Interest rates can be higher for contractors, but they needn’t be
Do lenders charge contractors higher interest rates than PAYE employees? Good question. And the answer is: it depends. It depends on how they perceive the risk you present.
If a contractor approaches a High Street lender direct, then yes. The interest rate a lender offers will be on the high side. Probably. That's because they don't get contracting.
Why a lender might see you as a high risk mortgage applicant
Think about it. In-branch advisors' main customers are employees and sole traders.
And that's fine. They have algorithms that can work out those clients' mortgage affordability.
But your limited company accounts?
Short-term contract duration, with no guarantee of further work?
A high top-line contract rate, but low salary?
How does all that work, then?
These advisors are good at their jobs, but they're not accountants.
In this example, yes. Interest rates will be higher for a contractor because they pose a greater risk. But getting a good deal shouldn't—and needn't—be this difficult.
Reduce the risk, reduce the interest rate
To get a better interest rate, you need to present yourself as a low risk applicant. A decent deposit—say 15%-20% minimum—will help, too.
The only way you'll do that is to appeal to an underwriter who understands contracting. And you won't find many of those on the High Street on a Saturday morning.
Specialist underwriters tend to operate out of a bank's head office. They rarely, if ever, deal with the public direct. So how do you access them?
Contract-based underwriting is still a specialist niche for most lenders. Underwriters reach out to specialist brokers and vice versa.
Together, they've developed a different set of criteria for professional contractors over time. The new criteria simplify what qualifies as relevant earnings for lending purposes.
Contractors and other homebuyers on a level playing field
This patient approach to negotiations has paid off. It now avails contractors of the same "best buy" rates available to permies.
Contractors can now choose from a wide range of low interest rate products, including:
- various length fixed term rates;
- discount rates;
- tracker rates;
- flexible offset mortgages.
The best fixed interest rates available begin at 60% LTV, or 40% deposit. The smaller your deposit, the higher the rate, i.e. 75% LTV, 80-85% LTV, 90% LTV and highest at 95% LTV/5% deposit.
Credit score and deposit will impact the eventual interest rate you pay. And always talk to a broker about your work situation and available deposit. They'll weigh up your options and point you to a contractor mortgage that best fits your status.