In the past, self-certified mortgages were the go-to choice for the self-employed contractor looking to buy a home. This system relied heavily on the applicant being truthful about their personal income. When the credit crunch hit, these loans were banned; leaving contractors searching elsewhere for mortgage funding.
The majority of lenders are often hesitant to loan out money to contractors. This can make it extremely difficult when trying to secure a mortgage on your home. But that isn’t to say it is entirely impossible. Many mortgage providers are more aware than ever that contractors earn more and have larger levels of savings than their full-time employed colleagues and, slowly, this is creating more choice for contractors.
In this article, TFMC looks at the contractor mortgage market and we share the advice we give to our contractor clients when they’re ready to make a property purchase.
Can I get a mortgage as a contractor?
In short, yes! There are a number of different mortgage options available to contract workers, no matter what industry you may be in. These can include mortgages for:
- Self-employed contractors with more than six months’ working history
- Agency workers with at least twelve months’ working history
- Contractors and employees of umbrella companies
- Employed fixed or short-term contractors with previous experience
- Zero hours contracts with six months’ working history
It is still important to bear in mind that, even though there are mortgage options available to contractors, that it can still be very difficult to access the funding.
Why do contractors get turned down for mortgages?
The most common reason contractors get rejected for mortgages is because they apply through their own bank. The bank will look at their earnings and their cash flow, then deciding that they do not pass the very strict affordability test banks are known for.
The issue here is that contractors, more often than not, will have a low salary and high dividends. In these cases, the bank will only see the salary and not the dividend.
Many banks do not understand that contractors are, in fact, often less of a risk than a permanent worker as they tend to have higher incomes and a more marketable skillset to keep them in secure work.
High street banks are arguably the worst for this. They regularly fail to recognise that retained profit in a contractor’s business more than proves that they will be able to afford their repayments.
When you apply for any mortgage, the lender will need to work out how much they’re willing to advance you. During this affordability assessment, they’ll look at how much you earn, your expenses, and how secure your income actually is.
Of course, security of income can be difficult to prove if you are a contractor. Finding a lender that specialises in contractor loans greatly increases your chances of being accepted. These lenders better understand that your finances as a contract worker are unique and they’re able to see past the usual affordability criteria.
How is my income assessed?
If you’ve been a contractor for a while now, a loan provider may choose to simply average out your income over the years. They’ll then use this figure to estimate how much you can afford to repay each month.
Say you earned £40,000 in 2016 but £45,000 in 2017. The lender would assume your annual income to be around £42,500 and base your repayments on that.
However, if your earnings have changed dramatically from year to year, they will not be able to use this method. Instead, it is likely that they will take either the most recent year or the lowest figure as an indication of your earning capacity.
What if I get paid a 'day rate' for my contract work?
You may be able to find a lender willing to calculate your annual income based on your day rate, however it is likely you’ll need to be able to show a twelve-month contract for them to do so.
They’ll simply take your daily rate and multiply it by the number of days you tend to work each week, then multiply it again to show the full year. Lenders will take any holidays and gaps between contracts into consideration here, so it’s likely they will assume you work only 46-48 weeks out of the year.
Let’s say that your day rate is £400 and you work four days a week - you’ll be earning £1,600 a week on average. Your estimated annual income in this case would be around £76,800.
This can be a helpful way to work out your affordability for a mortgage if you have only recently left full time employment and do not have an established track record as a contractor. Lenders will want to see evidence that you are likely to succeed in contract work, such as previous experience or qualifications in your field, before accepting you.
Speak to TFMC today
If you’re a contractor and would like to know more about where and how you can apply for a mortgage, speak to TFMC’s helpful advice team today on, give us a call on 0800 470 4820 or email firstname.lastname@example.org.