Contractor mortgages: How much can I borrow?
When it comes to contractor mortgages, you may be wondering “how much can I borrow?”. It’s an important question and one that needs answering before you start to scour Rightmove to find your dream house.
When you apply for a mortgage, the lender will conduct an affordability assessment to work out exactly how much they are willing to let you borrow. This assessment will look at your income, your outgoings and the perceived security of your earnings.
Many contractors assume they will not be able to borrow as much as permanent employees, who receive a regular monthly wage. However, if you engage with a specialist contractor mortgage advisor early on in your mortgage application process, they can help you to secure the best deal tailored to your circumstances.
Contractor mortgages: How much can I borrow?
To start, here’s a simple calculation to help you gauge the value of a potential mortgage:
- Multiply your current day rate by the number of days you work each week.
- Multiply this by 48 weeks.
- Multiply this total by 5.
For example, if your current contract day rate is £400 and you work five days per week, you could potentially get £400 x 5 x 48 x 5 = £480,000 for a mortgage.
If, on the other hand, you have an hourly rate of £50 and work (on average) 35 hours per week, you could borrow: £50 x 35 x 48 x 5 = £420,000.
However, different lenders will take different approaches when assessing how much you can borrow, depending on your circumstances.
For example, if you have contracted for a long time, your average yearly income may be calculated to work out how much you can afford to pay each month. So, a contractor that earned £40,000 for one year and then £50,000 for the next year would be viewed as having an annual income of £45,000.
If your income has changed dramatically from year to year, then a lender may only look at your most recent contract when assessing your affordability. This may mean you can borrow a lesser amount.
However, it’s not just the size of your income that affects how much you can borrow for a contractor mortgage. There are many additional factors, and these include:
Your deposit amount
It’s a good idea to start saving towards your mortgage deposit as early as possible. If you are able to pay a 15 to 25% deposit then you will be able to secure a better rate than a 10% deposit, for example.
However, that’s not to say that contractors need to provide a larger deposit compared to permanent employees to secure a mortgage. It simply makes better financial sense for every mortgage applicant as a significant deposit will help you to avoid issues such as negative equity. It will also give you access to a wider range of mortgages.
There are many different ways to boost your deposit. If, for example, you have an existing rental property, you could release some of the profit made from your existing house to increase your upcoming deposit. A specialist contractor mortgage advisor can arrange a remortgage that allows you to switch to an alternative scheme and release some of the equity in your rental property at the same time.
Finally, due to money laundering regulations, you must be able to prove any deposit amount is your money. A specialist contractor mortgage advisor will be able to help you with this process.
Your long term security
Mortgage lenders favour applicants that can demonstrate long term financial security. So, you may want to supplement your mortgage application with an ongoing agreement letter from your client, or provide evidence of past contract renewal agreements to make your application more appealing.
What’s more, you should try to minimise any lengthy breaks between contracts in the run-up to applying for a contractor mortgage.
Your credit rating
Your credit rating can also affect the amount you can borrow. This is a particularly pertinent point for contractors as it demonstrates good financial management to lenders, even though your income is not guaranteed.
Consequently, you may want to work on improving your credit score in the run-up to your mortgage application.
Buying with a significant other
Mortgage lenders may be more willing to let you borrow more if you’re buying with a partner in full-time employment.
Alternatively, you could apply for a guarantor mortgage where a parent or family member provides a guarantee on your mortgage against their own home.
Other financial commitments
If you have any dependents or other regular outgoings, then this can affect the amount you can borrow. Following on from the Mortgage Market Review in 2009, all mortgages are now based on an affordability assessment, where both your income and outgoings are both taken into account when calculating the amount you can borrow.
As a result, you may want to assess your expenses, operating costs, any standing orders and other regular payments that appear on your bank statements at least three months before applying for a mortgage. If you can streamline your outgoings before your mortgage application, it could help to boost your borrowing amount.
If you already know the amount you want to borrow, you can also assess your monthly payments and the total cost of your loan using our mortgage calculator.
For contractor mortgages, “how much can I borrow?” is often a difficult question to answer without the help of a specialist contractor mortgage advisor. Because contractors tend to fall outside the criteria used by many high street lenders, your mortgage application may be turned down if you don’t use a professional advisor to help boost your chances.
What’s more, a failed mortgage application could have a detrimental effect on your credit rating and (consequently) your future mortgage applications, so you must tread carefully.
That’s why ContractorUK has teamed up with Freelancer Financials; one of the UK’s leading mortgage specialists for contractors, freelancers, and business owners. You can click here to find out more about how they can help you and the services they offer to contractors.