Duncan Hodgson is back on the Mortgage and Protection Podcast but this time to tell us all we need to know about mortgages for Contractors.
What is a Contractor Mortgage?
There aren’t specific Contractor mortgages, but as a Contractor or someone that earns their money going from contract to contract, you are eligible for all the usual mortgage products that are available. The term Contractor mortgages is really focused on how a lender treats your income, and how they underwrite your ability to repay the loan.
It’s more about whether the lender will look at your income rather than what type of mortgage you can get, because if you pass the underwriters checks, you can whichever type of mortgages you would prefer.
Do all Mortgage Lenders lend to Contractors?
Not all lenders lend to Contractors, but from an independent advisor perspective, there are certain lenders that are more able to help Contractors. They understand the nature of a Contractor’s work and can therefore make a more considered assessment of their income, for the purposes of a mortgage application. There are a growing number of lenders beginning to accept Contractor applications to, in line with the growing number of Contractors in the UK.
How much can a Contractor borrow?
Once an underwriter has understood how that individual learns their income, the nature of their contracts, and they’ve calculated what they feel their annual income is, it’s no different to the same level of annual income for an employed person in terms of how much they can then borrow.
It’s all down to lender’s affordability calculators, and the figure will probably range somewhere around four and three quarters times the assessed income. It’s a misconception that Contractors can borrow less than other people.
How do Contractors get a mortgage?
Here at Purely Financial Planning, we’ve dealt with a huge amount of Contractors over the years. Contractors should certainly be going to an independent advisory firm like us, because they often perceive themselves to be difficult to get mortgages for. Contractors actually give us the biggest range of options when it comes to proof of income, so it’s interesting that there is still a difference between the perception that Contractors have and the reality.
How is a Contractor’s income assessed for a mortgage?
Typically, Contractors tend to be Self-Employed individuals who have their own company, and they invoice via their limited company. Contracts are often expressed as a daily or weekly rate and there are ways in which we can use that daily rate contract to calculate their income. If that same person also has their own limited company, we might be able to look at their limited company accounts and profitability.
We could look at their salary and dividends when it comes to calculating a Contractor’s income, so they often provide two, three or four different ways of looking at their income. It’s then a case of trying to find the lender who will look at them most favourably.
The beauty of being a Contractor is that before deciding how much they can borrow, we have the opportunity to decide which version of their income could get them the most money or which version of their income puts them in the best light for a lender. A Contractor has way more options than they often think they have.
How do you strengthen your mortgage application as a Contractor?
The best thing that a Contractor can do is to keep accurate records of the contracts that they obtain. Whether it’s a big paper folder or online doesn’t matter, you just need to be able to prove that you had each contract for the defined period of time. Particularly over the last twelve to twenty four months, which is what the majority of lenders will ask to see.
What about contracted buying with another person?
There is not really a difference here, it’s quite often the case that the secondary person buying might be employed. In that case, their employed income is just added to the calculation for the Contractor, and they can typically borrow more money if there’s more income available. It doesn’t complicate things to have one Contractor buying with someone that isn’t.
What documents does a Contractor need to apply for a mortgage?
You will need copies of your contracts, certainly over the last twelve months, but probably twenty four months. Tax returns, and copies of their trading accounts would also be needed.
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