There was a time when, unless you were a traditional 9-5 employee, your chances of being able to secure a mortgage (at a reasonable rate of interest) were slim. In recent years, the major mortgage lenders have relaxed their lending criteria in line with the changing nature of the UK’s workforce.
Despite this, some brokers struggle to submit mortgage applications to these lenders in a way that is a true reflection of what contractors earn.
For this reason, we recommend using a specialist mortgage adviser who has access to ‘contractor-friendly’ mortgage lenders who understand the way contractors work in practice.
Read on for answers to dozens of the most commonly-asked questions about securing a mortgage as a contractor.
How does the mortgage application process work?
In the past, contractors would typically have to wait until they have several years’ company accounts before approaching mortgage lenders. Some lenders prefer to lend only on multiples of your salary, not a combination of salary plus dividends. However, thankfully this is no longer the case.
Many lenders are now far more aware of non-traditional ways of working, and all you need to produce now is a copy of your current contract, your photo ID, 3 months’ bank statements, and proof of address (typically a utility bill).
So, there are no time restrictions these days. A specialist contractor-friendly broker will even be able to secure a mortgage offer on the first day of your contract.
Read our dedicated article – how does the mortgage application process work.
Can contractors get access to ‘high street’ mortgage rates, or will they have to pay a premium?
If you are applying directly to the lender then they may charge a premium depending on what your accounts show and how long you have been contracting, or they may insist that you pay a higher deposit.
However, a contractor-specialist broker will be able to access ‘high street’ mortgage rates – giving you access to the same mortgage products as permanent employees.
We would recommend you use a contractor specialist as they will know which lenders to approach, and exactly what type of information and proof of income you will need to produce to secure a mortgage offer.
Can I get a 95% contractor mortgage?
The answer is yes, however more competitive deals are usually available to borrowers with a minimum 10% deposit.
If you are a contractor and have only got a 5% deposit, then a specialist lender can help in two ways either via the Help To Buy scheme where an additional 20% (40% in London) deposit is provided by a Government-backed loan scheme in order for you to purchase a new build property.
Or with lenders offering both 95% products and a contractor-friendly policy. Multiple High Street lenders are willing to lend using specialist contractor criteria to contractors with a 5% deposit.
How much can I borrow?
Unsurprisingly, this depends on a number of factors, including:
- The size of your deposit.
- Your contract rate / other income.
- Any existing financial commitments you may have.
- Your credit rating.
- How many applicants there are.
Contractor specialist mortgage brokers typically estimate that you can secure lending of between 4.5 and 5 times your income.
If you are basing lending on your contract rate, first multiply your daily rate by 5 to get your weekly rate, then multiply this by 48 weeks in the year.
For example, if you are on a daily rate of £400, you should be able to borrow £432,000 (based on a 4.5 multiple).
What mortgage loan products are there?
Depending on your personal circumstances, there are a number of mortgage products on offer to contractors.
Your mortgage will either be fixed-rate (where the interest rate remains constant over a fixed period of time) or variable rate (where the rate may change – such as when the Bank of England raises the base rate).
The majority of mortgages are repayment (where you repay part of the capital loan, plus interest each month). Interest-only mortgages are far less widely available these days, as the mortgage industry has had to tighten up its lending criteria following the credit crunch over a decade ago.
There are many types of variable rate products available – including those which offer discounted, tracker, and capped rates.
Your mortgage broker will be able to present you with a variety of mortgage options. Make sure you know what the real cost of each option is, once you take any introductory fees and other charges into account.
Read our dedicated article – what mortgage products are available to contractors.
Top 5 tips to securing a mortgage
- The higher the deposit you can raise, the more products will be available to you, and better rates of interest.
- Try to avoid long gaps of more than 6 weeks between contracts.
- Be upfront and honest about any debts or credit commitments to avoid any delays.
- Make sure you have all of your paperwork in place (ID, proofs of income, contracts) to minimise delays.
- Try to keep your credit rating strong – make sure you’re on the electoral roll and don’t miss any credit payments.
Contractor mortgages – what are your options?
Complete this short form for a rapid response from our recommended partner, Broadbench, who specialise in providing mortgages for contractors.