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All about mortgages for contractors with Joel Piveteau and Kirsty Hill.
Are there specific mortgages for contractors?
Interestingly, no, the mortgage products offered by lenders are exactly the same. It’s actually how the lender assesses the income for a contractor that’s different. This is something that’s evolved a lot recently and every lender takes a different viewpoint.
Some will consider you as employed, some as self-employed – it’s mainly how they’ll view that and your income that varies.
Do all lenders lend to contractors?
No, but an awful lot now do. There’s been a big rise in this area – last year there were 4.2 million self-employed professionals in the UK. So more and more lenders are entering the arena for contractor mortgages and have changed their lending criteria.
It’s a good thing, because in the past we were reliant on specialist lenders and sometimes contractors were penalised with slightly higher rates.
How much can contractors borrow on a mortgage?
It varies depending on the applicant’s situation. If we look at a CIS contractor, for example, some lenders will see them as self-employed and look at their last two years’ tax returns and net profit figures. Others will see them as employed, so will look at their payslips and P60s. So it really varies depending on how that person is seen from the lender’s viewpoint.
On the professional side, lenders tend to look at the day rate to determine the amount they’re likely to lend. If, for example, your day rate is £400, they’ll multiply that by five for your working week and take that over 46 or 48 weeks to calculate your income.
So £400 per day is £2,000 per week. Over 48 weeks, that equates to an income for the year of £96,000. Based on an income multiple of 4.5 times, they’d be able to borrow up to £432,000.
How do contractors get a mortgage?
Often people worry that they will find it hard to get a mortgage as a contractor or self-employed person. But it shouldn’t be a problem. All the usual things will help, such as making sure you’re registered to vote and keeping an eye on your credit score.
Keep your paperwork too – make sure you’ve got up-to-date contracts, CIS payslips or and copies of your previous contracts. Lenders really like to see your history. If we can show an employment history in a similar job role we can also use that too.
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How is a contractor’s income assessed for a mortgage? What sort of documents does a contractor need?
We will need to see a copy of your contract, a history of your experience in the area you work in, and information about your day rate. Some lenders will ask for SA302s or tax calculations and overviews, plus bank statements.
Often they’ll ask for invoices, if you’re working for another company and invoicing them. You will need to show a record of those invoices going out.
Sometimes they’ll want P60s from a previous employer. So if you’ve started contracting in the last six months as an IT consultant and you were previously employed in an IT role, your P60 will show the income you received. It also shows that you were in the same field that you’re contracting in now.
How do you strengthen your mortgage application as a contractor?
It’s all about the paperwork, which we love in the mortgage industry. Ideally, we want to see around 12 months’ work history, so it helps to gather evidence of what you’ve been doing.
In some situations I’ve even put together a CV for a client. It might be that they don’t quite fit the lender’s criteria, but having proof of experience on a CV, contracts or invoices will always assist.
Keeping a good credit score will also help. Having a credit card and paying it off each month will help improve your score if you don’t have much of a credit record.
What about contractors buying with another person?
Their incomings and outgoings are assessed in exactly the same way. We usually advise clients buying jointly to put the employed applicant down as the first applicant on the form.
That can often help from a credit scoring perspective with the lender. But apart from that, the assessments are all done in exactly the same way. There’s no other difference.
What else do we need to know about contractor mortgages?
It’s all about seeking advice as early as possible. It might be that you’re not even thinking of getting a mortgage for another year or 18 months, but that preparation is key so seek advice from us.
We can have a chat about your situation – where you’ve been working, where you see yourself going and we can help you plan and maximise your situation. That way, you’ll have enough employment or self-employment contracting history behind you to approach the most suitable lender.
Just seek advice by speaking to somebody like us as early as possible.
Your home may be repossessed if you do not keep up with your mortgage repayments.