With the number of self-employed contractors and freelancers rising over the last decade, how has the mortgage market reacted to this seismic change in the British workforce?
According to research carried out by Aldermore Bank and reported in the Guardian, 30% of self-employed homeowners believe that they have a harder time getting a mortgage than their full-time employed colleagues (source: The Guardian).
Often stigmatised by ingrained opinions, in reality, the contractor mortgage market is healthy and full of competition. Banks and high street lenders view contractors as a safe bet when looking at mortgage proposals. Especially if they have a history of successful contracts. Why you might ask would insecurity be valued over employee status?
The facts are pretty straight forward. Contractors make more than employees (source: Contractor Calculator). Half of IT contractors earn more than the average UK salary over a 90 day period (source: BM Magazine). Contractors pay less in tax too (source: People Management) meaning when looking at mortgage affordability contractors get a big tick.
In this article, Umbrella Broker debunks many of the widely-held beliefs about contractor mortgages. We share with you the information you need to know when we’re helping you prepare to apply for a mortgage.
Contractor mortgages – how much can you borrow?
The amount of money you’ll be able to borrow for a contractor mortgage depends on how much you earn and your contractor status. Whatever income the mortgage company decides to use in assessing your application, you will normally be able to borrow up to 4-5 times your post-tax income. As long as the mortgage company believes that you won’t struggle to meet the repayments.
Deposit size
10% deposits are normally fine however you’ll pay a higher level of interest if you use the smallest possible deposit. According to IT Contracting, the rates you’ll be charged drop significantly if you can raise a deposit of 20%, 25%, or more.
Joint mortgages
If your other half (whether married, in a civil partnership, or neither) is a full-time employee with a stable vocational history, this will give lenders more comfort as it lowers the overall risk that you eon’t be able to afford the mortgage when between contracts. You may be offered up to 4.5 to 5.5 times your joint salary.
Credit report
Although, unlike in previous times, the information contained on your credit report is not the be-all-and-end-all factor influencing whether your application will be accepted. They still do form part of a lender’s decision-making process. Contract Eye recommends that you keep up to date on all current credit accounts and that you appear on the Electoral Roll.
Contractor mortgages – how your income is considered
Now that we know that you can borrow between 4-5 times your individual income (slightly higher if it’s a joint application). How do mortgage companies work out what your income is to base their decision on how much they’ll lend you? It depends on your contractor status. Whether you’re on day rates, and the paperwork you have to back up your assertions.
Contractor mortgages if you are a limited company contractor
If you are a limited company contractor, your income may be assessed in one of two different ways. The most common method of calculation is adding up your salary and the dividends you’ve paid yourself over the last two to three years. A less common method is to take both your salary and the retained profits within your limited company into account.
Your mortgage provider will dig around your limited company accounts in an attempt to understand your underlying profitability and they will discount “funds set aside to pay company tax, VAT or income tax (as not counting) towards your personal assets.” (source: Which?)
Be warned, as a limited company contractor you might be expected to present three years accounts to as high street lender. Although there are contractor mortgage specialists that will lend based on sight of a current contract. As presenting lengthy accounts is becoming increasingly common, it’s not only important that you have a good accountant, but that they help you maximise the things the bank will be looking for such as your disposable income.
Umbrella contractor mortgages
Umbrella contractor mortgages have traditionally been tougher to secure in general. Being an umbrella contractor is like walking a line between being a self-employed person free to control their own time and a traditional employed person.
Some brokers allow you to use a current contract rate to calculate a level of general income by annualising your rates. If you’re an umbrella contractor, ask us to point you in the direction of a specialist umbrella contractor mortgage broker.
Sole trader contractor mortgages
For sole traders, there are two methods of assessing your income. If, over the last two to three years, your income from contracting has increased, the mortgage companies will normally take an average of your salary over that time. However, if your income has decreased, they will be more likely to use your income over the last tax year on which to base your application.
What if you’re on day rates?
Mortgage companies do consider contractors on day rates. Speaking to FT Advisor, Rob Barnard, sales director at Pepper Money, says that, in common with many of his competitors, his company uses “either the 12-month average day rate times five days per week times 46 weeks, or the current day rate times five days per week times 46 weeks – whichever is the lesser amount”. Contractors basing their mortgage application on their day rates will need to be able to show 12 months’ trading history to a potential lender.
Why only 46 weeks? Simple, banks expect you to take a holiday and that’s time you won’t be invoicing for.
What paperwork will you need for a contractor mortgage?
Making sure your contractor accounts and paperwork are up to date and readily available is key. It’s no good turning up at an appointment only to find out that you need to spend the next 6 months finding an accountant to make sense of your finances.
For limited company applicants, have your bank account statements and tax statements (personal and corporate) ready. Invoices and evidence of the contract work you’ve completed will help your case as will successfully demonstrating that there are not long gaps between contracts (except by choice).
During any contractor mortgage application, involve your accountants as much as you can. More often than not, the evidence submitted by an accountant on behalf of their client for a contractor mortgage application tips the balance in your favour. And we say that from experience.
Where to find contractor mortgages
There are plenty of specialist contractor mortgages available. You can either approach a lender direct or via a broker. Brokers generally know the “borrower profiles” of each individual lender – in other words, they will know, based upon the information given on your application, which lenders will want to work with you and which ones won’t.
We would generally recommend a specialist broker rather than trying to do everything yourself. It will save you a lot of time and we believe that you’re more likely to get a better interest rate through a broker making lenders compete for your business. However, they do cost money – sometimes a few hundred, sometimes a four-figure sum.
Help with your contractor mortgage through contracting experts
Getting the right contractor mortgage for you will involve investment of time, stress, and paperwork – just like with the mortgages your full-time employee friends find for themselves. Try to secure the best deal for yourself and make sure that, if possible, your mortgage allows you to overpay without penalty – this will save you a lot of money when you enjoy bumper years.
To speak with one of our team about contractor mortgages, please click here to request a call back, phone 0161 464 8708, email customerservice@umbrellabroker.com
