Getting a Mortgage as a Contractor: The Basics
Being a contractor may have put you off getting a mortgage. You might’ve heard that you can’t get one, or that it’s really difficult to get approval.
Getting a mortgage as a contractor is entirely possible!
Contractor mortgages do vary slightly from those available to people on a payroll. This two-part guide will help you to wrap your head around the types of contractor mortgages available, how to calculate your self-employed income, and how to maximise your chances of getting a mortgage.
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Am I a Contractor Or a Freelancer?
A contractor is a self-employed freelancer – but a freelancer might not count as a contractor for mortgage purposes.
Confused? Don’t panic: read on.
A contractor usually operates through a limited company and takes only one contract at a time, typically for a 3 to 12-month period. They may act as an employee if they’re employed by an agency – which can include umbrella companies – or as a self-employed sole trader.
A freelancer, however, will often run concurrent, and often short-term (a day to 3 months), contracts with several clients. Freelancers can operate as a sole trader or a limited company; in both situations, they’re still a freelancer.
In the eyes of a mortgage lender, the freelance approach affects the stability of income. You’ll have multiple income streams but they may be less reliable than a longer single term contract.
What does this mean for mortgage applications?
A contractor mortgage provider will usually only consider one contract when assessing your income as a contractor. It’s expected that you’ll only work for that contract on a full-time basis, until the term of the contract expires.
If a contractor has more than one contract at any one time, a mortgage provider is unlikely to accept if you appear to work an unrealistic number of hours per week as this isn’t a sustainable way to operate or live.
A freelancer working on several client contracts at a time will need to provide evidence of previous income via tax calculations, Ltd company accounts and/or accountant reference.
The differences between a contractor and a freelancer are relatively small – but could impact how a mortgage lender assesses your application. If you’re a freelancer or a contractor in need of a mortgage, contact us today to find out how much you could borrow and what deals you could qualify for.
Minimum Requirements for a Contractor Mortgage
Contrary to popular belief, you don’t have to have years and years of accounts to be accepted for a mortgage as a contractor. You do need to show evidence of previous, current, and future contract agreements, however.
It’s a myth that you can’t get a mortgage as a contractor if you have less than 2 years of contracting history, too. As long as you can show a reliable income from your contract(s), and/or a history in the same line of work prior to contracting, you should be able to apply for a mortgage.
What about contract breaks?
Mortgage lenders recognise the nature of contracting means that you’re likely to have breaks or fluctuations in your income over the course of the year.
A break of a few weeks isn’t going to be a problem; breaks of more than a month could make it slightly harder to get the mortgage you need. If, however, you regularly only work a set number of months per year and can prove the income generated in those set months will cover a full year of mortgage repayments, that can help your application.
Remember: you need to show mortgage lenders that you can afford your monthly mortgage repayments even with a fluctuating income.
How to Work Out Your Contractor Income for a Mortgage Application
You have a few options for working out your annual income from your work as a contractor to encourage mortgage providers to lend to you.
The first, the holy grail of contractor mortgage applications, is the daily rate.
Lenders can use the annual gross earnings of a contractor to calculate the potential amount they’d be able to loan to you. If you have regular work, such as a set full-time contract, you could use this to work out your contractor mortgage eligibility.
For example:
Your day rate is £500. You work 5 days per week, earning £2,500 every week.
Lenders usually use 46 or 48 weeks of your contract rate to work out the annual gross income, to allow for holidays and time you don’t work. So, in this example, your contractor income would be £115,000 per annum on a 46-week calculation (£500 x 5 days x 46 weeks).
You would use this figure of £115,000 for your contractor mortgage borrowing assessment.
Salary vs Dividends: How to Get the Split Right
There are three more ways to work out your income: salary and dividends, salary and company profits, or umbrella company payments.
Operating as a limited company gives you the option of drawing a lower monthly salary in return for larger tax-efficient dividends.
Traditionally, a mortgage lender will assess your income based on your salary and dividends. You’ll need to provide at least one year of company accounts, although most lenders will ask for two – or three – years’ accounts.
What about salary and company profits for mortgage applications?
You could consider borrowing using your share of the company profits and your director’s salary. Doing this, especially if you’re not taking much from the company in the form of dividends, provides a much higher income for mortgage assessment.
However, not many mortgage lenders will accept this as a valid income calculation. If it’s the only one you want to use, you would need an expert contractor mortgage broker to help you find the right deal.
Find Out More About Contractor Mortgages
If you’ve still got questions about getting a mortgage as a contractor, you now have two options.
You can read Part Two of our contractor mortgages series here Common Contractor Mortgage Questions Answered. Alternatively, contact us to speak to an experienced independent contractor mortgage broker for a free initial consultation.
Additional information
A few years ago, there were only a handful of lenders, who could assess contractors’ income based on daily rate. Today there are dozens of lenders, which makes the market more competitive. As an example, another specialist lender has recently joined https://www.peppergroup.co.uk/about-us/latest-news/pepper-money-introduces-day-rate-contractor-calculations.
To get a feel for how differently lenders treat contractors, check out their mortgage lending criteria:
https://intermediaries.virginmoney.com/virgin/lending-policy/find-articles-a-z/
http://www.clydesdalebankintermediaries.co.uk/criteria/
As a matter of fact, these 2 lenders have just agreed to merge, which will create a bigger contractor mortgage lender http://www.mortgagesolutions.co.uk/news/2018/06/18/clydesdale-group-seals-1-7bn-virgin-money-takeover/.
