What is a Contractor mortgage?
Historically it has been more difficult for contract workers to obtain a mortgage, however, due to a significant rise in contract and freelance work in the UK, adaptations have been made by many lenders to allow contractors more access to mortgages.
There are no specific mortgage products aimed at contractors, but some specialist mortgage lenders do offer mortgage deals to those in particular contract roles such as doctors, dentists, and teachers.
How much can a Contractor borrow for a mortgage?
Mortgages are based on affordability (income minus expenditure) and credit status rather than your job type, so the fact that you are a contractor shouldn’t impact your loan offer.
Lenders usually offer loans of between three and five times your annual income, depending on what they deem your affordability to be and your credit score. An online mortgage calculator can provide a rough guide to this, prior to meeting with a Mortgage Broker.
How is a Contractor’s income assessed for a mortgage?
In order to determine your affordability, lenders will need to establish an average annual income. This can be more difficult for those working as a Contractor, as your income can fluctuate. Ordinarily, they will average your earnings from the past few year’s accounts. You may also be asked to supply your CV and SA302 forms to further prove your long-term earning potential.
In the case of dramatic changes in income from year to year, lenders will often use only the most recent year’s earnings for their calculation, whether or not this is higher or lower than previous years. If you are not in an active contract role at the time of application or don’t earn enough to pay UK tax, your application won’t be considered until you have started contracting or have taxable income.
Some specialist independent lenders who are more sympathetic to the needs of Contractors will offer competitive mortgage deals to contract workers. At OB1 Mortgages we can put you in touch with these lenders, who are most likely to consider your application.
Getting a mortgage when you are paid a daily rate?
Contractor-friendly lenders are usually willing to establish your annual income by multiplying your standard day rate by your annual working days. You will usually need to have had a contract in place for at least the last twelve months, however.
Getting a mortgage as a new Contractor
If you’re new to contracting, it can be more difficult to obtain a mortgage offer. Most contract workers will need at least three years of company accounts available before they are considered for a mortgage, as it can be too difficult to establish an average annual income without this.
If you’re a qualified professional such as a Doctor, for example, lenders are often willing to overlook the three-year requirements that other contractors are subjected to.
How do you strengthen your mortgage application as a Contractor?
As a Contractor, you will be considered more of a high-risk borrower than those in other job types. Anything you can do to improve the appearance of your financial stability prior to applying for a mortgage will increase your chances of securing a mortgage:
- Offer a larger deposit to mitigate risk
- Prepare income and expenditure records ahead of your application to show financial responsibility
- Improve your credit score, if necessary
- Obtain documented contractual agreements with your clients where possible
- In the 12 months prior to your application, don’t leave significant gaps (including holidays) between contracts
- Consider a joint mortgage with a partner in more traditional PAYE employment
How mortgage affordability is assessed for a Limited Company?
If you operate as a Limited Company, only your salary and dividends will be used to establish your affordability. The lender will therefore calculate your loan amount based on this, rather than the total business income.
How can a Mortgage Broker help if I’m a Contractor?
High street lenders are rarely able to offer competitive mortgages to Contractors and often have stricter acceptance criteria than independent brokers. Our advisers at OBI Mortgages can help you to source those specialist lenders who are more likely to accept applications from contract workers, not to mention offer them more competitive interest rates.
We can assess your individual circumstances to determine your chances of acceptance and advise you on how to strengthen your application. Our goal is to save you time, stress, and in some cases the disappointment of a rejected mortgage application.
As a Contractor, will I be able to get a mortgage?
Whilst historically more difficult for contract workers to get a mortgage, the rise in contract and freelance workers has forced lenders to adapt.
Specialist independent lenders can often offer competitive mortgage deals to Contract workers.
Speak to OB1 Mortgages for more help [LINK]
How much can I borrow as a Contract worker?
Mortgages are based on affordability and credit status, so being a Contractor shouldn’t impact your loan offer. Lenders usually offer 3-5 times your annual income.
Meet with our brokers at OB1 Mortgages to see how much you could borrow [LINK]
What Deposit will a First Time Buyer need?
When applying for a mortgage, the deposit required depends upon both the lender and the type of mortgage you choose. As a result of coronavirus, you’ll need a much larger deposit to persuade the lender. Most lenders will ask for at least 10%, but 20% or more is likely to get you a more competitive mortgage offer.
A range of government backed schemes are available, which intended to help first time buyers get onto the housing ladder. Some of these, such as the help to buy and NewBuy schemes only require a 5% deposit. The shared ownership scheme gives you the opportunity to purchase a share of the property, making the overall deposit lower. In this case, you pay rent on the remaining share of the property, usually to a local authority.
What help is available for First Time Buyers?
There are some offers available to first time buyers, such as lower interest rates and fees. The schemes mentioned above are also aimed specifically at helping first time buyers.
How do I Find out and Improve my Credit Score?
There are a number of places online where you can check your credit score. Your credit score can have a huge impact on mortgage acceptance. It’s important, therefore, to take steps to improve your score, in advance of your application.
Make sure you are on the electoral roll and only have current addresses on your accounts. Keep on top of any credit agreements you have in place, as late or missed payments will affect your score. Ironically, never having used credit can also lower your score. You can use a single credit card and pay the balance in full each month, this will show you’re a reliable borrower.
What is an Agreement in Principle (AIP)?
An agreement in principle, sometimes known as a decision in principle, is an initial decision that your mortgage application will be accepted. However, this is subject to their own valuation of the chosen property and their receipt of your proof of income.
What Fees are Involved with Buying a House?
There are many fees involved with house purchase, which will vary by lender. A mortgage broker is able to help you find the best lender for your circumstances. The main fee types to consider are:
This charge is for organising the mortgage and is variable.
This is the cost for the lender to have your home independently evaluated.
This fee has quite a complex calculation that is based on the cost of your home across various tax bands. Until 31 March 2021, however, no stamp duty will be due on first properties below £500k.
These include conveyancing and local authority search fees which are carried out by your solicitor.
How can a Mortgage Broker Help First Time Buyers?
Mortgage brokers are able to see mortgage offers that you don’t have access to. They are best placed to find the most suitable mortgage deals for you. They can also help to explain the full process of becoming a homeowner.