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Contractor Mortgages – What you need to know
As a contractor or freelancer, you might be worried about how to get a contractor mortgage. Whether you’re a first time buyer or you’re looking to remortgage your current property, there are a few things to be aware of.
What is a Contractor Mortgage?
There are no mortgage products specifically for contractors. People who work for themselves simply apply for the same products as an employee. The difference comes in how you confirm your income and that you can afford the mortgage you’re applying for.
Some mortgage lenders look more favourably on contractors than others, so it’s worth talking to a Mortgage Broker to identify the most suitable options.
How much can a Contractor borrow for a mortgage?
The general rule for a mortgage is that you can borrow up to 4.5 times your salary . This applies to both salaried employees and the self employed. As a contractor, the challenge is to show you have a stable income and that you can comfortably afford the monthly repayments.
How is a Contractor’s income assessed for a mortgage?
When applying for a mortgage, lenders assess applicants on how easily they will repay the loan. As a contractor, you might operate as a limited company or a sole trader. In either case, the lender will want to see at least two years’ certified accounts to understand your level of income and profit.
It’s even better if you can supply more detailed information. It can help the application process to demonstrate new contracts or clients that have signed up for your services. If you have a good level of savings, this is useful to show too. Like any loan application, your credit rating will also be taken into account.
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Getting a mortgage when you are paid a day rate
For a full time employee, it’s easy to demonstrate your income. You simply state your salary and supply payslips to confirm it. But when you’re paid a day rate, your income depends on how many days you work in any given month. That could vary significantly depending on your profession.
To the lender, your contract rate is less important than your annual turnover and profit. So your company accounts will be their main focus.
If your income varies a lot year to year, it doesn’t necessarily mean that you can’t get a mortgage, but you might find that you’re offered products with higher interest rates.
How mortgage affordability is assessed for a contractor?
The affordability assessment is how a lender decides how much it will offer you.
Contractors working for a long time find that lenders often calculate their annual income as an average, based on their earnings over a few years.
But if your earnings change dramatically from year to year, they could end up basing their assessment on your lowest annual profits – or sometimes just your most recent year. This could mean that you’re unable to borrow as much as you expected. Or, similarly, you might not be offered the most competitive mortgage rates.
How do you strengthen your mortgage application as a Contractor?
To secure a mortgage loan there are a few things that might help. If you’re fairly new to contracting, it might be best to wait until you have a couple of years’ accounts – 12 months at the least – before buying a home.
Secondly, make sure your accounts are in order. Talk to an accountant to see if there are other reports or information that can present your business in a positive light.
Third, if you’re able to apply for a joint mortgage with someone who’s employed full time, it could increase your chances of being accepted.
Finally, as always, if you can put down a decent deposit – more than 20 per cent of the property value, for example – that will make you a more appealing customer. It will potentially get you more competitive mortgage rates too.
How can a Mortgage Broker help if I am a Contractor?
Authorised and regulated Mortgage Brokers are experienced at helping all kinds of clients – from contractors and the Self-Employed to people with bad credit. It’s their job to know the market and find a specialist lender that will accept your personal situation.
Whether you’re looking for residential loans or buy to let mortgages, at fixed or variable rates, we can help. We can help you to learn which stains are hardest to remove, and find the right solutions to clean them. As accredited advisors registered in England, we will explore your unique circumstances and recommend the best ways to achieve your home ownership goals. Visit our registered office or call us to get started.