You may wonder whether you could get a mortgage, if you’ve just started contracting or if recently changed from Ltd setup to an umbrella. Could you even get a mortgage with a gap between contracts or if your contract was not paid in GBP?
There are many questions contractors face and the good news is, in most cases, there are suitable lenders out there.
Contractor Mortgages: The Basics
Contracting comes in many shapes and forms.
If the contract is through your limited company, then you would normally be considered self-employed. This way, a contractor mortgage could be assessed based on your limited company accounts or based on your daily rate – whichever gives us the best mortgage deal.
If, however, the contract is paid through an umbrella, some lenders would consider the income based on the umbrella payslips, just like for an employee. And yet, the option to have your contractor mortgage assessed based on your daily rate is still available with some lenders.
With the IR35 rules changing in Apr21, a lot of contractors moved from limited company to umbrella. Lenders took a little time to work out how to handle the situation, but eventually, everyone managed to clarify their position and we will be happy to work out what’s best for you.
Challenges
Gaps between contracts remain the biggest challenge when trying to get a contractor mortgage. Some lenders only allow 2-3 weeks, while others are more lenient and can accept a break even up to 6 months.
Another common question is how long you need to have contracted for before applying for a mortgage. Again, it depends on the lender. Some can accept you from day 1, although most lenders would like to see minimum 6-12 months contracting history and perhaps a contract renewal.
Not getting paid in GBP, having more than 1 contract at the same time, contract term being less than 3-6 months, only a few weeks are left on the current contract, looking for 85-90% mortgage and other aspects can also pose a challenge when looking for a contractor mortgage.
Solution
As you would expect, here at BlueWing Financials, we have worked with hundreds of contractors over the years, so are familiar with the possible setups and circumstances you may have. However, as lending criteria is a moving target, we constantly monitor the situation and speak to our lender counterparts to secure you the best contractor mortgage possible.
During the initial discussion, we will aim to understand your situation, then ask you for some specific documents and information before researching the suitable lenders and making a recommendation to you. Once you have the property you’d need the mortgage for, we will then check that the chosen lender can accept it before applying on your behalf. In other words, we offer a tailor-made solution for you – from the beginning until completion takes place.
Call us on 0208 323 8989 to find out more or fill out our contact form and one of our advisors will get in touch.
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.
Checkout today’s contractor mortgage best buys:
| Purchase | |
|---|---|
| Lender | Halifax |
| Type | 2 year fixed |
| Rate | 1.06 |
| Ltv | 90% |
| More info | |
| Remortgage | |
|---|---|
| Lender | Halifax |
| Type | 2 year fixed |
| Rate | 1.06 |
| Ltv | 90% |
| More info | |
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.
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.
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/siteassets/lending/pdfs/residential-criteria.pdf.
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/.
