One of the most common questions and enquiries that we get, especially being based in London and working with highly skilled professionals on a regular basis, is the subject of how to get a mortgage as an independent contractor. Contractors are an essential part of the workforce, and for a lot of professions, it is very lucrative to be a contractor rather than a full permanent employee. But, due to the nature of the job, it can be difficult at times to get a contractor mortgage. In this blog we will go through all the ins and outs of getting mortgages for contractors through a professional and experienced mortgage broker.
What Is A Contractor Mortgage?
Growing up, most people are introduced to the world of work with the simple expectation that you will finish school, get a job employed by a company and receive a salary that should increase over time as you progress and gain more experience. However, this is of course not the only way that people can earn a living, and you certainly don’t need to be permanently employed by a company to receive a regular income.
One option for work has become more and more common over recent years and is now a very popular way of working. The contractor. A contractor can be a skilled individual with a sought after talent in their field of expertise, who prefers to work on short or long term contracts with another company or organisation rather than be permanently employed by them. For example, an architect could be hired on a year long contract with the local council or a local building firm to help them design buildings around town. This architect will negotiate a contract with the company on how much they will be paid, what their hours of work are expected to be, and any other specifics of the job. In this scenario, contracting already offers much more flexibility that standard permanent employment.
Contracting can stretch to all kinds of jobs, from the odd bit of handyman work to large city corporations hiring analysts as contractors. But, despite often being a much more appealing and beneficial way of working for a lot of people, securing finance like mortgages can be a challenge.
Why Can Getting A Contractor Mortgage Be Tricky?
Being a contractor has many benefits. Aside from the flexibility of your working arrangements, you can also negotiate your pay and the frequency of when you get paid. Some contractors might decide that they want to receive a flat monthly salary, some may decide that they want to be paid per week, and others might decide that they want a day rate or a flexible hourly rate which changes depending on when they are contracted to work. Mortgage lenders like to see consistency in everything that they assess because it is easier to track and audit. For people who have worked in the same job for years and receive a regular monthly payslip or annual salary, it is extremely easy for lenders to judge the sustainability of the job and income. For contractors, this is not as easy for them.
Because of the nature of the job, you might be contracted in one industry for a month, then another for 2 weeks, then another for 5 days, then another for 3 months. Tracking the work history of a contractor can confusing and risky in the eyes of a lender. Also, lenders normally want three months payslips minimum for a standard employee when assessing their income. If you are a contractor on a day rate or have done several short term contracts over the last three months with varying pay, this can be an issue to some lenders.
Contractor Mortgages. What Do I Need?
If you are a contractor and the things we have spoken about so far seem familiar, then you may be in need of some financial advice and guidance when getting a contractor mortgage. Mortgage advisors such as us at Oportfolio are experienced and skilled in contractors and know the best way to position your application to satisfy lenders. You can give our team a call at any time or drop us a message if you feel that you need to discuss a new contractor mortgage with one of our advisors. You also need to be aware that there is actually no such thing as a specific contractor mortgage. As a contractor you are potentially able to get any kind of mortgage, but which mortgage fits your situation best will be dependent on your circumstances.
So, what do you need for a mortgage as a contractor. The most important thing to consider is whether or not you are going to position yourself as employed or self-employed. If you pay your own tax and national insurance, most mortgage lenders will consider you as a self employed contractor. This is often much easier to navigate, but the mortgage lending level could be lower. If you are applying as a self employed person, the lenders will need three years (can be 2-years minimum) tax overviews and tax calculations from HMRC. They will then use an average of the three years net profit figures as your annual income.
If however, you do not pay your own tax and national insurance, you can potentially use either the value of your contract or the payslips from your contract as proof of income. Normally to do this, the lender will need you to have a 3 month history in the same line of work and 3 months remaining on your contract. If you do not have the history they may need longer remaining on the contract e.g. 6 – 12 months. If you do not have 3 months remaining on the contract, they may need confirmation of a new contract in place or a longer history in the job.
Some lenders will go off the full monetary value of the contract e.g. 12 months work for £30,000 salary. Some lenders will go off an average of the last three months pay annualised, and some will go off the day rate e.g. £300 a day X 5 days a week X 48 weeks to come up with an annual income figure. There are lots of variations of how the income will be assessed and your mortgage advisor will find the best route forward for you.
How To Get A Contractor Mortgage
If you are in need of a new mortgage or a remortgage, and you are sitting asking how to get a mortgage if you’re a contractor, start by contacting us at Oportfolio. Getting a contractor mortgage on your own, as you can see from the points above, can be a bit of a minefield if you don’t know what you are doing. The worst case scenario if you are getting a mortgage is to go to a lender and secure a mortgage deal that does not meet the lender’s criteria. For example if you get a mortgage application in with a lender who does not accept day rate contractors and this is what you do. Your mortgage application could go right down the line until they check your contract, at which point they decline the entire application.
Getting a contractor mortgage through a mortgage advisor is much easier and will save you stress and hassle. Because we know which lenders accept which type of contractor and what they will need to see at application stage, we will only approach the appropriate banks for you. We will make sure that we provide them with everything that they need from yourself and will follow the application right through to the end, ensuring that there are no hiccups.
Contractor Mortgages. How Much Can I Borrow?
Now onto the most important part of a contractor mortgage, how much can I borrow? Generally the rule of thumb for mortgage lending is that you can borrow between 4.45 and 4.5X your annual salary. Some lenders will go up to 5.5X salary for higher incomes and most will reduce your lending amount if you have any major monthly credit commitments.
For contractors, this can obviously play in your favour depending on how your income is presented. As we have mentioned, for people deemed as self employed, lenders will work off an average of the income you have received over the last 2 – 3 years. They will use the income figure AFTER tax, so this will be lower than the gross income figure that you have received over the years. If you are considered an employed contractor and in your contract you are entitled to a gross annual salary, then lender can potentially use this annual salary figure for your mortgage affordability. Because you are salaried, the lender will use the gross income figure, not the after tax net figure. Meaning that your mortgage affordability could be higher.
For day rate and hourly rate contractors, this can be a much more efficient way of presenting income to lenders. If you are classed as employed and receive a day rate, lenders can go off a gross annual figure for your income. So, if you earn £400 a day, a lender will potentially annualise this figure to somewhere around £96,000 a year. This could allow you to achieve 4.5X, 5X or even 5.5X your annual salary potentially. This is particularly good for employed IT contractors, contracted doctors, and other high earning professionals.
How To Get A Mortgage As A Contractor – Use A Mortgage Advisor
The best way to determine where your mortgage affordability falls and how much exactly you are able to borrow is to speak with one of our advisors here at Oportfolio Mortgages. Once we can precisely determine how much you can borrow, you can have comfort in knowing what is and isn’t possible in your mortgage borrowing journey. Call our team today to see how we can help.