contract? Did you rely on credit cards / loans when out of contract? We’re here to tell your story and will get any gap in contracts agreed by the lender prior to submitting an application.
Getting a mortgage as a contractor may be challenging, but it’s far from impossible. By understanding the specific hurdles, gathering the right documentation, and working with a contractor specific broker, you can secure a mortgage that meets your needs and circumstances.
Let Us Help YouPlease fill in your details below and a member of the team will aim to call you within 24hrs to discuss your specific needs.
11 Nov 2021
Many of us chase the lower premium on our car or home insurance, so…
19 Jul 2022