Mortgages for Contractors: How to Prepare for Your Application
Most contractors believe that getting a mortgage is a Herculean task. There are obstacles, true, but these are not at all impossible to overcome.
Myth 1: Contractors need three years of accounts
Unlike what most people believe, contractors are able to get a mortgage with their day-rate.
Some mortgage companies allow contractors to apply for a mortgage based on their current contract. Seek help from companies offering accounting services in order to get connected with lenders that offer more leniency when it comes to mortgage applications.
Myth 2: Contractors must have been contracting for at least six months
Some mortgage companies are able to lend money to contractors who have just transitioned from a regular job to contracting. This means that you can apply for a mortgage one day into the contract.
Myth 3: Banks and building societies see contractors as high risk when getting a mortgage
Contrary to what some contractors believe, they are not seen as high-risk and their applications undergo the same assessment process as regular employees. Being self-employed does not lower one’s chances of getting approved for a mortgage.
Myth 4: Contractors need a large deposit
Although mortgage companies associate deposit amount with level of risk, having a 5% deposit will not exempt you from a lender’s approval. This only means that having a larger deposit results to a more competitive deal.
Myth 5: Contractors get charged a higher mortgage rate than permanent employees
It is not true that contractors will be charged higher mortgage rates than regular employees. If you are a contractor and you are able to give a higher deposit or set aside more savings, then you might even be given lower mortgage rates.
Questions and Answers on Mortgages for Contractors
Q: How does one start the application process?
A: Get in touch with a mortgage company or an accounting services provider like us to discuss your options.
Q: Can the mortgage be under a limited company or does it have to be in an individual’s personal capacity?
A: The mortgage application must be under your personal name. One can invest in properties, but this usually needs to be a special purpose limited company.
Q: Am I required to show a £75,000 contract value or does that amount apply to one whole year? What are my chances if I have a day rate of below £500 and a contract running for three months?
A: The length of one’s contract does not really matter. Mortgage companies pay more attention to experience. If you have been working in the industry for quite a long time, then lenders will consider a three-month contract, as long as your income is around £75,000 within the span of 48 weeks of your contract.
Q: My contract has just recently started and I do not have enough money for a director’s loan, but I am planning do some home improvement. Am I eligible for a short-term loan (e.g., 3 – 5 years)?
A: Most contractor’s take out a loan for the purpose of improving their homes. Normally, the minimum term for a home mortgage is five years.
Q: When I was still working as a full-time employee two years ago, I took out a mortgage. The introductory rate will be changing in a few months and I’m planning to remortgage. Would living in an ex-council flat affect my application? The building isn’t covered by other providers, so I had to go with Nationwide. Also, I became a contractor six months ago. What are my options?
A: More than living in an ex-council flat, mortgage companies would be more interested in how long your contract is for. Most require a minimum contracting period of 12 months worked continuously, so you need six months more of contracting.
Q: My wife and I have a fixed term mortgage ending soon. However, I am the only one who is earning since my wife stopped working when we had a baby. I have plans of becoming a freelance photographer in the next six months. Will this affect our mortgage renewal? What effects will it have if we take out a new loan?
A: Working as a freelancer may affect qualifications for a mortgage. Possible workarounds include making sure you have at least one year of finalised company accounts, or switching to another product from the same lender. If you choose the latter, the lender would not need to look at your income situation.
Q: My partner, who is employed full-time as a teacher, and I have a joint mortgage. I heard that there are offers exclusive only to contractors. What options are there in terms of joint mortgages?
A: Self-employed and employed clients, and contractors have the same access to exclusive products. This means that regardless of your source of income – contracting, employment, or self-employment – you will be quoted rates based on your earnings.
Q: I do remote work but I have clients who pay on a regular basis. Since it’s a month-to-month work, there are no contracts. If I cannot present copies of contracts, will my earnings still be considered when my mortgage gets evaluated?
A: This case will be treated similar to a self-employed earner where a minimum of 12 months of finalised accounts is required. Apart from your accounts, your Self-Assessment will also be evaluated.
Q: I earn a small salary as the director of my own company, but I also earn through dividends. Do these make up the total of my earnings and how much can I borrow if the amount were to be based on my salary alone, and salary with dividends?
A: For directors, most mortgage companies will consider both the salary and dividends as total income.
Q: Would giving a bigger deposit, say 7% or 10%, help when I apply for a mortgage?
A: A bigger deposit will help you get better interest rates.
Q: My partner is currently taking a break because her contract just ended. Is it advisable for her to find a new contract before we apply for a mortgage?
A: When applying for a mortgage, only the income of the individual currently in a contract will be considered. Therefore, taking a break is not such a good idea when you have plans of taking out a loan.
Q: I have worked different contracts since January 2018. Some ran for three months. I will soon be working under a six-month contract. Given these experiences, when can I apply for my first mortgage?
A: For most lenders, as soon as a contract has started, then you can get approved for a loan. However, there are other factors to consider, so it is important to discuss your current employment status.