Joint mortgage as a contractor: a guide to sharing a home loan
To get a mortgage, first-time buyers are increasingly relying on a second borrower with whom to club together to enable property ownership. This is common, accounting for almost two-thirds of mortgages for such property newcomers, and that’s whether your fellow borrower is a contractor or not, writes John Yerou, CEO of Freelancer Financials.
With or without a permie?
What can you expect from lenders if you decide that joint ownership is the way to go for you? Is a ‘permie’ co-borrower preferable in a lender’s eyes, or does having different income structures make buying a pain?
First, let’s look at the definition of a joint-mortgage and some relevant legal aspect before concerning ourselves with how lenders feel.
What is a joint mortgage application?
A joint mortgage allows two or more people (partner, family or friends) to buy a property together. This enables the combining of deposits and earnings to get onto the housing ladder.
Everyone who applies will have to meet the lending criteria of the bank to which they are applying. This is where it can get sticky, but I’ll come back to that in a moment.
Everyone named on the mortgage is responsible for the repayments. If one person is unable to pay their share of a monthly repayment, then the others named on the mortgage must ensure the whole amount is repaid between them.
Just as all applicants will have a legal claim to ownership of the property, they have the responsibility of making sure it’s paid on time. Failing to keep up repayments could see the property repossessed.
Legal ownership of a joint mortgage
When applying for a joint mortgage, you will have to decide on the legal ownership of the property.
There are two options:
Joint Tenants: All borrowers have equal rights to the home, inherit it if one borrower dies, and split profits equally when the property is sold. Together you act like a single owner, making it a popular option for couples.
Tenants in Common: Everyone owns separate shares in the property, which you divide how you like. 50/50, 70/30, 50/25/25 – whichever fits the way your party is buying the property.
You can then sell shares separately so that not everyone is affected if you decide to sell your share. Someone else can also inherit your share if you die. This ‘tenants in common’ option is popular when buying with friends or other family members.
What if both applicants are contractors, or if just one applicant is a contractor?
In my experience, people jointly own a home because they want to live together. The decision is not always financially motivated, but it would be churlish to overlook the possible complications that having different types of income can instigate.
We already know that not all lenders look favourably on contractors! For instance, Santander and HSBC will NOT assess a contractor’s affordability using their gross contract income.
Contractors applying for any sort of home purchase need to apply via a contractor-friendly lender -- joint applications included. Otherwise, proving your income to inflexible lenders can quickly become a nightmare.
Not all contractor-friendly lenders are equal
That said, even contractor-friendly lenders’ criteria can vary from one lender to another. Some lenders will accept only four weeks remaining on a contract, while others demand three months. What one lender considers an acceptable gap between contracts can prove too short for others.
Even the industry in which a contractor works can affect the decision, exemplified by Halifax’s criterion that IT contractors need no minimum day rate, but all other contractors must earn £320/day.
So, you need to select the best lender to suit your circumstances. To help, enlist the services of a specialist broker who can guide you to the lender most suitable to your unique situation.
What are the lending criteria for contractor-friendly lenders?
In addition to those mentioned above, lenders can have their own idea of what constitutes ‘risk’. This means that no two lenders’ criteria are the same.
Here are some factors which can fluctuate from one institution to the next:
- The length of relevant time you’ve been contracting
- Whether you’ve had contracts renewed or extended
- Gaps between contracts
- The industry in which you’re working
- The length of time remaining on your current contracts
- Your average income from contractual work
- Operating through a limited company (a PSC), or an umbrella company.
Your credit score, monthly outgoings and any other loans you may have will also be taken into consideration.
Not all lenders are generous with their income multiples
Some lenders may only lend up to three times your joint annual income, whereas others may lend up to four -- or even five times -- your joint earnings. Let’s look at how differing income multipliers might affect borrowing capacity:
You and your partner are looking to buy a home valued at £400,000. You have a combined deposit of 10%, so £40k; and let’s assume equal footing, so £20k each. That means you need a mortgage for £360k.
Your partner works at the local council as a PAYE employee and earns £40k a year. You’re a contractor on £300/day.
Annualised, your income is £69k (£300 x 5 days/week x 46 weeks/year). Add that to your partner’s £40k, and you have a combined annual income of £109k.
Income multipliers of three versus four
So, imagine you tick the boxes of the first lender, but they only offer an income multiplier of three. Your combined income of £109,000 x 3 only equates to £327,000. Even with your £40k deposit on top, you’re going to fall short by £33k. So, you either have to find that deficit, or look for something cheaper. Not good.
But your broker then points you in the direction of a lender who offers a multiplier of four times joint income. All of a sudden, you can multiply your joint income of £109k x 4, which means you can comfortably afford that same home!
A self-employed mortgage is NOT the same
And you might think that the above statement is obvious!
But we’ve had so many contractors approach us who’ve struggled to get an adviser to understand their income that they’ve put their permie partner’s salary as the lead.
The contractor has then settled for a lender’s ‘self-employed’ calculation for their own income, which is nowhere near as beneficial as contract-based underwriting.
Using a lender’s self-employed mortgage calculation is a disaster waiting to happen for most professional contractors. That’s because the lender will then only take the figure on your SA302, which won’t include any retained profits you’ve left in your limited company.
This not only devalues your income and status, but also means you’ll not likely get the home you can genuinely afford.
What if you’re an umbrella contractor or inside IR35?
Irrespective of whether you, the contractor, operate inside IR35, or if you work through a limited or umbrella company, there are High Street lenders who will assess you favourably.
But the trick is; you have to go to the right one. And even then, much will depend on your wholly unique situation -- there is no rule of thumb that covers all contractors when applying for a mortgage as a joint applicant.
Yes, two PAYE employee applicants have greater mortgage-product choice, because lenders can work with PAYE payslips all day long. And no, we’ve not convinced every lender yet that contract-based underwriting is just as low risk as full-time employment, despite us working very hard to do so!
Your top takeaway when applying for a joint mortgages as a contractor…
Don’t let us still needing to work on lenders so they see the light get you down. In fact, if you glean anything from today’s article, make it this positive fact:
As long as one of you is a contractor, it doesn't make a difference for mortgage purposes how the other person works.
Remember, a contractor-friendly lender will work with the contractor and put their gross annualised income first. We can then help them understand what you can truly afford.
The only time this might become complicated is if there's bad credit involved. Then, you’d need a specialist broker on board from the get-go who can manage your expectations. But if you’re a financially-savvy ContractorUK reader, you chose a mortgage broker specialising in the contractor sector from the outset anyway. Now all you have to do is decide who you want to share the mortgage with -- one step of having a mortgage in joint names that not even our talented team can help you with!
Find out more about contractor mortgages and get in touch with Freelancer Financials here.