Mortgages for Contractors

While there are many upsides of contracting, there’s a downside. And it’s a big, fat unexpected one: getting a mortgage as a contractor.

Why do High Street lenders make it sooooo tough?

Here’s how the story goes (some of you will be familiar with this scenario).

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The High St mortgage roller coaster

A contractor can turn up at a bank with a long and reliable work history. They have a contract in hand, a high salary and a large deposit. Heck, they even have a briefcase full of hope.

Yet with all this in their favour, the bank rejects them. Without cause, without reason and without a hope of getting a mortgage. So what went and goes wrong?

For years now, contractors have been going through these same motions. And emotions.

When self-cert was about no problem. But self-certification fell by the wayside, and good riddance, too. More about that in a while; for now, back to our scenario.

A contractor arranges an appointment with their bank manager. This is often at the same bank where said contractor has their business and personal accounts.

The aim of this meeting? To try to convince the bank that them taking out a mortgage is a safe investment.

This would seem the obvious choice all around, right? Mm. Is that the harbinger of doom I hear on the horizon? Ding, dong.

Square pegs, round holes: the mortgage affordability calculation

All our contractor wants is a mortgage, the same as their self-employed counterparts. Not too much to ask, is it?

You’d think not, but here’s the problem: in-branch mortgage lending criteria.

Most banks and building societies tailor that criteria around employees. That’s because the majority of homeowners in the UK have full time jobs. Ergo, they’re an employee with a regular salary, taxed at source.

YThus, their wage slip often has a direct relationship with their mortgage affordability. That’s not the case with limited company contractors.

Have you ever looked at your limited company accounts?

If so, you know that you draw the least salary to qualify for NICs. This entitles you to state benefits, whilst retaining most of your income as profit.

In branch mortgage lending criteria doesn’t accommodate this type of tax efficiency. It doesn’t matter whether they class you as employed or self-employed. If the bank offers you a mortgage, they’ll base your affordability on that low salary figure and dividends drawn.

Any offer will ignore the bulk of your income, tied up in the company as it is. It will be so far away from your true affordability, it will insult you.

The oil tanker of change: relevant mortgages for contractors (hurrah!)

Like the proverbial swan, lenders are coming around to limited company contracting. On the surface, they’re gliding along in graceful ignorance. Yet beneath the surface, underwriters at head office are working up a frenzy.

Many are realising that contractors are high earning, reliable borrowers. They acknowledge that the contracting sector is growing every year. They even concede that it’s feasible for contractors to build a business beyond the IT sector.

With specialist mortgage brokers’ help, mainstream institutions are making a U-turn. Yes, it’s slow. Slow and cautious enough to be imperceptible at eye level. But, they are adapting their lending criteria to accommodate contractors.

At Contractor Guides, we’re one such rotor blade beneath the surface, working like Billy-oh! We’re helping those lenders willing to listen turn their boat around. And not just on one boat.

We have a flotilla of lenders waiting to on board UK contractors. But your boarding pass doesn’t await through route one, the High Street.

Oh, no. We have a place at the captain’s table. Care to join us?

Specialist lending and contractors’ place therein

Getting a mortgage whilst working contracts may seem impossible. At least that’s contractors’ perception after having gone the usual route.

The financial implosion of the last decade or so hasn’t helped. Banks stopped lending to anyone but gold-plated borrowers with:

  • perfect credit files;
  • large deposits;
  • substantial, regular, reliable income.

From the outside looking in, that’s how it may have seemed. But even in the face of recession, adversity and austerity, banks were working hard.

Their efforts have paid off.

There’s a greater confidence in the housing market as a whole. Banks have learned to interpret responsible lending guides rather than follow them verbatim. Plus, specialist lending is no longer a taboo topic.

Most lenders are now clear on specialist lending, to whom it applies and how borrowers access it. By definition, it’s for those whom lenders would reject if applying through usual channels.

Contractors, for example, would fail going through ‘usual channels’. That’s because they don’t appear to satisfy the monolithic monthly salary income model.

A specialist mortgage broker, on the other hand, has no such limitations. They take other factors into account, many of which in branch advisors can’t.

Many contractors invest in buy-to-let and receive income from their property portfolio. They may also have planned or unplanned breaks between contracts. Or they may be brand new to contracting, taking their first entrepreneurial steps.

These factors could all deter mainstream banks and building societies at street level.

But lenders’ underwriters are starting to appreciate contracting’s nuances. They’re moving away from traditional lending models to make room for contractors. More often than not, though, it’s through specialist brokers.

What makes a contractor mortgage so, well, special?

A contractor mortgage in itself is no different from other mortgages.

Applicants need a deposit and to be able to evidence income. In most cases, work history and good credit are essential, too.

