A contractor mortgage is the same as any other mortgage. The difference is that some lenders are more willing to lend to contractors than others, often require extra documents, and apply different rules to how they calculate what they will lend.
Lenders can categorise individuals as contractors if they are self-employed, engaged in short or fixed-term contracts, and have an agreed-upon rate of pay for the contract's duration. This definition may extend to agency workers or those on zero-hours contracts.
Securing a mortgage as an independent contractor may seem like a daunting task, but with the right approach and some additional paperwork, it's entirely possible. In this guide, we'll unravel the intricacies of contractor mortgages in the UK, providing you with essential insights to navigate the process successfully.
Finding the Right Lender
This is essential when you are a contractor. There are lots of high-street banks (and non-high-street banks) that are willing to provide a mortgage to a contractor. So, it’s important to find a lender that will lend you the amount you need, at the most competitive rate.
Determining Borrowing Capacity
The amount you can borrow as a contractor depends on a personalised affordability assessment conducted by the lender. This assessment is generally the same for all mortgages and considers the amount of deposit, income, living expenses and commitments to determine the lending amount. The difference is that some lenders work out how much a contractor’s ‘income’ is in vastly different ways.
Documentation to Prove Income
To substantiate your income as a contractor, you may need to provide detailed documentation, including Self-assessment (SA302) tax calculations, tax year overviews for the last two or three years, and chartered accountant-prepared accounts. If you operate through a limited company, proof of dividend payments and details about upcoming work may also be required. Lenders typically calculate your average profit over the past few years to determine your mortgage eligibility, but some will consider the most recent year if it is higher.
Due to the challenge of proving annual income, contractors must prepare thoroughly for mortgage applications. In addition to tax returns and accounts, you'll need to supply your current contract, CV, and bank statements. Standard identification and address proofs are also required, along with details of living expenses and other financial commitments.
Day Rate Contractors
Certain lenders, particularly specialists, may calculate your yearly income based on your day rate rather than overall profit. This involves multiplying your contract rate by the average number of days worked per week and then by the expected weeks worked in a year. Collaborating with a mortgage broker can assist in finding a lender open to considering your day rate as proof of income.
Tips for Success
Maintaining a good credit score, providing a healthy deposit, and showcasing a regular, reliable income are crucial factors that enhance your chances of securing a contractor mortgage. Lenders favour lower loan-to-value ratios, so having a larger deposit, is advantageous. Consistent employment without extended breaks between contracts further strengthens your mortgage application.
The key to obtaining a mortgage as a contractor lies in working with the right lender and demonstrating your financial stability. While your confidence in contract renewals and job security is valuable, lenders require concrete evidence. Specialised lenders who understand the contractor landscape can provide attractive mortgage deals, levelling the playing field with traditional employment arrangements.
The Benefits of using a Broker for your Contractor Mortgage
While securing a contractor mortgage presents its challenges, working with a knowledgeable and experienced broker who will take the time to fully understand your situation, can simplify the process and make sure that you apply to the right lender the first time.
At MRG Private Clients, we believe in providing our clients with personalised guidance and support when it comes to making important financial decisions. If you're considering an interest only mortgage or have questions about the options available to you, please get in touch.