Contractor mortgages demystified: Clearing up common misconceptions

Since beginning to offer bespoke mortgages for contractors in 2004, we’ve seen one trend pervade. Despite earning more than they did as a permie, contractors who approach mortgage lenders directly get burned.

Heard the one about the contractor mortgage? You couldn’t make it up. Oh, wait…

This unenviable experience has led to many wild and wonderful myths and misconceptions about contractor mortgages. Are any of them true? Or, writes John Yerou, CEO of Freelancer Financials, are the purveyors of such tall tales away with the fairies?

Based on our two decades of hearing J.K. Rowling-esque fiction and fantasy and about contractor home loans, let's now separate rumour from reason and put you on the right path, by clearing up common misconceptions to demystify what a contractor mortgage in 2024-25 entails.

I'm first-timer new to contracting. Do I need 2-3 years' accounts?

You don't need accounts to verify your income for a contractor mortgage.

Contractor-friendly lenders will use a multiple of your gross day rate upon which to base your affordability. Therefore, all future retained profit from your contract income lenders automatically include in your affordability assessment.

If you're new to contracting (i.e. a first-timer contractor) , they will insist that your work history from your employee days aligns with the industry in which you've begun contracting.

That's why lenders who offer mortgages for contractors include an up-to-date CV as part of their lending criteria.

As well as your CV, other documents a broker will ask you to provide are:

  • A copy of your current contract;
    • possibly with an ‘extension guarantee’ if the contract has nearly run its course;
  • 3-6 months’ bank statements confirming your earnings and expenses;
  • Proof of ID, such as a passport or driving licence;
  • Recent utility bills addressed to your current residence.

Crucially if you’re a limited company contractor, proof of your day rate on your contract supersedes the need for accounts or payslips.

So, with such a streamlined process, it guarantees your application won't drag on and on.

Will my umbrella payslips help my cause?

If you're an umbrella contractor/employee, the same criteria apply as for limited company contractors, above.

You may think your payslips perform the same task as your ‘old’ permie payslips used to for mortgage lenders. They don't.

Rather than help your cause, umbrella payslips' numerous different fields only confuse untrained mortgage advisers and underwriters further!

Crucially, if an adviser or 'vanilla' broker asks for anything but your contract upon which to base their affordability assessment, you're in the wrong place.

Are deposits for professional contractors higher?

The 'TL;DR' answer to this question is: No.

Deposits for contractors are no different than for permies. But, at least I can shed some light on whence this myth was born.

Back in the day, it made sense to take out an interest-only mortgage to serve that purpose. Because interest-only mortgages don't pay off any of the capital over the term, there is an element of extra risk to the lender.

On that basis, interest-only mortgages, even today, command a higher deposit (usually a minimum of 25%) than capital and interest (repayment) mortgages. This is perhaps where this rumour has its roots.

But things have moved on. Thanks to the Herculean efforts of brokers like us, lenders' once-frosty attitudes towards limited company contractors and their payment structures have thawed.

Contractors can now access the same mortgages as their permanently employed peers. That means there's no difference in lenders' deposit expectations between contractors and permies today.

What about interest rates? Are contractors 'high risk' to lenders?

The eventual interest rate a lender offers you they'll derive from their risk assessment of your financial profile.

Part of that picture is the deposit you've set aside; so crucially contractors, the more you can 'put down', the better.

Other factors will include your credit history – just like it’s relevant to all other borrowers. Your mortgage affordability and ‘job security’ also play a part.

If you use a specialist broker, they will have access to special underwriting teams at lenders' head offices. More on that in the next section, below.

But, providing you go the prescribed route, you are no more ‘risk’ than a permie doing the same job as you. In fact, because we can highlight your greater affordability, quite crucially contractors, we're consistently able to offer exclusive and semi-exclusive interest rates you simply won't find anywhere on the high street.

Do contractors need a specialist broker? Aren't all mortgage brokers the same?

There are 'vanilla' brokers, who have a catch-all policy.

Then there are specialist brokers, like us, who focus on specific industry niches. And, forgive me here, as I can only offer you a comparison based on our services.

Because of limited company and umbrella payment structures' complexities, it's imperative contractors use a broker who can speak their language. More importantly, interpret your financial profile to a willing underwriter.

Specialist brokers can prove to underwriters that your six- month contract or 12-month contract is just as stable as any full-time position. And, because we've educated underwriters to use your day rate, we can establish your true affordability, too.

Crucial to be aware of contractors -- not all brokers have such a capacity.

Furthermore, advisers at high street bank branches and call centres are stuck with ancient, labyrinthine systems. The agents there may not have access to the contractor mortgage policies that their specialist underwriting team do at head office.

So, yes. To make the most of your contract earnings, you do need a specialist contractor mortgage broker.

Why can't I find a self-cert mortgage?

You can no longer self-certify your income.

Before the global financial crisis of 2008, most contractors and self-employed workers chose the self-cert option.

It's easy to see why self-certification was popular. If you were self-employed, you could imply that you could afford a mortgage way beyond the reduced amount you put through your books to qualify for statutory benefits.

The problem was that, as house prices soared, people in the housing market got greedy. Once the housing bubble burst, those who'd exaggerated their income began to struggle. As unemployment soared, many homes quickly slipped into negative equity. The result was chaos.

Self-cert mortgages were among the first things to be culled once the FSA (as the FCA was back then) began tightening up lending criteria.

So today, if you're a hairdresser/barber, work a market stall or run a food truck for example, you may be tempted to declare only ‘x’ amount to HMRC. The problem is, it's only that ‘x’ amount; the amount on your SA302, that a lender can use as the basis of their affordability calculations.

The tip of the iceberg

The above myths comprise just the most popular contractor mortgage misconceptions we hear on a daily basis. But, like all myths, most are based on an element of historical truth.

Relying on word-of-mouth from other contractors can sometimes be misleading. That' partly because every individual contractor's circumstances are different. Your financial profile is, similarly, unique to you.

Crucially though, there remains one commonality between contractors, which is 100% not a myth -- at branch level, high street lenders are ill-equipped to deal with complex income structures, like yours. They may not intentionally be trying to fleece you. But, remember: you have a golden opportunity to leverage your income with someone who truly understands contracting.

Don't let your fear of mortgages be your Achilles heel. The last thing we want is your ‘vim and vigour’ gone. Talk to a specialist broker today who can slay the mortgage rejection dragon for you and help you complete your property quest!

Tuesday 30th Apr 2024
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Written by John Yerou

John Yerou is a British executive and serial entrepreneur, who has founded a number of financial services companies. He is best known for founding Mortgage Quest, an unbiased and wholly independent financial service company. During his career, he has held the positions of director, vice director and managing director for a variety of tech-led companies, before becoming a true pioneer of independent financial services in the UK.

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