The Ultimate Guide
Why are Mortgage so hard to get for Contractors?
If you have ever approached a bank or building society to obtain a mortgage, you will probably find that the lender’s criteria are two specific categories; employed and self-employed.
This is where problems can arise for contractors. Many individuals who contract do so via tax efficient payment mechanisms in order to maximise their take home pay. Contractors pay themselves a low salary and take the rest of the money from their limited companies in the form of dividends or expenses, others use a third party payment vehicle like an umbrella company. Both of these ways of paying yourself are 100% legal and considered to be the norm in the industry, but anyone outside the industry can have a hard time trying to understand it and this includes your bank manager!
In most cases, the underwriters will try and push the contractor down the most relevant route, and will simply ignore all areas of income which they do not understand or recognise. For example, a contractor who works via an umbrella service may be pushed down the employed route, where pay slips are used to define income and expenses and other earnings are not taken into account.
Similarly, an individual who is contracting via their own limited company may find that the lender only reviews their taxable income, such as salary and dividend draw, to define their earnings, in line with standard ‘self-employed’ criteria.
Contracting Income overlooked!
With a large area of income being overlooked when the lender assesses the contractor’s affordability for a mortgage, the underwriters can often make the assumption that the contractor cannot afford to borrow the mortgage sum that they have applied for, despite the fact that many contractors earn considerably more than their salaried counterparts.
Unfortunately, there is a further drawback when the lender assesses the longevity of a contractor’s income. Many underwriters see an ‘end date’ on the contractor’s current role and assume that the contractor will not have sufficient ongoing income to make repayments over the term of their mortgage.
The two-fold problem of income assessment and income longevity has led to thousands of adverse lending decisions, whereby reduced borrowing is offered or the application is declined, causing a very frustrating and stressful experience for many contractors.
Why choose a Contractor Mortgage?
Unlike traditional mortgages that are based on accounts or payslips, Contractor Mortgages allow you to borrow based on a multiple of contract rate alone which avoids the hassle of proving your last three years income.
So even if you are on the first day of your first contract, you can secure a mortgage!
You save time and can often borrow more than your ‘permie’ colleagues at the same great rates available on the high street.
What are Contractor Mortgages
Some Mortgage Brokers identified the problems that contractors were facing and realised that this was unfair. After spending time educating the banks on the true earning potential that many contractors possess due to their advanced skill-set and high demand within the sectors that they operate, many financial organisations began to recognise that many contractors pose a lower risk than permanent or self-employed individuals.
These Brokers are now able to engage directly with the underwriters upfront in order to present the contractor’s individual situation before a formal application is submitted. This enables us to agree lending criteria and conditions upfront, using a specialist agreement called ‘bespoke underwriting.’
How do they work?
The bespoke underwriting process seeks to resolve any issues that the contractor might face by approaching the banks up front. Using bespoke underwriting, our consultants can usually arrange for income to be reviewed based on an annualised sum of the contractor’s daily rate, which ensures that full earnings are taken into account when affordability is assessed for mortgage purposes. This eliminates the risk of any adverse outcome due to complexities in the contractor’s remuneration structure.
To overcome the issue surrounding income longevity, they're usually able to agree that a copy the contractor’s CV is sufficient evidence to prove that the contractor has enough advanced skills to be able to secure future work when the term of their current contract expires.
With a bespoke underwriting arrangement agreed at the outset, contractors are able to avoid any of the drawbacks that they might face in approaching the bank directly. Because full, gross earnings are taken into account, the contractor is even able to secure the same competitive ‘high street’ rates which are available to permanently employed individuals.
What Information to I need for the Mortgage Application?
- Photo ID for each person on the application
- Proof of Current Address - Less than 3 months old
- Proof of Income - Payslips, business Accounts or letter from Accountant
- Copy of your CV
- Copy of your current contract
- 3 months of bank statements - Personal and Business
When you use a mortgage broker, who is targeted toward the contractor market the chances of securing a mortgage are greater, but it doesn;t mean the banks aren't going to do their due diligence. The simple rule is the more information, the better.
Best Mortgage Rates for Contractors
|Lender||Borrower Type||Starting Rate||Rate after intro||Overall Rate||Loan to Value|
|Halifax||First Time Buyers||1.74% Fixed- 09/2018||3.99%||3.81%||60%|
|Virgin Money||All||1.49% 01/09/2018||4.79%||4.20%||70%|