Contractor Mortgages
02/07/2021
49
8 min read
Contractor mortgages have resulted from lenders catering to the huge increase in self-employment in recent years; these specialist mortgages take into account how contractors' work patterns and their particular type of self-employment varies from other forms.
High street lenders often refuse to grant contractors mortgages because they approach their own bank, which looks at their earnings and then determines that they fail the affordability test.
Often, contractors have a low salary and a modest dividend but a non-specialist lender doesn't for example take into account tens of £1000s of retained profit in the contractor’s business which demonstrates that a contractor can more than afford a mortgage amount they are trying to secure.
NB You should not assume that you'll get a less favourable interest rate with a contractor mortgage; as always, this is calculated on your own individual circumstances and application.
Contractor vs. Self-employed vs. Freelancer?
On the face of it, these terms are similar and might be regarded as almost interchangeable, however for the purposes of this article, we use the term contractor to mean a type of professional - and quite often niche - self-employment where:
- contracts are likely to be longer term (for example 12 months);
- most often, the person involved has established a limited company for payroll, administrative and taxation purposes; and
- there is no ambiguity about the person being self-employed rather than an employee.
Freelance work tends to be regarded as shorter term, less niche/professional and those carrying it out quite often use what's termed an 'umbrella company' to outsource their payroll, administration and taxation matters.
Both contractors and freelancers come under the broader banner of being self-employed, however contractor mortgages work differently from what are termed self-employed mortgages (click if you specifically wish to find out about self-employed mortgages); this is explained below.
It is beyond the scope of this article to discuss umbrella companies and related matters such as IR35 taxation rules and you should seek appropriate advice if you think these subjects concern you.
This article examines:
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Contractor? Looking for a specialist Mortgage?
This kind of mortgage requires specialist underwriters and much fewer lenders offer this product. Let our specialist independent mortgage brokers locate the right mortgage for your needs.
- You may not need to have been a contractor very long (even as long as 6 months); and
- Mortgage can be calculated on your contract rate and not your income and dividends (if applicable).
* Access to whole of the market – Available Outside of Work Hours – No need for face-to-face meeting with mortgage advisor - Terms Apply
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Who are contractors?
As stated above, contractors are a particular grouping within those who are self-employed and are normally regarded as niche/professional, working for reasonably long contracts for clients (months rather than days or hours) and most often arrange their employment affairs by establishing a limited company.
Technically any self-employed person who works in the manner described might be regarded as a contractor (or call themselves one) but frequently, these workers are from these sectors (this isn't an exhaustive list):
- IT programmers, systems managers, systems administrators and other IT professionals
- Business Analysts
- Engineers
- Telecom consultants
- Management consultants
- Operational risk managers
- Change managers
- Marketing consultants
- Acccountants
- Actuaries
- Architects
- Surveyors
- Oil and gas contractors
- Doctors and medical professionals
- Teachers, in particular supply teachers
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What are the issues which contractor mortgages address?
Getting a mortgage when self-employed (click for an in-depth article on this topic) as a sole trader is frequently more challenging than getting one as an employee because self-employment can bring with it varying levels of remuneration and thus consistency in your ability to make regular mortgage repayments and you can find yourself out of work for periods.
It's very difficult to get a self-employed mortgage if you've been in business for less than 12 months - and have the SA302 accounts to prove it - and most experts advise that things only become easier after about 3 years, when you've more of a demonstrable trading history.
Additionally, you'll generally want to reduce your tax bill as much as possible - after all, one of the biggest perks of self-employment is the opportunity to reduce the tax you have to pay - and you'll do this largely by deducting your business expenses from your gross taxable income.
The trouble here is that standard mortgages, classically those granted by high street lenders - including self-employed mortgages - use your income (pay and any dividends) to calculate how large a mortgage you can get. And if you're minimising these measures to lower your tax bill, you're also lowering your mortgage potential.
It's also clear that however you structure your self-employment, whether you've invested in setting up a limited company or are purely operating as a sole trader, you'll have plenty of paperwork and you'll most likely have to produce this when applying for a standard mortgage.
Into the bargain, if you fail in your application for a standard mortgage as a self-employed person, this worsens your credit rating, at least for a period, regarding any further applications you make.
Contractor mortgages are constructed to tackle each of these issues in turn.
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What criteria do specialist lenders use?
First and foremost, this type of mortgage is the preserve of specialist underwriters and lenders; many high street lenders do not cater for them and you are best advised to use a specialist mortgage broker to research them for you.
- Specialist underwriters use your contract rate and your demonstrable retained profit as the basis of your application instead of calculating your mortgageability based on your salary and dividend drawings.
- The underwriters also take into account the contract/s itself/themselves: if it's clear that you'll be offered a contract on a rolling basis that will stand in your favour and past agreements can also be examined for evidence of continuing employment. Additionally, your CV can also be factored in: if it's clear that you have specialist skills which clients and employers have engaged you for previously, this also carries weight.
- Limited company establishment: when you set up a limited company, you have established an extra layer of credibility in the eyes of a lender because of the costs involved and the requirements, such as auditing and to file accounts annually with Companies House subject to financial penalty. Specialist lenders take this on board when a contractor applies for a mortgage.
Contractor rate mortgage affordability calculation example
Let's say your contract terms stated you would be paid £500 per day and you would be working 5 days per week.
So your weekly wage would be £2,500.
This would then normally be multiplied by 46 or 48 weeks - the calculation works in holidays taken - so let's say 46 weeks which makes your yearly gross wage 46 x £2,500 = £115,000.
The lender applies its multiple to this figure, perhaps 4 (like a normal residential mortgage), which gives you a possible maximum mortgage of £460,000.
- You'll generally only be considered if you can present a deposit of at least 10% of the value of the property you're buying and sometimes as high as 25%, depending on your circumstances/individual application.
- You'll have to produce, in the normal way, proof of ID and address and at least 3 months' bank statements. And the very first thing that's always examined is your credit rating and history.
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How can you best help your mortgage application?
- Ideally you should have at least 6 months' earning history although this isn't essential.
- You should have at least a 10% deposit.
- You should ensure your contract is up-to-date when you apply and have evidence of past contracts that have been or are likely to be renewed.
- You should avoid lengthy breaks between contracts particularly more than 8 weeks in the last 12 months prior to application.
- You should investigate mortgages which allow for additional payments.
- You should be realistic about estimating the size of your repayments.
- You should have evidence of your expenses and operating costs.
- You should definitely approach a specialist independent mortgage broker as high street lenders often don't cater for this kind of mortgage.
- You should consider buying with another person; buying with someone else who is a full time employee can help.
- You should take the normal precautions that you would when thinking of applying for any mortgage: get a copy of your credit score and history, get any mistakes corrected, put off applying if your credit score is poor, ensure you're on the electoral register etc.
Contractor? Looking for a specialist Mortgage?
This kind of mortgage requires specialist underwriters and much fewer lenders offer this product. Let our specialist independent mortgage brokers locate the right mortgage for your needs.
- You may not need to have been a contractor very long (even as long as 6 months); and
- Mortgage can be calculated on your contract rate and not your income and dividends (if applicable).
* Access to whole of the market – Available Outside of Work Hours – No need for face-to-face meeting with mortgage advisor - Terms Apply
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