So, you’re a skilled contractor, the very definition of an independent professional. Contracting has enabled you to earn top dollar. Your reputation now precedes you. You have a long term contract in hand with a great day rate.
You’ve supplied your service like this for a couple of years, now. And you have full confidence in maintaining this lifestyle indefinitely. Awesome!
Now that you’ve planted roots in your industry, you consider your personal situation. It’s time to put a roof over your head, one that you own.
By now, you’ve probably saved a hefty chunk of your income. That’ll do for the deposit, right?
Or, you have retained profits within your limited company. If so, a quick word with your accountant is all you need.
You tell them you want a mortgage. They tell you, “It’s about time, too.” Then they’ll tell you the most tax-efficient way of accessing any retained income. Sorted.
Either way, you know you’ve never been more able to afford a mortgage. Time to set down roots in a domestic capacity, as you’ve done professionally. Go, you!
You get all your shit together. Accounts, bank statements, contract, contract history and details of your savings.
Next, you head off to talk to your amenable bank manager. Often, this is the manager at the bank where you hold both your personal and business accounts. Makes sense, right?
By the look on their face when you explain how you work, perhaps not. They take one look at your situation and, almost without thinking, refuse you a mortgage.
What’s been the point of building a business when it won’t support buying a home?
Now, I agree, 100%: banks should be fighting for your mortgage business. Especially when you consider the amount of money your contract rate earns you.
But the typical High Street mortgage lender doesn’t understand!
They view contractors as both self-employed and high risk.
Self-employed? In a round about way, yes.
But high risk? Nothing could be further from the truth.
Contractors occupy a unique, if unenviable, position in the eyes of in-branch advisors. Contracting doesn’t make them a permanent employee, nor does it make them self-employed.
Here’s Michelle: she had a similar problem. You’ll appreciate her situation if you’ve been there yourself:
If you’re employed, getting a mortgage based on your PAYE salary is straightforward. You show them your payslips, work history and bank statements. They do a means test and check your credit report. If everything meets their lending criteria, they offer you a mortgage.
It’s a little different for self employed people. They often need to show three years worth of accounts. These should show healthy profits, growing year on year if possible.
Plus, the in branch advisor may ask for related references, similar to those of an employee’s. That could be bank statements (business and/or personal) and your credit score.
Again, if it all adds up, they can walk away with a self-employed mortgage. All tickety-boo so far.
Now, a contractor’s income fits neither of those scenarios. Limited company payment structures are a hybrid of employed and self-employed.
What doesn’t help a contractor in their mortgage quest is their accountant’s advice. A good contractor accountant will streamline income for tax efficiency. This often involves maximising business costs in order to minimise profit.
But most banks don’t want to see this, at least at High St. level. Their affordability calculation cannot accommodate any profit retained in the business.
Now, if you think this sounds like a catch 22 you’d be right.
So what can a contractor do to convince a lender that they’re mortgageworthy?
Our definition, in 50 words or less:
Contractors can access the same mortgage deals as everyone else. The big difference lies in how lenders underwrite contractor mortgage loans.
Affordability calculations lenders use to assess contractors’ relevant earnings don’t use accounts or payslips. They base how much a contractor can afford to borrow on their contract rate alone.
The best advice by far is to see a bona fide mortgage broker. Not a generic one: a broker who specialises in securing mortgages for contractors.
To some, that advice may seem foreign. Despite the reasons above, I know what will happen. Many contractors will still think that the bank they bank with is their best option for a mortgage.
Good luck with that. But if you are determined, here’s some sage advice.
Once you start contracting, start talking to your bank. Book an appointment with a mortgage advisor and explain your situation.
Make them aware of the timeframe you’re considering before you submit an application. Show them copies of your contract(s); keep them involved.
If they seem unresponsive, ask them to talk to the central lending process unit. This can help prevent running into problems later on. Or even better, try to get the contact details of someone there.
Your fellow contractors can prove a great source of information. Ask those who have mortgages for the name of the financial advisor they used.
If that advisor’s issued a mortgage to a fellow contractor, chances are they GET IT. They should be happy to talk to you about your situation, too.
But do be aware that circumstances play a huge part in the contractor mortgage process. And, not all brokers or financial advisors are equal.
Make sure that your representative understands your situation 100%! That includes, but isn’t limited to:
Not sure of what interest rates contractors should aim for? The best buy table demonstrates all competitive interest rates available to contractors.
Ask your accountant, umbrella or recruitment agency for any recommendations. Chances are, most will have connections to a bank or mortgage broker.
Also, use your social networks and contacts. These could offer you many valuable contacts you wouldn’t find going the usual route.
As alluded, not all brokers are created equally. It’s best to speak to a broker whose prominent client base is contractors.
That way, you can ensure they understand your situation before you begin the process. Most offer advice for free. They’ll even take the entire process off your hands.
As you have a special skill, they specialise in getting contractors mortgages. Yes, they will charge a fee. But the time, shoe leather and headache they’ll save you? Worth every penny.
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.