Contractor Mortgage
Jamie Elvin talks us through the mortgage process for contractors.
As a contractor, you are likely aware that securing a mortgage can be more
challenging compared to being fully employed. While contracting offers
flexibility and independence, it can also complicate matters for lenders due to
the ever-changing nature of your income. However, with the rapid growth of the
self-employed, contract, and freelance economy in the UK, there are numerous
property finance lenders who are willing to lend to you.
Strive Mortgages has a proven track record of successfully securing
excellent contractor mortgage solutions for our clients. We will closely
collaborate with you, your accountant, and solicitor to gain a comprehensive
understanding of your earnings and income profile. This enables us to
effectively present your case to our extensive network of lenders and meet
stringent affordability criteria. Your dedicated Strive Mortgages adviser will
also assist you in strengthening your case, offering creative and flexible
approaches to showcase your income security and gather all the necessary
documentation.
What classes as a contractor mortgage?
A contractor mortgage is a type of mortgage that is designed for self-employed
contractors, freelancers, or other workers who don’t have a traditional employment structure. These individuals may work on a project-by-project basis or have irregular income streams.
How is a contractor’s income assessed for a mortgage?
When assessing a contractor’s income for mortgage purposes, lenders typically look at their latest contracts and invoices to determine their earnings over a certain period. They may also consider other factors such as the length of the contract, the frequency of the work, and the likelihood of continued work in the future.
In the example you provided, the lender may calculate the contractor’s annual income as follows:
– Daily rate: £500
– Working days per week: 5
– Weeks worked per year: 48 (allowing for four weeks of holiday)
– Total annual income: £500 x 5 x 48 = £120,000
Generally mortgage lenders will consider lending 4.5 -5 times income, subject to the applicant meeting the lenders criteria.
This method of assessing income is commonly known as annualising or grossing up the contract value.
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How much can contractors borrow?
As a general rule, contractors can usually borrow between 4.5 and 5 times their annualised contract value. However, some lenders may offer higher loan amounts based on the borrower’s financial history and creditworthiness.
Example: if the contractor earns £500 a day, works 5 days a week, and works for 48 weeks a year, their annualised contract value would be £120,000 (i.e. £500 x 5 x 48). Applying a multiple of 5 times their income, the contractor could potentially borrow up to £600,000 (i.e. £120,000 x 5).
However, it’s important to note that each lender may have different criteria and policies when it comes to assessing a contractor’s income and loan affordability. Lenders may also consider other factors such as the borrower’s credit score, deposit size, and financial stability.
A guide on how to get a bigger mortgage
Which lenders consider contractors?
While many mainstream lenders offer mortgages to
contractors, most will treat them as self-employed and use their self-employed
earnings or some may have more stringent criteria or only lend to those with a
certain level of income or employment history.
However, there are several banks and building societies
that are known to be more contractor-friendly and may offer more flexible
lending options. Some of the lenders that are known to lend to contractors
based on annualised contract value include:
– Halifax
– Bank of Ireland
– NatWest
– Nationwide
– Clydesdale Bank
– Metro Bank
– Skipton Building Society
How do contractors get a mortgage?
The process itself is exactly the same as it would be for any other applicant. It’s just that the documents required and the underwriting may be a little bit different. Your best bet is to speak with a mortgage broker who’s got experience dealing with contractors and understands the marketplace. We’ll help you understand all the options available to you.
What documents does a contractor need to apply for a mortgage?
To apply for a contractor mortgage, you will typically need to provide the following documents:
Proof of identity: You will need to provide a valid form of identification, such as a passport or driver’s license.
Proof of address: You will need to provide a utility bill, bank statement, or other official document that shows your name and current address.
Proof of income: As a contractor, you will need to provide evidence of your income, such as contracts, invoices, or bank statements. Some lenders may require you to provide tax returns or accounts to verify your income.
Contract details: You will need to provide details of your current and past contracts, including the name of the client, the start and end dates of the contract, and the rate of pay.
Business details: You will need to provide details of your business, such as the name, address, and registration number (if applicable).
Bank statements: You may need to provide recent bank statements to show your income and expenditure.
Credit report: You may need to provide a copy of your credit report to show your credit history and score. Download a copy of your credit report
How long do I need to have been contracting to get a mortgage?
