Many criteria affect how much a can contractor borrow

Reading Time: 5 minutes

Today, there are many contractor friendly mortgage lenders available to independent brokers. Each has their own set of lending criteria. Each set of criteria reflects how that lender perceives risk.

For an exact amount, if you've seen a house already, you need to talk an advisor. It's not only lender criteria that determines how much you can borrow for a mortgage. Your borrower profile has a significant impact, too; criteria like:

  • income;
  • payment structure;
  • contract status (time served/time remaining to expiry date);
  • your career industry and your history therein;
  • current homeownership status;
  • and, of course, credit history.

Why use a broker?

If you approach a High Street lender direct, you're stuck with their mortgages. Even if they do take elements of your borrower profile into account, there may be a better deal out there for you.

The chances are, though, that an in-branch advisor won't see your true affordability.

High Street lenders not only have the restrictions of their mortgage portfolio. The calculations they use to work out borrower affordability are inflexible, too.

As a contractor, you're in a minority niche. The majority of reputable lenders have special underwriters to deal with minority borrowers.

That's not because they're prejudiced. It's because the elements that expose genuine risk and affordability are complex.

Most contractors hire specialist accountants to manage their limited company accounts. So it's unrealistic to expect an untrained advisor to understand contract earnings.

That's where contract-based underwriting kicks in. And in most cases, the only way to get to underwriters who get contacting is through a broker.

Is there a guide to what I can borrow using my contract rate?

We can estimate how much you can borrow using your day rate here. The quickest, simplest way to get a guide figure is to use our Contractor Mortgage Calculator.

This is an average figure based on terms we've negotiated with various lenders. Other specialist brokers may have different terms, depending on their reputation and relationship.

This average uses your annualised contract income as the basis of the calculation. As mentioned, your unique circumstances will affect the final figure, too.

The contractor mortgage affordability calculation

finger adding up figures using a calculatorLenders use a straightforward calculation to work out your potential borrowing capacity.

First, multiply your contract day-rate by the number of days you're contracted to work per week.

Then, multiply that answer by 46, the number of weeks in a year lenders use to work out your affordability. Others use 48, but let's be conservative.

Take that figure and multiply by 4½. That will give you your potential borrowing using contract-based underwriting.

The final offer may be more or less, depending upon the lender and your profile. Some lenders use ×5, others use ×4; your profile could affect either.

An example using contract-based underwriting:

Let's take a contractor earning £500 per day:

  • £500 × 5 days per week = £2,500 weekly;
  • £2,500 × 46 weeks = £115,000 annualised;
  • £115,000 × 4.5, the lender's affordability factor = £517,500.

You're unlikely to get anything like this amount in-branch using traditional underwriting. Contract-based mortgage underwriting, through a broker, only uses the elements that matter.

A broker can save you the time and hassle of trudging the High Street. And then having to provide at least of 2-3 years' of irrelevant accounts to 'prove' your earnings. All that for them to turn your down because your 'income', according to them, isn't enough.

For a definitive figure, talk to an experienced independent advisor. They'll build up a picture of you by taking your details. They can then align you with the best offers from contractor-friendly lenders.

Don't get tied down to one lender with a handful of mortgage deals for you. Don't settle for a self-employed mortgage that uses accounts or salary + dividends. Use your contract rate to help you borrow what you can truly afford. It's the simplest and most relevant way for contractors to buy a home.


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