Contractor Mortgages Assessor – How much can I borrow?
A question clients often ask us is, "Can I get a competitive mortgage if I'm new to contracting?" It's a fair question, given the many myths abound in the contractor mortgage marketplace.
High Street mortgage lenders do little to dispel any misinterpretations. Any mortgage advice they give they base upon a pre-set lending model. The bad news for contractors is that their model revolves around salary and accounts.
Only on rare occasions can you find a lender on the High Street who'll consider contract earnings. The majority won't. Or worse, they'll offer you a mortgage using your limited company accounts. And that's where confusion begins.We and other specialist brokers like us differ in our approach. We can secure mortgage finance for contractors using a multiple of their contract earnings.
We don't need accounts. After tax-planning, they in no way reflect how much a contractor can afford to borrow. But that's where the High Street lending model fails contractors time and again.
So when we answer our client's first question, "Yes!", they're ready with another. It's often something like, "Okay, how much can I borrow?"
How much can contractors borrow using their contract rate?
The initial answer to how much mortgage funding you can access is, "It depends."
That's not a cop-out. We need to ask a few simple questions of our own. By design, the answers will reveal our contractor's unique circumstances:
- How long have you been contracting?
- What's your payment structure: self-employed, limited, director or umbrella company contractor?
- How long have you worked in your chosen contracting career before turning independent?
- What's your day rate?
- How's your credit rating?
Your answers help us determine who's the most appropriate lender for your circumstances.
We can now take your figures and enter them into a simple mortgage calculator. The maths uses figures that lenders who offer mortgages for contractors use.
After crunching the numbers, we can advise a guideline mortgage amount. That's not a firm offer. If only they made contractor mortgages that easy. ;)
No, there's a little more to it than that. We'll suggest a typical amount a mortgage lender will offer based on what you've told us.
Even so, at that point we often hear a sharp intake of breath at the other end of the phone. After collecting themselves, our contractor's final questions is, "How do you work that out?!"
It's these popular questions that we want to examine further here. If they sound like questions you have too, a contractor mortgage may be the solution for you. So, please: read on.
How do lenders assess my income for lending purposes?
So, we've answered the first question. Contractors can get competitive mortgages using their annualised contract rate. That's true whether they're a veteran or a newbie on their first contract.
The other two questions need further explanation. Answers to both will depend on a contractor's individual circumstances and status. Combined, they'll paint a picture, which will determine how we process their mortgage application.
But first of all, we need to define what we mean by a "contractor".
A typical contractor will work for one client at a time through an agency. The agency expects the contractor to keep certain office hours.
They'll also work on projects or assignments that last between three to twelve months. They invoice on an hourly or daily rate and will submit their timesheet at the end of the week.
Contractor mortgages are only available to contractors who:
- work through their own limited company, or
- through a UK payroll umbrella company.
These contractors can apply for a mortgage based on that day or hourly rate, should they choose.
If they've been trading long enough, contractors can also apply as a self-employed entity. This secondary method uses their trading accounts going back often three years.
But here's the key benefit of applying for a mortgage using your contract. All mortgage lenders must calculate annual income for lending purposes. That stands to reason.
Contractor-friendly lenders pro rata the applicant's current contract rate over a year. We call this the annualised rate, which lenders then use to work out how much applicants can afford. There's an example of how this works a little further on.
Self Employed Basis
Contractors who are company directors often prefer to draw low salary and minimise dividends. This is by far and away the most tax efficient method of working.
But it does have a knock-on effect of limiting how much they can borrow for a mortgage.
The majority of lenders will demand three years' trading history via this route. As such, this is a hurdle that disqualifies contractors just starting out in their new career.
There's more information on applying for a mortgage as a self-employed company director, here.
Our mortgage calculator offers contractors a guideline amount of how much they can borrow. The precise figure may differ after an underwriter has appraised your mortgage application.
They'll work out a mortgage offer using your answers to our initial questions first. The special way we package your application will also reflect in their offer.
Rest assured, we'll align you with the most suitable mortgage lender for your situation. We'll then package your application to meet their specific needs. It's a winning combination!
In the meantime, you can calculate a typical borrowing limit with this formula:
- multiply your daily contract rate by the number of days you contract for per week and then again by 48 weeks;
- this determines your annualised income. Contractor-friendly lenders will use this figure in their affordability calculation;
- as a guideline, you have the potential to secure mortgage funds of up to 5 times this total sum.
In real life, what does that mean? A contractor earning £425 per day, working 5 x 8 hour days a week has the potential to borrow £102,000 x 5 = £510,000.
Joint Application (contractor applying with a Permie)
If you are applying on a joint basis with your partner who is a permie, then use the following calculation:
- multiply your daily contract rate by the number of days you contract for per week and then by 48 weeks.
- this gives you your annualised rate, the same as you'd work out as if applying on your own;
- then add your income to the permie's gross annual earnings;
- again as a guide, your joint potential is a mortgage of up to 5 times this total sum.
So, let's imagine the same contractor applies with a permie earning £35,000 a year. As a joint entity, they could borrow (£102,000 + £35,000) x 5 = £685,000.
What paperwork will the lender ask for?
Your mortgage lender or broker will expect you to provide a copy of your current contract. If you only have a short time left to run, they may ask for a continuation. You should approach your agency or client whom, experience tells us, are quite accommodating.
This document will outline the terms of your contract, including your day or hourly rate. And it will confirm that you're eligible for contract-based underwriting. That's the process we describe here, using your contract rate to underwrite the mortgage.
They'll also need bank statements to prove your income matches the contract amount. And finally, they'll need an official form of ID.
Where Can I get a Contractor Mortgage?
The place you don't want to start looking for a contractor mortgage is on the High Street. Use a specialist mortgage broker who understands how contracting works.
If you use traditional lenders, you may get offered a mortgage based on your take home pay. And that's the difference with using contract-based underwriting.
Remember, you're a tax-efficient contractor. What your accounts say that you ‘pick up' doesn't always reflect your top line income.
There are also many websites purporting to offer contractor mortgages. If you apply, ensure their staff understands what "contract-based underwriting" means. Don't let them bully you into a self-employed mortgage. They're NOT the same.
Also, ensure that the mortgage they offer you is from a genuine contractor-friendly lender. Again, many lenders who say that they cater for contractors use an accounts-based calculation. Especially for those new to contracting or umbrella employees, this method's futile.
Use the shortcut, not the High Street
So back to the original question, "How much can a contractor borrow based on their contract rate?" For a ballpark figure, enter your contract rate into a contractor mortgage calculator.
If you have seen a home you want to buy, you need a more specific answer. Talk to a qualified IFA who understands the way you work and how you get paid.
Also, have the answers to our questions ready and any documentation to hand. It will surprise you how quick the contractor mortgage process completes once you start. Because there's so little paperwork, 3-5 weeks is often all it takes.
So, one last question for you: how do you fancy being in your new home in a month and a half from now, tops? Thought so. Pick up the phone and start the timer; the countdown's on.
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.