When you become a contractor there are many advantages and disadvantages. Flexibility and independence are often the main drivers, but also the potential benefit of being self-employed on the one hand while have a healthy, regular income on the other.
As a result, Contractors often find that they fall in the crack between ‘employed’ and ‘self-employed’ and in this, obtaining a mortgage to buy a home or re-mortgage can become slightly more complex and challenging.
Contractors can find that obtaining a mortgage directly from a lender can be tricky however, as the number of freelancers and contractors in the UK increases, mortgage lenders are becoming more willing to lend and brokers like ourselves are seeing a rise in demand from contractors for assistance.
Luckily at Resolve, we have been working with a number of contractors in various industries (e.g., IT or Marketing) for a number of years and can bring this knowledge and experience to the table to benefit our clients.
“A study, commissioned by the Professional Contractors Group, revealed that there are now 1.4 million freelancers in the UK – representing a 14% growth over the past 10 years.”www.contracteye.co.uk
Contractor applying for a mortgage
You will need to give evidence of your earnings history as with any mortgage application. A contractor will need to provide evidence of at least the past six to twelve months minimum but some lenders will require two to three years of accounts.
If you have been working for a company as a contractor for a long time then a mortgage lender will often average out the income you’ve earned over recent years. This will give them your average income which they can use to work out how much you can afford to repay each month. If however, your earnings have dramatically fluctuated over the years they would take the most recent year (or lowest) as an indication of your earning capacity. This may result in you being able to borrow a smaller sum of money.
Getting a mortgage if you are paid a day rate
Some mortgage lenders may be willing to calculate your annual income based on your day rate. To do this they will often require a 12-month contracting history and evidence of your current contract as well. This will normally have to have a minimum term remaining on it, say 3-6 months. The lenders would take your daily rate and multiply it by the number of days you are contracted to work and then multiply that by a varying number of weeks, depending on lender.
Day Rate Contractors
Day rate contractors are acceptable for lending purposes if the following criteria is met:
- A maximum of 52 weeks income used from the current contract but this can vary with many lenders using 46 or 48 weeks in their calculation to take in to account holidays.
- Maximum 8-week gap between contracts in the last 12 months
- Minimum income of £300 per day or £50,000 per annum
- Minimum 12-month track record of contracts with a minimum of 3 -6 months remaining on the current contract. If less than 3 months remaining on current al longer track record may be required.
- Current and previous contracts covering the last 12-month period
- PAYE/Umbrella Co/Sole Trader: latest 3 payslips/invoices and latest 3 months personal bank statements
- Limited Company: latest 3 months business bank statements and latest 1 months personal bank statement
How you can help the process
If you are looking for a mortgage for contractors, then you can help the process by offering a larger deposit and therefore borrowing a smaller amount. Mortgage lenders also look for security so evidence of agreements with your current or past employers will make your application more appealing. Try not to take any breaks between contracts in the run up to purchasing a property as lenders may be wary if they see you out of work for more than eight weeks. Consider checking your credit score and seeing whether you need to work on improving this.
If you are a contractor or freelancer, it would be very beneficial to speak with us. We can help you find out how much you can borrow and find you a lender that accepts mortgages from people in your situation and we would help you navigate the application process.