Lenders charge an interest rate, fixed, tracker or variable. The mortgage loan has a ‘term’, its duration of repayment. Contractors need to be aware of insurances to cover monthly payments, too.

So far, so good: just the same. Nothing to perturb you there, whatsoever.

No. Where contractor mortgages differ is in the early stages. It’s how an advisor calculates your mortgage affordability. It’s then how they package your application for their underwriters.

As we’ve discussed above, the High St route is full of pitfalls. Traditional lending models can’t access your retained profits. This is where a specialist broker steps in.

Benefits of using a specialist mortgage broker for contractors

A specialist contractor mortgage broker will act as the go-between between applicant and lender. Both parties rely on the broker’s skill and market insight to interpret affordability.

As the contractor, this may be your first venture into buying a home using your contract rate. To you, ‘contract-based underwriting’ is a new and welcome prospect.

But an established broker will secure mortgages thus: day in, day out. They’ll have built up relationships with underwriters that give them a certain license.

This makes the broker, thus eventual underwriter, more receptive to:

  • irregular patterns of payment;
  • different working styles that can encumber a move into the contracting sector;
  • limited company or umbrella contractor finances;
  • how many years someone has already been contracting;
  • the level of retained profits they have achieved;
  • the rates they charge per contract;
  • the expected duration of the contract they’re working at time of application;
  • the number of contracts they are expecting in the upcoming months.

Most of these factors would elude an in-branch advisor. A good broker not only knows to look for these elements, but also why they’re there!

They can then feed only the relevant information to their underwriters. This is key to your mortgage success!

Seeing only what matters cuts down those underwriters’ heavy, prioritised workloads. This, in effect, decimates the application process time. Win-win-win!

Whatever happened to self-cert mortgages?

The only reason I want to mention self-cert mortgages is to appeal to contractors who still have one. Guys and gals, if that’s you, it’s time to remortgage!

Back in the day, pre-2007, self-cert mortgages were a popular choice amongst the self-employed. It placed the burden of mortgage affordability on the applicant, not the lender.

At the time, this was an acceptable practise. But there’s an old adage:

nothing worthwhile in life is ever easy

So it proved for self-certification; those who took them out paid the price:

  • interest rates were eye-watering;
  • they didn’t differentiate between types of income (including employees!)
  • people “keeping up with The Jones'” often inflated how much they could afford to repay.

That these mortgages became labelled ‘liar loans’ says it all. If you still have a self-cert product, you now have options.

Today’s contractor mortgages are more relevant and at competitive interest rates. They’re akin to ‘prime’ rated High St mortgages, but have broader categories of eligibility.

Are all contractors eligible for contract-based underwriting?

Contractor mortgages aren’t limited to a specific class of contractor, nor even to contractors. Anyone can apply for one of a number of mortgage products that best suits their employment model.

This breadth of accommodation may interest those who consider themselves freelancers, too. The available range of mortgages for contractors includes (but isn’t limited to):

  • first time buyers;
  • home movers and remortgages;
  • contractors working in any industry sector, not just IT;
  • applicants with less-than-perfect credit scores;
  • newbie contractors, yet to amass years of prerequisite accounts for a self-employed mortgage.

What’s the catch?

Today, lenders who favour contractors have no hidden agenda. Since the Mortgage Market Review, transparency is – or should be – a given.

Thus, deposits, interest rates and mortgage terms are no different for contractors. You may even find that your broker has an exclusive deal that the High Street can’t touch.

One reason that happens is because the broker does all the vetting for the lender. Plus, with contractors’ high income, they’re more than worthy mortgage candidates.

But if we can, here’s a word of warning. There are IFAs who claim to offer contractor mortgages, but actually don’t. Some draw contractors in on purpose; others through sheer ignorance.

To help you out, we’ve prepared a cheat sheet. It can help you choose the right specialist broker for your status:

How do I know if I’m getting a genuine contractor mortgage?

There may be hundreds of IFAs and/or brokers in your area and online. It’s crucial that you research each before choosing one.

Especially for contractors, make sure you’re getting a genuine contactor mortgage.

If an IFA tries to send you down the self-employed mortgage route, ask yourself why. Challenge them with the concept of contract-based underwriting. If it’s alien to them, any forthcoming offer may not reflect your true affordability.

And do remember: a failed credit search is more than a black mark on your profile. It could deter other lenders from offering you a mortgage. Don’t commit unless a lender uses your contract rate to secure a ‘Decision in Principle’.

Make sure that their interest rates compete with similar High Street mortgages. And, yes: you will have to find a deposit. But ensure it’s in line with the amount you want to borrow.

Check how much they charge in fees; all IFAs and brokers will. That includes built-in percentages they may ask you to pay.

