Buying a home is usually a lengthy and complex process and being a contractor does not usually make it any easier. However, it need not be much more difficult to find a mortgage as a contractor than as a permanent employee, so long as you understand your options.
Getting a self-employed mortgage
Your mortgage adviser will carry out a “fact find” interview, where relevant information is given by you in order for you adviser to recommend the right product(s) for you. The next steps are for the adviser to obtain a mortgage agreement in principle, this will enable you to make an offer on a property knowing, your borrowing limits. Once an offer is accepted, the adviser will package your case together with supporting documents and pass this to the bank for final approval. It is at this point that should the case be formally agreed, a property valuation will be carried out. Should this be satisfactory, you will receive a formal mortgage offer meaning that pending your solicitor’s searches, you are nearing the completion of your mortgage.
Many people prefer to use a mortgage broker to help them through the process – they act on behalf of customers and will often liaise with all parties involved: estate agents, solicitors, valuers and lenders, to make the process a seamless as possible. There may, of course be a charge for this service. They will have insight in to lenders’ criteria quirks and practices as lenders have tightened up procedures considerably since the 2008 financial crisis. For contractors whose finances are seldom as straightforward as for permanent employees, it’s often a good option to use a specialist mortgage broker.
Getting the best rates for contractor mortgages
Typically, contractors have been asked to provide three years of accounts, demonstrate that they have been contracting for at least six months and ideally much longer, and show they have six months left on their current contract. These criteria are not hard and fast, and it’s quite possible to find a mortgage if you’ve only just started contracting. But your range of available mortgages is likely to reduce if you can’t show your financial history.
The other factor is the size of your deposit. With interest rates at a historical low, as little as 10% deposit achieves an extremely attractive interest rate. It’s still possible to find mortgages with a 10 percent deposit though with a good contractor history. If you have bad credit, or less than six months as a contractor, then you’ll need to find a specialist lender and they will often require a minimum deposit of 20 percent.
Borrowing limits for contractor mortgages
Lenders use different criteria on how much they will lend, but as a rule of thumb it’s typically four and a half times the annualised contract rate. Banks and building societies will usually calculate this by multiplying your day rate by the number of days worked per week, then multiplying that figure by 48 weeks. So someone on £500 a day for three days a week would have an annualised contract rate of £1,500 x 48 which is £72,000. Times that by four and they’d be able to borrow roughly £324,000. In addition to this, any monthly credit commitments, such as loans or credit card balances will reduce the borrowing amount.
Buy-to-let mortgages for contractors
If you’re a landlord or considering investing in property, the picture for contractors is much the same as for anyone else. Most lenders will require your own income to exceed £25,000 per annum (there a limited number that have no requirement) – they will want to know what the rental income for the property would be and they will usually need a minimum of 25 percent deposit.
Insurance for contractor mortgages
Everyone has their own appetite for risk, but after taking on a mortgage you may want to take out insurance to make sure your mortgage is paid if you can’t work for a period of time. There are several types of insurance available so for more information take a look at our guide: How to build your contracting insurance parachute