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YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
SOME BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
Graham Sharkey answers your questions on Mortgages for Contractors.
When we refer to contractor mortgages, we don’t mean a unique product or lender that are only available to contractors, it really means finding a mortgage lender that is happy to offer a traditional mortgage to somebody who’s defined as being a contractor.
The challenge is that the specific definition of a contractor can vary from one provider to the next. It can be a complicated process to find the most suitable provider, so it’s advisable to use a broker. We have lots of experience in this area.
Most lenders categorise a contractor as someone that works in a role that isn’t a permanent position. Examples are people working under an umbrella company, zero hours contract workers and tradesmen subcontracting under the Construction Industry Scheme. It also covers consultants on fixed term contracts and a whole host of roles that place workers on short term contracts.
In all of these scenarios, lenders need to spend a bit more time getting comfortable with the stability of this type of income. Once they understand and they’re happy with this, the mortgage offered is the same as any offered to any applicant with a traditional employed income.
The good news is yes, there’s a large number, including high street banks. The rates on offer are as good as for any other customer.
The issue is whether a particular contractor ticks the boxes for the lender – and that’s where we come in. We need to make sure we’re clear on the facts of the contract so we know which lender will be suitable for your situation.
Lenders will be interested in your profession and the industry you work in, how long you’ve been contracting, your current contract, if you’ve had contracts renewed in the past and if there have been any gaps in your CV. Another key one is whether your income tax is paid at source by the contract providers – similar to an employed role – or if you report your own income tax to HMRC. All this information will help them build a picture of the consistency and security of your earnings.
Typical criteria might be that you have at least six months left to run on the contract, that there are no gaps between different contracts and that your current deal has been renewed a certain amount of times.
The list goes on. It can be quite complex but as the client you don’t need to worry about that as we will analyse this for you. You just need to know there are options available to you.
How much can contractors borrow on a mortgage? What deposit is needed?
Lenders will offer the same level of borrowing to a contractor as they would to someone on an equivalent income in a straightforward employment position. There’s generally no difference to the affordability assessment.
The main variation is how the lender calculates the contractor’s income. This can vary considerably from lender to lender. Once the client’s income figure is established, lenders will typically lend approximately 4.5 times this amount and in certain niche circumstances, they may go higher, up to 5.5 times.
These calculations are also underpinned by a complicated affordability assessment which again varies. They may offer you less depending on your age, existing credit commitments, credit score and the size of your deposit.
Currently the minimum deposit on a standard mortgage is 5%, but lenders tend to favour individuals with higher deposit amounts. That’s true for anyone looking for a mortgage, not just contractors. To access the most competitive rates, aim for a 25% to 40% deposit.
When any lender is looking at an applicant’s income, they are looking to calculate an accessible income figure – in other words, the level of income the client receives that’s sustainable for the long term.
Even in traditional employed roles, sporadic overtime or irregular bonuses will potentially be excluded or only partially included in the calculation. Accessible income is determined in a number of ways depending on the lender in question, but an important factor is whether you pay your own tax or is it stopped at sourced by the company you’re contracting for.
Some contracts, like those under the Construction Industry Scheme, stop a proportion of tax at source. In this case, some lenders will treat the applicant similar to an employed person – they will assess income earned on the contract. If a client pays their own tax, some lenders would deem them to be self-employed and will look at limited company accounts and personal tax returns.
A day rate contractor is just another type of contractor. Mortgages are readily available to you, subject to the aspects mentioned above. For a client on a day rate, some lenders will treat you as an employee and just apply a simple calculation to arrive at that accessible income figure.
They’ll take your day rate, multiply it by 5 for the working days in a week, then multiply that by, say, 46 weeks in a year. That will be your accessible income figure. The reason it isn’t multiplied by 52 is to allow for holidays or sickness. Some lenders may multiply by less and be more cautious, but this is quite a common approach.
If the contractor has set up a limited company which the contracted income is paid into, then most lenders ignore the contract and look at the company accounts. That’s assuming there’s at least two years of final accounts available.
A select few lenders will accept just one year’s worth of accounts, but this would be detrimental to the rate. I’ve done a podcast exclusively on self-employed mortgages which is worth listening to if any listeners fit this category.
Broadly speaking, lenders will calculate accessible income in two ways. They take the director’s salary and add in any dividends taken from the company. They can calculate the last two years’ average figures from the applicant’s tax calculation or SA302 – a document generated when you submit your tax return to HMRC. These would be reviewed by the lender in conjunction with company accounts.
Alternatively, the lender will just look at the company accounts, add the director’s salary to the company profits and again take an average to arrive at the accessible income figure. We go into more detail on that on the self-employed podcast.
There’s no difference in the process or the products available. You just need to contact a good quality broker that has experience in contractor mortgages. We make it simple and fast to find the right deal for your circumstances.
In addition to the usual ID and address verification requirements, contractors should have available their current contract and previous contracts to show their history. You also need proof of experience via a well-documented CV, payment invoices, payslips or CIS vouchers if it’s with the Construction Industry Scheme.
You will also need the last two years’ tax calculations (SA302s) and two years’ company accounts if you’re a limited company. It is a good idea to gather six months’ business bank statements and three months personal bank statements as well.
Anyone who has adverse credit will find the process a little bit more complicated, but it’s irrelevant whether they are a contractor or not.
Bad credit means the choice of lenders is restricted. How restricted it is depends on how recent and how severe the adverse credit is. Rates and terms won’t be as competitive, but we do have lenders available for many different circumstances. A large percentage of them will be happy with contractors’ income. It’s well worth contacting us if you fit that category – bad credit is not a barrier to a mortgage.
No – you’re still eligible for government schemes and incentives as a First Time Buyer. Many of the lenders that offer mortgages for the government Help to Buy schemes will also accept contractors. So again, it’s business as usual for contractors here.
No, it’s all very straightforward. Whatever the applicant’s circumstances, the lender reviews income according to their employment status. They will establish the contractor income and if the other person’s just in a traditional PAYE setup, the two figures are added together and processed as normal.
I’ve done another podcast on Buy to Let mortgages which is worth listening to for further information on that type of borrowing. One of the stipulations with most Buy to Let lenders is that they require a minimum income, usually about £25,000. Plenty of Buy to Let lenders would be happy to accept income from contracting to tick that box. There’s no issue there.
To put yourself in the most suitable position for getting a mortgage, it helps to show consistency of earnings and a good track record of managing your money.
So look at your credit score. Find out if there are any credit issues and try to improve your rating. That means paying your bills on time, making sure you’re on the electoral roll and and if you have no existing lines of credit, take out a credit card and pay it off in each month.
Create a consistent work pattern if possible. Take a steady flow of work and avoid too many breaks, especially in the 12 months period prior to applying. Try and renew agreements with your clients to show current and future stability.
Finally, gather evidence. The lender will only be convinced that your income is stable if you have evidence. Gather bank statements, make sure your tax returns are up to date and your company accounts are completed swiftly at the end of each year – that will put you in good stead.
It can be complicated to satisfy contractor lending criteria and there is a wide choice of lenders available which is good – but it means a quality mortgage broker is key.
You’ll be less likely to be turned down if you choose this route. Your mortgage broker will guide you through the whole process and give your application the maximum chance of success, first time. Given that declined mortgage applications can impact your credit score, using a broker can help protect you.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The Financial Conduct Authority does not regulate some Buy to Let Mortgages.