A Guide to getting a Contractor Mortgage
Finding the right mortgage can be difficult, and as a contractor it can be even harder. For years contractors have faced setbacks from lenders due to the misunderstanding of their work and remuneration. Often, high street lenders will base a contractor’s mortgage on their company accounts and these may not truly reflect how much they earn, leaving them unable to purchase their dream home.
Banks and building societies generally only lend to those who are considered a low risk, and contractors just do not tend to fit in to this category. The reason being is that lenders worry that these individuals will struggle to afford their monthly payments when their current contract comes to an end.
Although it might seem impossible to get a contractor mortgage, contractors can obtain competitive mortgage funding. It is even possible for them to secure funding with lenders that may have previously turned them down; however, these lenders need direction from specialist brokers.
Presenting a case is a fundamental aspect for contractors, to ensure they are able to borrow the funding that they need.
The application has to be presented in such a way that the lender looks at the borrower and sees them as a good risk.
There are two problems that need to be tackled:
1. Proving full income in a suitable way to support the level of funding required.
2. Proving long-term income, demonstrating that the monthly payments will still be paid when the current contract comes to an end.
How can you tackle these problems?
A specialist mortgage broker can help with the process as they will have a thorough understanding of each mortgage lender and how they work. These brokers have designed bespoke contractor based underwriting with many lenders, which means contractors are able to avoid the traditional frustrations.
This underwriting ensures that your income will be assessed using a multiple of your gross annualised contract rate, and this figure will be used to calculate how much you can borrow, ensuring this is based on your true earnings.
Essentially this means you will be able to secure a larger mortgage because the tax saving methods that you use will no longer cause you to be penalised during affordability testing.
The mortgage broker will be able to present your circumstances upfront to the most suitable contractor-friendly lender. Any concerns or worries about the way you work are usually eliminated at the first possible instance, which should leave your credit rating unmarked. To overcome the income longevity issue, your mortgage adviser will inform the lender of your skills and experience, demonstrating your ability to secure future contracts.
There are two essential pieces of documentation used by specialist brokers to ensure contractors avoid any issues relating to affordability; a copy of your current contract and an up-to-date copy of your CV. You can read more on mortgage pitfalls and opportunities for contractors here.
What type of client are you?
Requirements and lending criteria may also depend on the type of client you are. Whether you’re a first time buyer, next time buyer or are thinking of remortgaging you will need to have worked out your budget; all lenders will look at what income you have coming in, and what outgoings you have. You will need to ensure you have enough money saved to cover your deposit; be able to provide documentation to prove all of this and to show the lender you are a responsible borrower.
Buy to let mortgages are also becoming an increasingly popular investment strategy for contractors in the UK. There are many lenders that offer mortgages specifically for the buy-to-let market, however it can be difficult as a contractor to secure funding for them, as lenders are regularly changing their lending criteria, deposit requirements and the rental calculations needed to be satisfied. Again, this is something that a specialist mortgage broker will be able to advise you on.
What type of mortgage do you want?
There are many different products to choose from, each with different interest rates, fees and flexibility. All of these affect how much your total mortgage is going to cost you, and how long it will take you to pay it off.
The type of mortgage you will have to choose from are fixed rate, capped rate, and variable rate mortgages including tracker, standard variable and discounted rates, and it is important to know the differences and pros and cons of each product.
For instance, a fixed rate mortgage gives you security knowing that regardless of what happens in the market, your payments and interest rate will stay the same for an agreed period of time. However, you will not benefit if rates were to fall which you would with a variable tracker rate mortgage. You can read more about the different types of mortgages here in the full guide.
What other fees do you need to think about?
There are various other costs involved in buying a house which need to be taken into account including:
- Arrangement fees – fee the lender charges for setting up your mortgage
- Valuation fees – fee the lender charges for carrying out a valuation of the property
- Legal fees – fee the solicitor or conveyancer will charge for the legal work they carry out
- Stamp duty – fee paid to the government on all properties over £125,000
- Broker fees – fee charged by the mortgage broker for arranging your mortgage
These are just some of the things you will need to think about before you set about getting a contractor mortgage.
Download the complete guide to getting a contractor mortgage for more information on securing a home loan as a contractor, or contact specialist mortgage advisors ContractorMoney.