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Steve from Momentum Mortgages joins the Mortgage and Protection podcast to talk about contractor mortgages.
It’s a mortgage whereby the lender is considering income from an applicant that is not on a standard permanent employment contract. That could be someone who’s on a fixed term contract with an employer, working through an umbrella company or contracting through their own limited company or as a sole trader. It could even be a subcontractor within the Construction Industry Scheme.
Most of the banks will accept contractors in some form. The difference really is how they look at your income, which depends on the contract you’re on.
They will either see you as self-employed or employed, and that will depend on whether or not you are paying your own tax. To be seen as employed, the company that you’re employed by needs to be paying your tax, or it goes through your umbrella company. In this case lenders will want to see a set of payslips.
To be considered as self-employed you’ll be managing your own tax as a sole trader or a limited company. Typically most lenders will want to see your accounts or tax returns to work out your income.
It depends upon a lot of different factors. An important one is the type of contractor you are, and your industry. As we’ve seen, it depends who pays your taxes, whether you are directly employed through the company, if you have a fixed term contract or if it’s through an agency. Another factor is whether you have multiple contracts or just one, as well as your level of income.
As a general rule most lenders offer between 4.5 and 5 times an applicant’s income. Your outgoings and dependents could affect the maximum amount.
This is a key consideration in choosing a contractor mortgage. When you pay your own tax, there is a large variation between the contract value versus the profit you make from the agency or client. Some lenders understand these differences. So if the contract is over a certain value, above £50,000 to £60,000 a year, then generally they will take the income directly from the contract.
That means they will either take the total yearly income stated on the contract, or the day rate multiplied by the number of days in a year that you work. This is important, because this means the lenders are taking the gross income of the contract. If you’re seen as self-employed, the income is usually taken after expenses, so it will be lower and could affect how much you can borrow.
The first step for any contractor is to put as much preparation in place as possible. That means pulling together all the details of your previous contracts. Lenders will want to see at least a year, if not two years’ worth of contracting experience.
It’s also important to have recent tax returns, self-assessment tax calculations or accounts, along with the regular requirements like bank statements and payslips, if applicable.
Once you have this information together, get in touch with a Mortgage Broker. We can look at all the details, including what’s happening with your current contract. Let’s say you have three months left on your current contract. Lenders are going to probably want to see what the arrangements are going to be for the future – will you get a renewal from the current company? Can you get something in writing about your next job?
This will give you the best possible chance of a lender accepting you for a mortgage.
Aside from having all your records ready, having a good credit rating is important. Any adverse credit makes it harder to get a good mortgage deal, because it reduces the pool of lenders. It’s harder to find lenders that accept both contracting income and also adverse credit issues.
A decent deposit will help as well. If we’re looking at very high loan-to-value, where you have a 5% or 10% deposit for example, not only are the cost of those mortgages higher, but you are reducing the pool of lenders.
Generally, the longer you have been contracting, the better. If you’ve just got yourself your first contract, from the lender’s point of view there’s no guarantee you’ll find a new job at the end of it. You need at least 12 months’ contracting experience from a lender’s perspective.
In some scenarios lenders will overlook that. For example a professional in an IT role who has just switched from being employed to contracting may still be able to get a mortgage deal.
There are two scenarios for a limited company. One is that your contract is of a high enough value for the lender to take your day rate as your income, you would evidence this via a copy of your current contract.
Alternatively you might have multiple contracts with various different companies, in which case the lender is going to look at your business accounts and treat you as self-employed.
They will look at the average of the last two years’ worth of salary for you as a company director, and also overall the dividends or the net profit of the business. Generally speaking, you need to have two years’ accounts in this situation.
For a joint mortgage with one contractor and the other applicant being employed, the lender would apply their criteria to the specific employment type of each individual. The employed person’s income will be assessed as per the standard criteria for the lender. Then the contractor will be assessed based on their specific situation.
The benefit of using a mortgage broker is they can take into account the big picture and find the most appropriate lender for your unique situation.
The most important documents involved are self-assessment tax returns, or accounts for a limited company, plus personal and business bank statements.
If you receive pay slips you will generally be asked for the last three months’ worth. The most important documents are your contracts, because they are the framework of your employment.
Sometimes we even send the contract to the lender before an application is even submitted – we can often get pre-approval from underwriters using it as the basis of income.
We can help contractors achieve their goals and maximise their borrowing. More often than not, if someone wants to buy a house or remortgage as a contractor, being assessed as self-employed just doesn’t work. It can mean you’re unable to get the mortgage you need.
But a mortgage broker can put forward your case with a lender that truly understands how contracting income works. And in fact, some mortgage underwriters have said that we think just like them. By packaging everything up and putting it forward in the best possible light, we have a great chance of acceptance.