Contractor Mortgage Myths
You might have heard many nightmare-inducing stories about getting a mortgage as a contractor–stringent rules, the impossible document requests and the bar being raised higher and higher–but many of these stories are exactly that, just myths. While there might be a little extra work to do to secure a contractor mortgage, the struggles people face usually have more to do with income status than their employment status.
A successful contractor is likely to be earning more than a permanent employee at the same level, and so will be more able to save for a deposit, afford higher monthly payments and borrow a higher amount for a property. However, there are still a lot of myths and misconceptions around mortgages for contractors–let’s take a look at the six we hear most often and consider the facts.
Top Contractor Myths Busted
To be even considered for a mortgage, contractors need to put down a huge deposit–at least 50% of the purchase price.
This is completely false. Being able to provide a larger than average deposit (giving a lower loan-to-value ratio for the mortgage) will give you access to a wider range of deals, usually with more favourable interest rates, and will facilitate lower monthly repayments, but it’s rare to see a deposit greater than 25%.
While 100% mortgages vanished after the financial crisis of 2008, lenders are now willing to arrange mortgages of up to 90% of the purchase price, and a 10% deposit is perfectly common. You can even get a 95% mortgage through the government’s Help to Buy scheme, if you meet their conditions.
Lenders base their decisions on lending around your verifiable level of income, and its sustainability. Being able to provide only a standard deposit will not be a barrier to getting a mortgage.
The rates of interest on a mortgage are usually dependent on the level of deposit you provide and proving a regular level of income, so if these things are in place, you will have access to the same deals and rates of interest as people in conventional employment. You might actually find that, as your income is usually higher as a contractor than a regular employee in the same position, you will be able to get a mortgage with more favourable terms due to being able to provide a higher deposit.
Every individual lender will have their own set of criteria and policies around accepting a mortgage application, and it’s well known that some are more understanding of a contractor’s income structure than others. While many high street lenders have rather narrow conditions, the many specialist lenders on the market will consider offering you a mortgage based on as little as one year’s accounts, or your current contract rate, without the need for three years of accounts or a long contracting history.
Lenders always make their decisions around your ability to repay the loan, so you will need to prove your income with a copy of your current contract, and a breakdown of your salary plus dividends if you work through your own limited company, and also perhaps a list of your previous work history to show your experience in your field. Obtaining a mortgage even with a zero-hours contract might be possible, but lenders are likely to ask for proof of income over a longer period, perhaps a full year.
The element of risk plays an important part in the lender’s decision on whether to approve a mortgage application, and their assessment of risk is derived from their interpretation of your current and projected income figures, and also your previous borrowing records.
Just like anyone else, you will not be classified as a high-risk borrower if you are able to show you have sufficient regular income to meet monthly repayments, the necessary deposit available and a clean credit history. Conversely, someone with little savings, no deposit, a low income and a patchy credit rating will be labelled as a high borrowing risk, no matter what their employment status. It’s a more level playing field than you think.
If you have proved you meet all the lender’s criteria, then your application should take no longer to process than any other type of mortgage, or that made by any other applicant. In fact, many applications by conventional employees are often slowed down by getting hold of the necessary number of payslips–something contractors do not have to contend with, and it is often the case that the only documentation you will need is a copy of your current contract, your CV, three month’s bank statements and proof of ID.
As you know, all lenders have their own criteria for assessing mortgage applications, and the specialist lenders catering to the many niche markets take a far more enlightened view of contractor mortgages than their high street counterparts.
Every application will be assessed on its own individual merits, even those with a zero-hours contract. Most lenders like to see at least eight weeks remaining on a work contract, but there is no set rule, and if a contractor can show a promise of an extension or that a new contract is highly likely to be confirmed, that will be sufficient.
To get a quick indication of how much you are likely to be able to borrow, use the following formula to multiply up from your day rate:
(day rate) x (days worked per week) x (weeks worked per year) x 5 (the standard maximum multiple used by lenders) = your borrowing limit
For example, if your day rate is £300, you work 5 days a week for 48 weeks a year, and the lender uses a multiplier of 5 to assess what you can afford, the sum would look like this:
£300 x 5 (= £1500) x 48 (= £72,000) x 5 = £360,000
With this approach to calculating your income, you’ll find you are in no worse position than a traditional employee when it comes to obtaining a reasonable mortgage. And it might take as little as a signed copy of your contract, a record of your working history, the three most recent bank statements and proof of identity to secure it.
