The Ultimate Guide to Securing a Contractor Mortgage
Have you struggled to get a mortgage because of your contractor status? If so, you're not alone. And there are many, many reasons why.
For a start, people love to offer advice (whether you ask for it or not). If you’re working as a contractor or creating your own limited company, you'll have had plenty already.
One thing about these 'helpful' souls is that they love to be harbingers of doom. As such, you may think you'll need to wait until you have extensive accounting history before applying for a mortgage. That's not always the case.
There are many opinions, most based on myth, that may even deter you from forging ahead with your contractor business. We’ve heard so many horror stories in our time that we thought we’d better exorcise this particular ghost.
This concise FAQ will help sort fact from the fiction and give you a better understanding of how contractor mortgages work. Moreover, how contracting could even improve your chances of becoming a homeowner!
Do I need three years of accounts for a mortgage?
Mm, no. Contractors can arrange a mortgage on their current contract rate. In fact, they've been able to do so for many years.
You neither have to prove that you’ve been contracting for years nor provide the reciprocal accounts.
You may even have tried some of them yourself, but to no avail. Even then, we’re not surprised.
In a nutshell, these special terms mean that you can secure a mortgage based on your contract alone. Those reams of accounts others ask for have little to do with your current circumstances, anyway.
All we need from you is a copy of your contract, official ID, a CV and the last quarter’s bank statements. That's all.
Does my contractor status affect how much I can borrow?
Lenders sympathetic to contracting understand that you’re no more high risk than permanent staff. If your credit rating is in good health and you have a deposit, this will give you a low risk status.
As such, these criteria enable you to borrow as much as five times your annual contract rate.
If you have CCJs or have defaulted on mortgage or credit card payments on your credit history, then it will be more of a challenge. However, this is the same for anyone looking for a mortgage, not just contractors.
Even if your credit history isn’t perfect, you have options. There’s a range of specialist mortgage products designed to accommodate these oversights.
We all make mistakes and, due to the tax-efficiency of limited company contractors, you can rectify them. A specialist mortgage broker can help you identify the best offers by connecting you to the right people.
Will I need a huge deposit? Some say as much as 40%!
Again, this is a myth. There are advantages to having this big a deposit, but the average deemed necessary is between 10-20%.
Since the introduction of the Help-To-Buy scheme, entry level is even less. Many contractor-friendly lenders have brought back 95% mortgages. That means you only have to find a 5% deposit! However, interest rates may reflect the lower deposit.
For a more substantial deposit, there are some amazing rates available at the moment. It’s a case of knowing where to look and being able to speak to the right mortgage brokers.
Is it true that mortgage lenders quote higher interest rates for contractors?
No. At least they shouldn’t. Interest rates are the same for contractors as for permanent staff, and can even be lower.
Contractors potentially have more disposable income compared to a permie who does the same job. Therefore, they’re more likely to save more, hence have a larger deposit.
This combination will help both reduce your interest rate and subsequent monthly repayments.
The extra income could also mean your credit rating is sounder, too. This is another aspect that counts in your favour.
I thought a self-cert mortgage was the only answer, but I can’t get one of those now either?
Ah, the self-certification mortgage. The FCA (as was) all but banished these from the High Street.
While they were viable, Mortgage brokers used to rely on the self-cert. Because they didn’t (and still don’t) understand the contracting world, they were an easy fix. Although it sealed the deal, it wasn’t always the most cost efficient route.
In reality, the self-cert prevented contractors from accessing contract-based underwriting. This would have availed contractors of better interest rates and higher loan-to-value ratios.
Contractor mortgages have been available since 2001. Instead of using accounts, this way banks assess contractors on what they earn, not take home. In addition, they offer similar interest rates to standard products, if not better.
Is the reference process as complicated as people make out?
Here’s another myth-buster for you. It doesn't take forever to get your mortgage approved if you’re a contractor. You don't need your accountant, all four great-grandparents and next door’s cat to vouch for you!
On the contrary. Specialist mortgage brokers package your mortgage application showing only the details underwriters need.
Underwriters then don't have to plow through accounts nor get distracted by other factors. They understand contracting and know what to look for to determine affordability. This can speed up the entire process, rather than hamper it.
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.