Getting a mortgage has always been the one downside of working as a contractor – offsetting the lifestyle advantages of higher pay rates, flexibility and more freedom. Banks have for years turned their noses up at applicants who don’t fit into the regular salaried and employed categories that they use to approve loans – either ‘employed’ or self-employed’. Whilst contractors would naturally be seen as self-employed it was often the case that they would be paid through market specific tax efficient vehicles which had been designed to make the most of their earnings and which would, technically, make them appear to be employed. This combination of employed and self -employed was often too difficult for banks and building societies to deal with and led to contractors being pigeon-holed as one or the other and led to a large proportion of their income (which did not fit into the category they had been placed in) being ignored. Consequently they would find that their mortgage affordability would be significantly lessened (even whilst they earned more money per year than their salaried counterparts) and that banks would sometimes turn down mortgages completely because they saw an end date on the current contracts of contractors.
However, in the last two or three years there have been some positive changes when it comes to the mortgage market for freelancers and contractors. There are now a few lenders on the market who are willing to offer products specifically geared towards the contracting working style, with bespoke mortgage underwriting that reviews applications based on an annualised calculation of the contractor’s day rate and which looks at all income streams whether ‘employed’ or ‘self-employed’. This is a massive improvement, but it does not guarantee success. Contractors will still need to ensure that they cross every ’t’ and dot every ‘i’ when applying and with that in mind contractors should bear in mind the following:
(1) Keep That Credit File in Tip Top Condition – Contractors, like everyone else, need good credit when applying for a mortgage. Having a low, or even simply average score will mean the bank is less inclined to grant you a mortgage so if you know you will be applying, plan well ahead. This means that up to six months ahead of time you should join Equifax or Experian and conduct a survey of your credit rating to find out if there are any black marks. Should you find any problems you will have sufficient time to make repairs, including making sure you are on the electoral roll, that there are no accounts in default or payments that are behind and that your credit balances are as low as possible, meaning you have a high credit to debt ratio and therefore a better score.
(2) Use a Contractor Mortgage Specialist – Despite the new availability of contractor mortgages don’t be fooled into thinking you can simply wander into your high street bank and sign up to one. On the contrary, you will need to find yourself a reputable independent mortgage broker like CMME who has experience of the contracting market and who has already built up contacts in the underwriting department of banks offering contractor mortgages. These specialists will know how to fill out your application so that it guarantees maximum success and gets you the best interest rates and the maximum affordability of loan.
(3) Get An Agreement in Principle – Many contractors who have been through the problems of mortgage applications in the past will be keen to get everything agreed and in writing before they get too excited about these new products. One way of doing this is to get the mortgage approved up front by the mortgage company before you start looking at houses. This agreement, ‘in principle’ gives you confidence to bid on houses and is also appealing to sellers when comparing rival bids.
(4) Save Up as Much of a Deposit as You Can – No one offers 100% mortgages any more and even 95% ones are looking pretty scarce. The banks and lenders have tightened their belts and consequently the people who are going to be getting the best loans and the best loan rates are those people who come with large deposits. If you can raise 25% then that would be the perfect amount but these days that is quite an ask. However, raise anything above 10% and the bank will look very favourably on your application – and it will also allow you to qualify for the government’s current Help to Buy scheme which will increase that 10% up to 20%,
(5) Ensure All Paperwork is in Order – Once you have sorted the stuff for your credit file – bank accounts, addresses, electoral roll details – it is important to make sure you have got a copy of every single document the bank will need to see before approving your mortgage. This will include anything from copies of previous contracts (normally for two or three years) as well as a full copy of the contract you are currently working on. Also helpful will be evidence of possible upcoming contracts and anything that shows you are a respected ands in-demand contractor in your field.
(6) Don’t Stretch Your Affordability – In other words, don’t get greedy and overstretch. Before you apply for a mortgage make sure you have calculated exactly how much you can afford to borrow and in doing so plan for everything that could go wrong to go wrong. Look at worst case scenarios so that you know when you do finally get a mortgage you can be assured that you will always be able to pay it back. All of the economic problems of the last few years were built on people over -stretching themselves and then getting into trouble when things went wrong. Remember, just because a lender might be willing to lend you more money, doesn’t mean you have to take it. Calculate the payments on lots of different amounts and then add in your living costs, bills and any future costs that might arise. Once you have done this, work out what you are comfortable with and stick to that amount come what may.