Here are 10 well-tested things to bear in mind when applying for a mortgage – aimed specifically at limited company contractors and consultants.
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. Any missed payments, or CCJs will put a dent in your chances to secure a mortgage – or limit the amount you can borrow. Sign up to Equifax, or Experian 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.
More choices with a higher deposit
Most lenders will require a deposit of 10% or more these days. The more you can put down, the greater the range of products you will be eligible for. The interest rates offered can drop significantly if you can raise 20%, 25%, or more.
Make sure your mortgage is affordable
Many people stretch themselves as much as possible in order to secure the property they want. This is understandable, however you should be sensible when working out how affordable repayments will be, especially if you already have significant outgoings. 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. You may be able to afford repayments at, say, 3%, but what if they rise to 5%?
Use a contractor mortgage specialist
There are many ways to choose a mortgage broker. Many simply get in touch with the financial services desk at their local bank, and others use the well-known comparison sites as a first port of call. However, due to the particular way limited company contractors work, we highly recommend contacting a contractor specialist. They will have access to specially negotiated rates with friendly lenders, and they understand the peculiarities of contract work. The leading lenders will be able to secure you a mortgage even if you have only been working as a contractor for a short time.
Make sure your contract paperwork is up-to-date
Many contractors don’t yet have several years’ 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). So make sure you have your contract (and any past ones) ready to submit with your application. Make sure all the details on the contract (client, rate, your name, etc.) are correctly recorded.
Have your personal identification documents to hand
Whether you use your current contract as proof of income, or your company accounts (if you have several years’ worth), you will need to provide various pieces of paperwork to the lender. In all cases, you 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.
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 or 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.
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 a multitude of 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 recently years, you may have noticed that increasing numbers of lenders now charge additional fees for mortgage applications, rather than 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 broker should provide you with the APRC for each product you are interest in, so that you can make an accurate comparison of different illustrations.
What are your mortgage options?
Complete this short form for a rapid response from our recommended partner, Broadbench, who specialise in providing mortgages for contractors.