Paul Holland sits down and explains everything Contractor mortgages.
How do mortgages for contractors work?
They’re very similar to any other mortgages, in all honesty. For contractors, though, it’s in calculating income that things become quite complex. Because of that, affordability calculations will differ from lender to lender and contractors may be offered very variable loan amounts depending on the provider.
Are there many companies that lend to contractors?
Yes, there are plenty out there and most will lend to contractors. The problem with the term ‘contractor’ is that it’s so broad. A lot depends on what type of contracts you’re on and how long they last.
How much can contractors borrow on a mortgage and what sort of deposit is needed?
It’s similar to other employment types from a deposit perspective. Whether you’re permanently employed or self-employed, deposits start from as little as 5%.
With regards to how much you can borrow, lenders always set an underlying multiple to calculate people’s maximum borrowing. That will factor in things like your income, your commitments and monthly expenditure.
It’s just a question of how the underwriter deciphers what your income figure is for that calculation – and that’s where things differ from people that are employed. It’s easy when someone is on a set salary of £30,000, for example. But for a contractor it’s not as straightforward as just taking a monthly pay slip and multiplying it by 12.
How is a contractor’s income assessed for a mortgage?
Again, that’s going to depend on the type of contract you’re on. Most commonly, the underwriter will use a combination of your historic and current contracts to get a sense of your day rate to use for their calculation.
They’ll take the day rate and multiply that by the number of days you work in a year, allowing for holidays.
How is income calculated for limited company directors?
If you’re a contractor and you run your business through a limited company then the calculation can vary. Some lenders will assess your application based on the company’s figures and what you personally pay yourself through the company rather than use your day rate.
There are essentially two scenarios for contractors – they depend firstly on whether or not they have set up a limited company and secondly the lenders’ criteria for assessing their income.
What documents are needed for a contractor mortgage?
There’s no difference in the application process for a contractor, but you will need to evidence your income slightly differently as you won’t have payslips like an employed person.
You will need to supply bank statements, your ID and proof of deposit as normal, but you might also be asked to provide copies of your contracts and company accounts, SA302 self assessment forms and company bank accounts if you have a limited company. Potentially you may also need to share invoices sent to your clients.
It’s easier said than done, but we always encourage people to look at these things much earlier than application day. Some people have got all their records to hand electronically, while others find it more difficult. Being well organised will certainly help you in this situation.
How do you strengthen your mortgage application as a contractor?
We tend to find that having a strong contracting history really helps. It might be that you’ve been in the same industry for a certain amount of time, or you have a consistent contract that has been renewed, whether that be three-monthly, six-monthly or annually.
Consistency speaks volumes too. Contractors that have contracts with various different people that vary in length can find the process becomes quite messy.
How does it work for contractors buying on a joint mortgage with another person?
Each applicant will be assessed according to their income type. Your partner might be a company director, be employed or a CIS contractor… as long as they have an income it shouldn’t matter. They will be assessed according to their type of income. Again, it’s mainly a case of being mindful of the documents you might need to prove your earnings.
Do you have any other advice for contractors?
With contractor mortgages, it’s certainly one of the more complex employment types. I’d always recommend that people speak to a broker in today’s mortgage market, even at the most basic levels. As a contractor it really is a minefield, and even the best broker will spend hours deciphering which is the most suitable option for their client.
A broker is absolutely your best option to maximise your borrowing and get you a competitive mortgage that meets your needs.
Your property may be repossessed if you do not keep up with your mortgage repayments.