Contract-based underwriting is the differentiator, a big one!
A genuine contractor mortgage starts with a contractor's contract rate. A lender, or underwriter, need only concern themselves with the gross day rate, then *annualised. This method is called contract-based underwriting.
The problem is, most High Street lenders haven't the capacity to work with contract rates. Their calculations work on either:
- salary + dividends.
None of those methods take into account retained profits. As a limited company or umbrella contractor, it's those profits that reflect your true mortgage affordability. Given this, the High Street route often leads to rejection for professional contractors.
Can't you use your contract rate to get a mortgage, then?
As inferred, contract-based underwriting is how lenders assess a contractor's risk. It's this method of underwriting that differentiates standard and contractor mortgages.
Typically, you'll only find this type of underwriting by going through a specialist broker. But because it's so hard to find in your local branch, either:
- contractors think they can't get a mortgage using their contract rate, and/or
- in-branch advisors offer them self-employed mortgages instead.
A self-employed mortgage will use accounts or salary + dividends. A standard mortgage will work on PAYE salary. Neither will get a contractor the mortgage their income deserves.
The advantage of contract-based underwriting
Contract-based underwriting is important for many reasons. One reason is that by using pre-tax income, a lender can see what a contractor can really afford. The second might be even more important.
Brokers who lenders appoint to vet contractors have their finger on the pulse. They understand the contracting world. They and the lenders' underwriters build solid relationships over time.
These relationships help lenders see contractors as the low risk they are. Terms then become less punitive. So through a broker, a contractor applicant can get better interest rates. At worst, rates no higher than a salaried employee. At best, exclusive deals not available on the High Street.
*Annualising: extending your day rate across a year. This gives underwriters a view of your real mortgage affordability. The average annualised calculation is: day rate × 5 × 48 weeks × 4½.