Put the odds of getting a mortgage in your favour
For a long time, securing a mortgage as a contractor was tough. Attitudes are changing and, today, many lenders have adopted contractor-friendly policies.
As such, getting a contractor mortgage is easier if you know what to do and where to shop for a suitable one. But that's often the stumbling block.
Buying a home remains the biggest financial commitment most people ever make. The process can be confusing, tiring and frustrating if you're fumbling around in the dark.
We can shine a light on all the aspects you need to know about buying a home as a contractor. Making the right call at the right time is critical; we'll help you make those choices.
What is a contractor mortgage?
A contractor mortgage is like any other mortgage loan in its purpose. It's a long-term loan a lender provides to a borrower, in this case a contractor, to help them buy or build a property.
As more lenders add mortgages for contractors to their portfolios, choice becomes greater. Choice broadens (or contracts) further depending upon how each lender weights risk:
- time served in industry (including consecutive history);
- sustainability of contract tenure;
- incumbent debt;
- deposit available;
- credit score.
These in turn affect the terms a lender will offer, including:
- repayment method or type, including term;
- repayment vehicle (type of mortgage);
- secured and unsecured debt;
- interest rate.
The process of buying a home as a contractor
Lenders pay particular attention to details when they assess contractor applicants. A typical High Street lender will focus on sustainable income. To back that up, they'll ask for tax returns for the past two or three years.
That's where a typical application starts to unravel. Limited Company contractors may – and should – face different affordability checks!
Lenders can and do regard contractor applicants as high risk. The short term nature of their contracts raises unnecessary alarm bells:
- Why does this guy flit from company to company every six months?
- What happens when their current contract ends?
- How can I guarantee to my underwriter that they'll maintain their mortgage repayments?
All these questions are pointless. But they do exist, and purely because the advisor doesn't understand contracting. So their answers don't arise from how to get a mortgage, but from whom.
The road to assessing relevant affordability
Many lenders have capacity to base contractors' affordability on their annual contract rate. This is a simple calculation using an hourly or day rate, but 'annualised'.
The problem is, most advisors in branch can't access this underwriting criteria. It's available to only specialist underwriters, most of whom work at head office.
These underwriters consider several factors when determining how much they're prepared to lend. They can include:
- gross annual income;
- income derived from shares and investments (such as buy-to-let);
- income from pensions.
They'll also check your credit status, deposit and disposable income. Using all this data, they work out how much you can realistically afford to borrow and repay every month.
Not sure of that amount yourself? Our calculators can give you an idea of how much you can borrow, the deposit and your likely repayments.
Tips to make the homebuying journey smoother
As a contractor, the way you process your income is far from standard. Talk to an experienced specialist mortgage broker about your set up.
That you've not yet secured a mortgage might not be your fault at all!
A good broker will help put your affordability into a package underwriters understand.
It always helps to understand your own financial position first. Then apply for a contractor mortgage based on what you can afford.
Getting real figures will help you remain realistic in your house search.
Have your 5% deposit ready (at least!). The best rates start with 15% deposit, or 85% LTV.
The more deposit you have, the less risk you are to a lender. Putting more down up front often means you'll get a better interest rate.
Do what you can to bring your borrower profile into line. Can you settle any existing debts without affecting your deposit? Tidy finances will make you more amenable to lenders and underwriters.
If you've failed with one High Street lender, don't carry on bumbling from one to another. The more failed searches on your credit file, the less likely you are to succeed. Seek the help of a professional advisor who can help you understand what's gone wrong.
Additional costs to build into your budget
Don't forget the unseen costs. Stamp duty is a cost for which many homebuyers forget to budget. Take into account land registry searches, moving and solicitors fees.
And (the royal) you will want to put your own stamp on your new home. After all, what's the point of all that hard work if your home isn't as individual as you are?