IT (Information Technology) contractor mortgages’ difference

Here at Freelancer Financials, we’ve championed contractor mortgages since 2004. But the question is: “Why have we needed to, when many lenders recognise the high income potential of IT contractors’ contracts?”

The answer is right there in the keyword: ‘potential‘. Lenders can see how much IT contractors earn. But getting them to adopt/adapt lending policies to contract income is where the process often deteriorates.

We want to reassure IT contractors that they can get a mortgage even with a short-term contract. You don’t need Limited Company accounts or umbrella payslips. Neither of those methods of proving your income accurately reflects your true mortgage affordability, anyway.

In this post, we will go over how much contractors can borrow. But before we do, it’s worth explaining why we do what we do. After reading this, you’ll never go to the High Street or a comparison site for a mortgage again.

Why don’t banks recognise a contractor’s affordability status?

Many High Street lenders won’t base an IT contractor’s mortgage affordability on their contract day rate. They can’t, simply because their generic system won’t allow for complex income structures. This outlook makes them appear inflexible and outdated. It can even be detrimental to a contractor’s future attempts to get a mortgage!

So, how do they get it so wrong?

For a start, they apply lending criteria designed for self-employed workers or for permies to applicants, respectively. And even then, those self-employment criteria rely on accounts and SA302s.

In theory, yes: you are self-employed. But if you have limited company accounts, it’s likely they’re streamlined for tax planning. That means you draw a low salary and dividends for tax-planning purposes.

At branch level, algorithms can’t cope with this. Plus, paying yourself so much less than you earn reflects neither your genuine income nor your true affordability.

You know this. Your accountant knows this. But an in-branch mortgage adviser? They wouldn’t understand ‘retained profit’ if you gave them the link to Investopedia.

A simple (but overlooked) truth: IT contractors earn more than their permie peers

Most IT contractors work shoulder-to-shoulder with their client’s employees. All parties know that the independent professional earns more than their employed counterparts. Most even understand why. So why don’t mortgage lenders acknowledge this gulf in earnings?

The whole scenario would be laughable if it weren’t so grave. Even worse, it needn’t be: there are more contractor-friendly lenders today than ever. Yet IT contractors whose lenders have rejected their mortgage applications still call us.

The main barrier to them getting a mortgage is almost always the in-branch adviser or call centre agent, not the contractor. But we can’t blame those advisers if their bank hasn’t trained them to process specialist mortgages.

So, make no mistake: contractor mortgages remain a specialist field for most lenders. And until there’s a huge shift in the UK economic mindset, they’ll remain so. That begs the question: where do IT contractors go from here?

What are IT contractor mortgages? How do they work?

Here’s our definition of the IT contractor’s conundrum when it comes to getting a mortgage:

“Contractors working in IT are in high demand, making them high earners and (usually) low risk. So, despite working short-term contracts, their profile should make them ideal borrowers.

“But, while many lenders offer bespoke IT contractor mortgages, they don’t make them accessible ‘over the counter’. To access special contractor lending criteria, applicants need access to specialist underwriters. Many lenders will only allow such access through a specialist mortgage broker.”

So, how do you get a mortgage as an IT Contractor?

First, you need to work with a specialist broker who understands how you work. Not just the contracting side, but also the way you pay yourself. Limited Company payment structures are not for the faint-hearted.

That broker must also have strong ties to lenders’ underwriting teams. It’s those teams who sanction non-standard mortgages (like yours), not branch staff.

Finally, the broker needs to know how to package your application. Given the brevity of your contract, your application must highlight your strengths. For IT Contractors, those strengths are your income and its retention.

A ‘vanilla’ IFA won’t recognise the potential mortgage affordability in your contract. The day rate may look phenomenal on paper. But your accounts (with applied tax efficiency) won’t support those top-line figures.

If you’ve only been contracting a while, you won’t even have trading history on your side. No trading history = scant accounts = no-go on the High Street.

But those elements present no barrier if you approach a lender through the correct route.

How much you can borrow and the documents you need to back it up

When it comes to ‘proving your affordability’, I perhaps know what you’re thinking. What’s the point of going through the motions just to get rejected again?

For a start, there are so few factors involved in contract-based underwriting, you’ll hardly flinch. Plus, IT contractor mortgages are a speciality of ours.

After a brief chat, one of our experienced brokers can assess your situation and advise you on the best course of action. Then, when you’re ready, we can even get you a same-day agreement in principle. Here’s why we’re so confident.

Negotiating at the highest level for contractors

We’ve spent hours and hours around negotiating tables with lenders’ decision makers. These high-brow, often intense meetings have given us clear insight into what they need from us.

In many instances, we’ve even helped them understand what makes contractors so mortgage-worthy! That’s why we have over 30 contractor-specialist mortgage lenders we can approach on your behalf today.

So, we know that underwriters who understand contracting don’t use accounts or payslips to assess your potential. They know that these reflect a nominal ‘take-home’ pay, not your limited company profits. They also know that your accountant applies a tax-planning strategy to your income. That means they assess your mortgage affordability differently.

Specialist underwriters assess your borrowing potential using your gross current contract day rate. Yep, that’s right. Your day rate, annualised over a year, will be the basis of your mortgage affordability. To do so, they project your day rate over an annualised gross salary. How cool is that?

Evidencing IT contract income

The result is a hassle-free way of applying for your mortgage; all you need is:

• a copy of your contract, confirming your contract rate and its longevity;
• a copy of your latest CV confirming your IT employment history;
• three months’ bank statements;
• proof of ID and Address (passport and/or recognised utility bills).

Then, you want to know how much you can borrow. Based on a lender’s generic IT contractor affordability calculation, you:

• take your day rate: [£xxx.xx];
• multiply [day rate] by days worked per week to get a weekly rate: [×5];
• multiply [weekly rate] × weeks worked per annum to get an annualised contract value: [×46]*;
• multiply [annualised contract value] by the lender’s affordability factor: [×4.5]**.

This formula gives you the size of the mortgage you could potentially borrow based on your gross contract value.

Let’s do a theoretical example, based on an IT Contractor earning £500/day:

• their weekly rate would be [5 days × £500] = £2,500;
• their annualised contract value would be [£2,500 × 46 weeks] = £115,000;
• their potential mortgage affordability is [£115.000 × 4.5] = £517,500!

Use this info (and your IT contract) to get the mortgage your status deserves!

Don’t let past rejection put you off today!

You may have had a frustrating time securing a mortgage using your contract up until now. Why traditional lenders insist on making it so complicated, we don’t know. The reams of accounts in-branch advisers may have asked you to submit are just not necessary.

If you do anything after reading this, do yourself this one favour. Don’t risk going to your ‘local branch’ or where you’ve got your current account to try to get a mortgage. The days of loyalty counting for something mean nothing if you have a complex income.

A specialist broker won’t lose sight of what makes IT contractors such a safe bet for a mortgage: what they earn! We can access mortgage rates at least as competitive as your situation allows, often better. In the meantime, check out what you could potentially borrow with our comprehensive mortgage calculators.

*Most contractor-friendly lenders use 46 weeks to calculate your gross annualised salary. So, yes, you can use this as a guide. However, a few lenders also use 48 weeks or more in their calculations. If you want an exact figure, it’s always worth taking the time to get an official quote!

**The usual ‘affordability factor’ lenders apply to your annualised IT contract income is 4.5×. Again, we must point out that some lenders use a lower multiplier of around 4×, while others may lend 5–6× your annualised earnings as an IT contractor. Now that’s what you call an X-factor!