And do double-check how much the mortgage will cost you in total. If one broker’s example is a lot higher than another’s, that’s a red light.

Don’t be shy: ask them why!

And last but not least, ensure they’re registered with the Financial Services Authority (FSA). If they are, they will have strict standards to uphold.

Most brokerages wouldn’t jeopardise their license for the sake of a sly few extra quid. But, yes: it’s always worth checking your chosen broker over first.

Is a mortgage broker worth their fee?

For a PAYE employee, engaging the services of a broker isn’t always necessary. But for someone whose payment structure is off the beaten track, then: yes!

The likelihood is that going direct to a local branch will end in in heartache.

A specialist mortgage broker should be able to outline a contractor’s total earnings potential. They’ll then present their application to mortgage underwriters just so.

This acumen will garner that contractor a mortgage 4 or 5 times their annualised income. That’s often irrespective of the regularity of contracts or how they receive their income.

They do all this without requiring the reams of accounts that most high street lenders demand.

Specialist brokers know the contractor mortgage market inside out. For most, it’s the only field in which they operate.

Experience then enables them to tell the contractor up front if an application is apt to succeed. They’ll even know which lender is most suited to their status at a glance.

High Street lenders have less experience of this kind of application, if any. It’s critical to grasp the importance of getting it right first time.

A failed application will go straight onto the applicant’s credit file. This, in turn, makes securing a mortgage with the next lender they try even less likely.

You can avoid all this by choosing a broker who specialises in contractor mortgages from the off. Yes, you’ll pay a fee for the privilege. But they’ll handle your application in its entirety.

Like you, bespoke brokers offer a specialist service. They can process your application in a fraction of the time it would take you. And with a lot less risk.

If you value your time, credit rating and peace of mind, then: yes. A specialist contractor mortgage broker is worth every penny.

HELP TO BUY MORTGAGES FOR CONTRACTORS AND FREELANCERS

The Help to Buy Scheme, launched back in April 2013 has given the UK property market a massive boost and helped thousands of people get into the property market for the first time. The government provides first time borrowers with a 20% contribution towards their deposit on top of a minimum equity deposit of 5% from the borrower. This allows borrowers to put down 25% deposit on properties and gives lenders more incentive to provide more mortgages, knowing that the government is backing 20% of the loan. Contractors looking to buy their first home should take advantage of the scheme but once again, it is important to do so through a specialist contractor mortgage broker in order to ensure everything runs smoothly. Our Help to Buy guides show how to do exactly that.

A Self-Employed Contractor’s Solution to Mortgage Rejection

Here at Contractor Guides we advocate a ‘prevention over cure’ approach for contractors applying for mortgages but if you have applied for mortgages in the past and been turned down, don’t despair! We have put together a guide that explains exactly what you need to do next and a step-by-step approach to making sure it never happens again. From working out where the application broke down to choosing mortgages and mortgage brokers who can repair your credit file, your mortgage application and get you your first home, we cover every aspect of the application process.

WHY DO CONTRACTORS NEED A SPECIALIST MORTGAGE?

Contractors have not had much luck over the years when it comes to regular high street mortgages. The over-simplified division of workers into self-employed and employed fell harshly on contractors who were classified as both and therefore not properly eligible as either. The new specialist contractor mortgages neatly sidestep this problem by utilizing bespoke mortgage underwriting and assessing contractors on the basis of more relevant criteria such as annualized rates of income and their working history as a contractor. Our guides will help explain all the benefits of specialist mortgages for contractors.

How to get a Mortgage

4 Tips To Help Contractors Get A Mortgage

Just because some banks and lenders are now offering specialist contractor mortgages, that doesn’t mean you will automatically be welcomed with open arms. We outline five essential things you need to know about applying for a specialist mortgage, from how to get your credit in shape and how to find a specialist contractor mortgage broker to organizing your finances correctly pre-application and correctly filling out the application itself. Everything you need to get that mortgage!

The insider’s guide to contractor mortgage lending criteria

There are now a number of new specialist mortgage products on the market but they are still few and far between. And some of the larger banks offer a type of contractor mortgage but in turn make the criteria for approval ridiculously difficult. Here at Contractor Guides we have a regularly updated page dedicated to the latest contractor mortgage products to come onto the market and comparing the interest rates, charges and types of mortgage on offer.

Tips for Freelancers and Contractors Applying for a Mortgage

Just because some banks and lenders are now offering specialist contractor mortgages, that doesn’t mean you will automatically be welcomed with open arms. We outline five essential things you need to know about applying for a specialist mortgage, from how to get your credit in shape and how to find a specialist contractor mortgage broker to organizing your finances correctly pre-application and correctly filling out the application itself. Everything you need to get that mortgage!