Expert Mortgage for Contractors Advice & Low % Rates

How is a contractor’s income assessed when applying for a mortgage?

If you have been working as a contractor for an extended period of time, lenders will often average out the income you’ve earned over recent years to generate an estimate of your average income. They will then use this average to calculate how much you can afford to repay each month. For example, if you earned £40,000 in one year and £45,000 in the next year the lender could assume your annual income is around £42,500.

However, a mortgage lender probably won’t take this approach if your earnings have altered dramatically from year to year. In this situation, they might take the most recent year, or the lowest as an indicator of your earning capacity. This could mean that you can borrow a smaller amount than you would have otherwise.

Is it harder to get a mortgage when you’re paid a ‘day rate’?

Some lenders might be willing to work out your annual income on the basis of your day rate, though many will require you to have a 12-month contract for this to be an option for you. If this is the case, lenders will take your daily rate and multiply it by the number of days you generally work per week, and then multiply that to extend to the full year. It’s key to note that lenders will also want to factor in any holidays or gaps between contracts, so the majority will assume that you only work between 46 and 48 weeks per year.

Day rate example:

If your day rate is £400 and you usually work 4 days a week, your annual income would be about £76,800. This approach can be particularly useful if you have only recently left full-time employment and don’t have an established track record as a contractor. In this situation, lenders will need to see evidence that you are likely to succeed as a contractor. This includes previous experience and qualifications in your field, signed agreements and an existing network. It may seem like an arduous process, but lenders just want to ensure that when they provide mortgages for contractors the money can be paid back consistently.

How much can contractors borrow on a mortgage?

When applying for a mortgage, the provider will first work out how much to lend you which is known as an affordability assessment. This will get a view of how much you generally earn, what your expenses are, and how secure your income is. When you’re getting a mortgage as a contractor, you will typically need to show proof of your earnings history over the past six months, though be aware that most lenders will expect to see two to three years’ worth of accounts. Therefore, applying for a mortgage early on in your career as a contractor can be more difficult but you could still have a few options. It is recommended that you speak to an adviser in this situation as they will have all the knowledge to help you find the options available to you.

How can you strengthen your mortgage application as a contractor?

One way to improve your chance of success when applying for a mortgage as a contractor is by offering a larger deposit, hence borrowing a smaller amount. The less risk the bank has to take when lending to you, the more favourably they will view your application. Also, lenders will look for signs of long-term security in your finances. For example, if you can provide an ongoing agreement with an employer, or evidence of past agreements that are likely to be renewed it could make your application more appealing to lenders.

Another option when boosting your mortgage application is minimising your time off in the build up to buying a home. Even though taking longer breaks between jobs may be one of the perks of contracting, lenders could be wary if they see you have been out of work for more than 8 weeks in a 12-month period. Also, you should consider how good your credit score is and if it needs any improvement before submitting a mortgage application. This can be even more important for contractors as lenders will look closely for evidence of good financial management when your income is not guaranteed. You will need to produce evidence of your expenses and operating costs as well, the more information you give, the better the lender can understand your financial situation and feel confident in lending to you.

What about contractors who are buying with another person?

If you are a contractor planning to buy a house with a partner, mortgage providers might be more willing to lend to you if your partner has full-time employment. Even though variations in your income levels can be less important when you’re buying with someone else, you will still be required to demonstrate a consistent earnings pattern. Another possibility if your income tends to vary is applying with a guarantor mortgage. For this type of application, a parent or family member provides a guarantee on your mortgage against their own home.

Choosing a lender for a contractor mortgage

Providing your income is fairly consistent and you have been employed for a long period of time, some high street banks might consider approving your application, even if you are a freelancer or contractor. However, many lenders use strict score-based assessments modelled on full-time permanent employment, which could mean you are offered a smaller sum, or your application is rejected altogether. Your best option could be speaking to a lender who will refer you to an underwriter (a person who assesses your application). An underwriter could be able to take into account other factors about your expertise and employment history that are ignored by a rigid points system.

Another possibility could be a number of specialist lenders offer mortgage deals tailored to contractors, including some that cater to specific professions. If you’re a contractor or a freelancer, it can be valuable to speak to a mortgage broker. They can help you find the most suitable contractor mortgage by looking at lenders who will accept mortgages from people in your situation, as well as helping navigate the application process.

How affordability is assessed for a limited company

Lenders are likely to apply different lending criteria to your application if you are set up as a limited company. When you apply as a company, most mortgage lenders will only consider your salary and dividends as your income, not your total earnings. If you are taking a lower salary but your company is profitable it could be beneficial to find a mortgage lender that offers specialist underwriting and is willing to go over your full book of accounts. When you provide bank statements and financial information it is important to distinguish between money held by you and money held by the company. Funds that are put aside to pay company tax, VAT or income tax won’t count towards your personal assets.

Safeguarding your credit score

As many contractors tend to fall outside of a lot of lenders’ criteria, there is a chance your mortgage application will be turned down. If you are rejected try not to feel too disappointed, you might have more luck with a specialist lender. It’s important to keep in mind though to avoid making applications if you aren’t too sure of your chances of success. A declined application will be recorded on your credit history, and therefore make it more difficult to be accepted in the future.

Finally, the contractor mortgage checklist

Whilst getting a mortgage without a permanent position can be tricky, it’s definitely not impossible. You shouldn’t not try because you think you won’t be able to get a mortgage as a contractor. There are steps you can take to put yourself in the best possible position to be accepted, these are:

•       Provide as much evidence as possible of your earnings over the past few years, including invoices, bank statements, and other accounts
•       If you are a limited company, you must bring your full business accounts and balance books
•       Show evidence of your current and previous contracts, as well as qualifications and previous experience
•       Improve your credit score before applying if needed
•       Offer a higher deposit if you can so you can borrow a lower sum
•       Consider a joint or guarantor mortgage if possible
•       Look for a mortgage lender that specialises in contractors or freelancers

If you need any financial advice, contact Finance Advice Centre on 0800 103 2655.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.