How To Get A Large Contractor Mortgage - 5 Things To Consider
If you’ve tried to get one in the past by going down the high street lender route then you will no doubt be aware that getting a contractor mortgage certainly isn’t easy.
However, due to the fact far more people than ever before in the UK are today working on a freelancer or contractor basis (ie they don’t have a ‘regular’, fixed income every month), things are beginning to ease up a bit in this respect.
Certainly most private contractor mortgage lenders will be more than willing to chat through your application. The High Street is a different story though – it’s still trying to catch up with the new models of employment. In fact, with the exception of the Halifax and HSBC (more on these later!) you’ll probably still need a battering ram with which to break down those doors.
For more about mortgages for self-employed contractors, see our updated content.
High Street contractor mortgages aren’t bespoke
The difficulty with most high street lenders is that they base their mortgage application scores on a rigid criteria; one which is more suited to applicants in full-time employment. As a result, any freelancer or contract worker who fills out an affordability assessment with a traditional mortgage lender ends up being regarded as ‘high risk.’
Private contractor mortgage lenders are far more flexible in this regard. In fact, some have contractor mortgage deals are specifically designed for particular professions which are known to have a high number of contract workers, such as IT, Oil and Gas engineering and Business Consultancy.
You may be surprised to find too that some high street lenders do offer contractor mortgages. The ‘surprise’ comes from the fact that institutions such as the Halifax and HSBC don’t advertise these contractor mortgage packages widely (often their front desk staff aren’t even familiar with them). And, that’s why - even with these big names - it’s still best to go through a contractor mortgage broker with their networking contacts and expert knowledge to get him or her to work out the best deal for you.
Why you should use always use a contract mortgage broker
Here at Clifton Private Finance we would suggest that if you are a contractor or freelance worker then it’s always a good idea to speak to a specialist broker – regardless of whether you’re a first time buyer, second stepper or looking to remortgage etc.
A good specialist broker won’t just help you find a lender that accepts mortgages from people in non-traditional employment set-ups, but they’ll also hold your hand while you navigate the whole complicated mortgage application process (at which, unlike you, they are old hands). This includes explaining the various different types of mortgage repayment plans available such as a fixed rate mortgage, capped rate, or variable rate.
Your contract mortgage broker will also be able to advise you on additional costs you can expect to pay when it comes to the complete mortgage package. Arrangement fees, valuation fees, legal fees, stamp duty (if you’re not a first time buyer) and their own broker fees – can all add up and also need to be taken into account.
Always be prepared to have detailed accounts ready
Whether you go through a high street lender or private finance contract mortgage broker you will always be asked to reveal a certain level of accountancy detail so that lenders can get an idea of your incomings and outgoings, and whether or not the mortgage is feasible for you to repay on a monthly basis (something they refer to as ‘an affordability assessment).
They will also want reassurance that your line of work is secure ie that when your current contract finishes you’ll be likely to pick up another long stint of paid work (a few years work history of regular contracts would justify this).
How much can I borrow as a contractor?
How much money private contractor mortgage lenders will agree for you to borrow depends very much on what they deem your average income to be and how it fares against expenses and other outgoings.
Your average income is calculated by adding up 12 monthly incomes then dividing it by 12 to find an average figure. Usually lenders will ask to see two to three years of your accounts to ensure the average is typical over a number of years (or, at least, that the figure hasn’t fallen dramatically compared to your income from recent years).
If the figure for the previous year is higher than your current income, for instance, then they’ll want to know why. And paradoxically, if it’s lower than your current year’s income then, unfortunately, that’s the one the lender is more likely to base their mortgage repayment calculations on.
If you happen to have a 12 month contract then some contract mortgage lenders may take into consideration a day rate. However, they will also factor in holidays and potential gaps between contracts so this may not actually be as high as you originally imagine.
5 ways to improve your chances of getting a contractor mortgage
- The smaller the amount of money you’re asking for to pay off a mortgage on your home then the more likely you are to get it. If you are looking for a large mortgage loan the higher the risk for a lender so it will depend on the lender and their appetite for taking you on as a client. If your income is high e.g. over £300k pa then this opens the door to private banks who will consider your requirements on a bespoke basis. And the best way to reduce your lending is, of course, to put down as big a deposit on the property as you can afford. We would always recommend from 10 to 25 percent of the mortgage sum if possible.
- Another way of impressing contract mortgage lenders is to work as much as you possibly can in the run up to your mortgage application (certainly within 12 months of it). That means minimising time off for holidays (within reason) so that lenders can see availability of work isn’t an issue for you (ie you can usually pick up as much as you want).
- Contract mortgage lenders also like to see consistency in the form of a letter (or email) from a regular client verifying that he or she is providing you with ongoing, long-term work. The finance lender will then be able to view this as evidence of future earnings.
- What’s your current credit score like? One if 5 people in the UK have some kind of credit blip on their borrowing record. However, if you feel your own credit score could be a bit on the ‘messy’ side then see if you can tidy it up. Do this by paying off any outstanding debt (you may not even be aware you have any as this could go back years, so it’s worth checking with a credit reference agency), close down any old credit cards you never use as these will count against you, and make sure your current address isn’t linked to anyone else’s bad debt etc (which, unfortunately, is not as uncommon an occurrence as you might believe). In fact, make sure you’re on the electoral role for where you’re living today too!
- Another way to improve your chances of obtaining a contractor mortgage is to buy the property with a partner – one who, unlike you, does have a regular steady income via full-time employment. Or, if you’re single then you could always ask a parent or another close family member to ‘guarantee’ the mortgage against their own home.
How does limited company status affect a contractor mortgage?
If you happen to be the sole or joint owner of a limited company then contractor mortgage lenders will typically apply a different – and more complicated - affordability criteria. They will, for instance, only take into account the salary you draw from the business and any company dividends as your income.
This can prove problematic for many limited company owners since, especially within the first few years of starting up their business, they will only pay themselves a small salary, preferring to plough any profits back into the company.
It is possible, however, to find a private contractor mortgage lender who will take your overall earnings into account – but usually only if you use the services of a contractor mortgage broker to find them in the first place since their services aren’t traditionally advertised.
Another important reason for using a contractor mortgage broker is that every time you apply for a mortgage and are rejected, it’s noted on your credit file. Too many rejections and that file of yours doesn’t look good to any potential lender – regardless of how much you’re now earning compared to recent years.
With a contractor mortgage broker carefully tailoring your circumstances to the right mortgage lender package, the chances of rejection are far slimmer than if you go a bit gung ho by yourself right at the start of your mortgage hunt. And, in fact, you may be very pleasantly surprised at the outcome.