The length of time you need left on your contract to get a mortgage will depend on the criteria of the lender you are applying to. Some lenders may require a minimum time left on your current contract, while others may require a minimum track record in your line of work or a minimum time contracting. Some lenders, such as Halifax, have less stringent criteria for contractors who earn in excess of £500 a day or £75,000 per year, which means you may not need to meet specific requirements on the length of time left on your contract.
How do you strengthen your mortgage application as a contractor?
As a contractor, there are several things you can do to strengthen your position when applying for a mortgage:
– Save for a large deposit: Having a larger deposit can help reduce the lender’s risk and may make you a more attractive borrower. This can also help you secure a more competitive interest rate.
– Keep good records: Keep accurate records of your contracts, invoices, and business accounts to demonstrate a stable income and financial history. This can help to show lenders that you have a consistent and reliable source of income.
– Check your credit report: Make sure you check your credit report and address any issues before applying for a mortgage. This can help improve your credit score and increase your chances of being
approved for a mortgage.
Download a copy of your credit report
– Use a mortgage broker: A mortgage broker who specializes in working with contractors can help you find the right lender and product for your needs. They can also help you navigate the application process and provide guidance on what documentation you need to
provide.
Questions to ask a mortgage broker Why use a mortgage broker
– Consider using an accountant: Working with ana accountant who understands the needs of contractors can help you manage your
finances more effectively and ensure that you are maximizing your earnings and tax benefits. This can also help to show lenders that you are a responsible and financially stable borrower.
By taking these steps, you can strengthen your position as a contractor when applying for a mortgage and improve your chances of being
approved for a loan with favourable terms and conditions.
Can I get a mortgage as a contractor with a Limited company?
Yes, you can get a mortgage if you have a limited company as a contractor. However, the criteria and requirements may vary between lenders. Some lenders may base their assessment on the limited company’s profits, while others may consider your personal income based on your contract value, which may be more favourable.
What about contractors buying with another person?
The benefits of a joint application for a contractor include increased borrowing capacity, improved affordability, shared responsibility, access to better deals, and a simplified application process. However, it’s important to consider the potential drawbacks, such as shared liability and potential issues in the event of a breakup or divorce.
How can Strive Mortgages help contractor workers?
Contractor’s income can often be complex or quirky. Having a broker with experience dealing with contractors can help you understand all the options available, and can be invaluable and give you the best chance of success with your application.
Your home may be repossessed if you do not keep up with your mortgage repayments.
Yes, it is possible to obtain a mortgage with a 3 month contract. While some lenders may require a longer contract period, there are lenders who have no minimum contract length and may consider your circumstances for mortgage approval.
Yes, you can still get a mortgage being on a contract which is inside IR 35.
IR 35 was a legislation that was introduced by Her Majesty’s Revenue and Customs (HMRC) to prevent contractors and freelancers from exploiting the tax benefit by being classed as a limited company. Tax legislation states that day rate contractors with similar working practices to an employee is classified as a contractor inside IR35. A day rate contractor inside IR35 is likely to have to work through an umbrella company or join their client’s payroll. Traditionally these freelancers would work via a limited liability company, responsible for their financials pay their own taxes.
Day rate contracting or hourly rate contracting is very popular with IT contractors who work on short projects. It is also popular among professionals such as doctors and dentists who work as a locum. Other professionals who work as freelancers use this route too.
If the lender uses your contract income for assessing eligibility, you may not need years of accounts for a contractor mortgage. However, requirements can vary among lenders
If the lender uses your contract income for assessing eligibility, you may not need years of accounts for a contractor mortgage. However, requirements can vary among lenders
Yes, it is possible to get a mortgage even if you have just started contracting. While some lenders may require a minimum contracting period, there are lenders who have no such requirement. However, having a longer contracting history or a high income, such as a day rate of £500 or above or an annual income of £75,000 or more, can increase your options. Grammar has been corrected in this response.
Most lenders typically require that you have a contract in order to get a mortgage. However, some lenders may consider a future contract or evaluate your income based on accounts rather than solely relying on your contract.
Yes, it is possible to obtain a mortgage with a 12 month contract. While some lenders may require a longer contract period, there are lenders who have no minimum contract length and may consider your circumstances for mortgage approval.
The length of time required for a contract to obtain a mortgage can vary among lenders. While some may prefer a minimum contract length, others may consider your history of contracting or future contracts lined up as evidence of income stability. Consulting with a mortgage broker can help determine suitable options.
