Why IT (Information Technology) Contractor Mortgages are Different
Posted by John Yerou
on December 29th, 2017 12:18pm in
Last Updated on November 25th, 2019 17:52pm.
Freelancer Financials has championed the cause of IT (Information Technology) contractor mortgages for a decade. Most mortgage underwriters also recognise the high income potential of digital placements. At least they see that potential in principle.
Getting those same underwriters to adopt lending policies tailored to the IT sector? That’s where our job becomes more difficult.
We want to reassure IT contractors that you can get a mortgage based on your short-term contract. You don’t need Limited Company accounts or umbrella payslips. In truth, if you’re new to contracting, neither of those proof of income methods work in your favour.
But before we go into how much contractors can borrow, it’s worth explaining why we do what we do. After reading this, you’ll never go to the High Street for a mortgage again.
Why don’t banks recognise a contractor’s affordability status?
Many lenders won’t base an IT contractor’s mortgage affordability on their contract. This outlook makes High Street lenders appear inflexible, outdated and even dangerous!
They push lending criteria designed for permies onto all potential borrowers. Even their self-employed mortgage offering they base on accounts.
Yes, in theory 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 instead of a PAYE wage.
The problem is that paying yourself thus reflects neither your income nor affordability.
You know this. Your accountant knows this. But an in-branch mortgage advisor? 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 wasn’t so grave. Even worse, it needn»t be: there are more contractor-friendly lenders today than ever. Yet IT contractors whose bank has rejected their mortgage application still call us.
The main barrier here lies, in the main, with the High Street lender. Not you, the contractor; the stumbling block is often the in-branch adviser.
But we can’t blame the advisor if their bank hasn’t trained them to process specialist mortgages. Make no mistake, here: contractor mortgages remain a specialist field to most lenders. And until there’s a huge shift in the UK economic mindset, they’ll remain so.
So, how do you get a mortgage as an IT Contractor?
First, you need to go through a specialist broker who understands the way 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. In the case of IT Contractors, those strengths are your income and the retention thereof.
An in-branch IFA will not 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 what you need to back it up
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 you’ll hardly flinch. Also, we specialise in IT Contractor mortgages. We can take one look at your status and tell you whether it’s worth pursuing a mortgage.
We can even get you a same-day agreement in principle based on what we know! Here’s why we’re so confident.
We’ve spent hours and hours around negotiating tables with llenders’ decision makers. These high-brow, intense meetings have given us clear insight into what they need.
So in many instances, yes. We’ve helped them understand what makes an IT Contractor so mortgage-worthy!
Underwriters who understand contracting don’t need accounts or pay slips. They know that these reflect a nominal ‘take-home’ pay, not your limited company profits.
Instead, they assess your borrowing potential on your current contract rate. Yep, that’s right. Your day rate, annualised over a year, will be the basis of your mortgage affordability. How cool is that?
They know that your accountant applies a tax-planning strategy to your income. That means they have to work out your affordability in a different way. To do so, they project your day rate over an annualised gross salary.
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: [x 5];
- multiply [weekly rate] x weeks worked per annum to get an annualised contract value: [x 48]*;
- multiply [annualised contract value] by the lender’s affordability factor: [x 4.5]**;
to give you the size of the mortgage you could 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 x £500] = £2,500 ;
- their annualised contract value would be [£2,500 x 48 weeks] = £120,000;
- their potential mortgage affordability is [£120.000 x 4.5] = £540,000!
Use this info (and your IT contract) to get the mortgage your status deserves!
You may have had a frustrating time of securing a mortgage using your contract up until now. Why the High Street insist on making it so complicated we don’t know. The reams of accounts in-branch advisors 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 for a mortgage. Most specialist brokers offer at least as competitive mortgage rates, often better. Moreover, they know what they’re doing!
It makes sense for high-earning contractors to enlist an accountant.. It ensures that they remain tax-efficient. But brokers shouldn’t lose sight of what makes IT Contractors such a safe bet for a mortgage: what they earn!
*Most contractor-friendly lenders use 48 weeks to work out your gross annualised salary. Yes, you can use this as a guide. But be aware that there are one or two who use 46 weeks in their calculation. If you want an exact figure, always take the time to get an official quote!
**The usual ‘affordability factor’ a lender applies to your annualised IT contract is 4.5. Again, we must point out that some lenders only use 4 as their multiplier. But some lenders go the other way. They’ll lend 5 times your annualised earnings as an IT Contractor for your mortgage. Now that’s what you call an x-factor!
Author: John Yerou
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.