Here are 10 well-tested things to consider when applying for a UK contractor mortgage in 2023.
Recognise that you’re a non-standard borrower
High street lenders classify earnings outside of PAYE as non-standard and often struggle to accurately assess the risk of lending to a contractor.
Most lenders use a standard affordability calculation and lending criteria that won’t take into consideration day-rate earnings or if you draw only a little salary and choose to top-up with dividends.
Many lenders will disregard a solid work history of repeat contracts and focus on the contract length alone, which is not useful when most contracts are short-term.
This can result in contractors being quoted increased premiums or even an application being declined.
Keep an eye on your credit score
One of the first things a prospective lender will do is subject your application to a credit check. A declined mortgage application, any missed payments or CCJs will put a dent in your chances to secure a mortgage – or limit the amount you can borrow.
If possible, reduce any debts by as much as you can before applying for a contractor mortgage deal.
Sign up to Credit Karma or MSE Credit Club (both free with no catch) to check your credit status, and put right any errors which may exist.
Make sure you and any co-applicant(s) are on the electoral roll for your current residential address.
Use a contractor-friendly mortgage broker!
Contractor mortgage brokers talk directly to specialist underwriting teams that understand contracting. Applicants cannot access these specialist underwriting teams directly because the broker is expected to have correctly vetted the contractor in advance of submitting any application.
A specialist broker assesses your full work history and can interpret your contracting income. This helps contractor-friendly mortgage lenders to understand that you’re likely to be a lower risk. This is true even if you have only been working as a contractor for a short time.
Generic brokers don’t have these relationships in place, nor do Highstreet lenders, and often fail to even identify you as a non-standard borrower in the first place.
Save as much as possible
Most lenders require a deposit of 10% or more these days. If you are looking to buy a home worth £350,000, you’ll require a minimum deposit of £35,000.
The bigger your deposit is, the smaller the mortgage. This makes you less of a risk than a borrower with only a small deposit and a larger mortgage loan. The more you can put down, the greater the range of products you will be eligible for. The interest rates offered drop significantly if you can raise 20%, 25%, or more.
You’ll also need to consider other costs such as stamp duty (not if you are a first-time buyer), solicitor fees, mortgage product/application fees and surveyor fees.
Make sure your mortgage is affordable
Getting a mortgage as a contractor is exciting, however, contingency planning is vital when assessing how much you can afford to pay for your mortgage. You can afford your current rate but what if that significantly increases? This is especially true in the current climate of sharply increasing interest rates.
Your specialist contractor broker will give you access to their day-rate based mortgages calculator.
Importantly, the Bank of England may raise the base rate, which means lenders will raise their variable rates, and pass on the rise to their clients.
Avoid lengthy gaps between contracts
Mortgage lenders do not like risk, and if you have gaps longer than 6 weeks between contracts, or if your company accounts aren’t reasonably consistent over a period of time, this may count against you.
Often, a lender will take an average of your past 2-3 years’ accounts (if you’ve been contracting for a while).
If your most recent year’s net profit is significantly lower than previously, however, they may opt to use the most recent accounts as a basis for working out how much they are prepared to lend you.
The paperwork!
Contractor mortgages require a certain amount of paperwork. Many professional contractors won’t yet have several years of company accounts to use during the mortgage application process. However, a specialist broker will be able to arrange a mortgage with just your current contract paperwork (and the normal ID documents).
Make sure you have your contract (and any past ones) ready to submit with your application, this needs to include full details on the contract (client, rate, your name, etc.).
All applicants will need proof of your name and address (passport, driving licence, utility bills), and recent bank statements.
If you’re using your accounts as proof of income, you will need signed copies of the past 2 or 3 year’s company accounts, and/or copies of your last few year’s HMRC SA302s.
You will need to contact HMRC directly to get printed versions of SA302s (tax calculations), although some lenders are now happy to use copies you have printed off from your online tax account yourself.
Your mortgage broker for contractors can help ensure that you have all the necessary paperwork lined up and ready for the lender.
Do some basic research before you apply
It is sensible to at least research the fundamentals of mortgage borrowing before you approach a broker so that you have realistic expectations.
There are many different products available – from tracker and discounted rates to offset mortgages. You should also find out the difference between fixed and variable rates, and other common mortgage-related jargon.
Will your lender allow overpayments?
There may be times when you have spare cash, which you’d rather use to offset against the capital of your mortgage loan, or simply to pay down the outstanding value of the loan.
Many mortgage products allow for overpayments, but others don’t.
Make sure you can make reasonable overpayments without risking penalties, or alternatively seek an ‘offset mortgage’, which takes into account the value of your savings and then ‘offsets’ this amount against your outstanding mortgage loan.
Watch out for additional charges and penalties
In recent years, you may have noticed that increasing numbers of lenders now charge additional fees for mortgage applications, rather than simply increasing the interest rates on loans.
Typical ‘extras’ include
- Arrangement fees (often for £1000 or more).
- Booking fees (often non-refundable – for processing the application).
- Valuation fees (to establish the value of the property you are buying).
- Early repayment charges (these can be significant – many thousands if you repay your loan early).
These fees can often be added to your mortgage, so you may not even notice in the short term, however, they do increase the real cost of your mortgage.
The annual percentage rate of charge (APRC) is the total cost of the mortgage expressed as an annual percentage. Your specialist broker should provide you with the APRC for each product you are interested in so that you can make an accurate comparison of different illustrations.
Contractor mortgages – what are your options?
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