Many contractors worry that they won’t be able to get a mortgage due to their complex income structure. Lenders do assess income for contractors slightly differently to self-employed or employed applicants, but an understanding these differences can help to get the best mortgage for you. An experienced adviser who has specific knowledge in this area will be able to guide you through your options.
Income and Affordability Assessments.
Mortgage lenders need to establish if a mortgage is affordable to you right now, and if it will continue to be affordable in the future. For an employed applicant, this is pretty straight forward because the income is the same each month. For a contractor they have to factor in the significant fluctuations that can happen over a single year as you move between different projects.
Most lenders that specialise in contractors and understand contractor income will use a multiple of your day rate. The actual multiple varies between lenders, but is typically between 46 and 48 weeks. For example if your day rate is £300 this would be multiplied by 5 (days a week assuming those were your contracted days) and then by 48 weeks, which would give you an income of £69,000 per year to use for your affordability assessment.
Some lenders treat contractors as self-employed for the purposes of the mortgage assessment, with these lenders you need tax calculations and tax year overview documents. Your adviser would look at both options and assess which is most favourable to you in terms of income and lender’s rates in order to be able to make a full recommendation.
Employment History & Gaps Between Contracts.
In order to assess how stable your income might be the lenders may ask for certain criteria to be met, such as having at least 6 months remaining on your existing contract, having a contract of 12 or more months lined up, or having previously been renewed by your current client. It’s vitally important to talk to an adviser well in advance of looking for a property because the timing of your mortgage application in relation to your contracts could have a significant impact on the number of lenders available to us.
The sector you work in can also have an influence on a lenders assessment. I had a case recently where the contractor had only a few months left on a project, however due to them being in a sector which has an experience and skills shortage (and after looking at the applicants experience) they decided that he would be able to get a new contract without any issues at the end of the current one.
Lenders may also be wary if you have lots of gaps between contracts for longer than 3 months at a time. The reason for this is that it might be a sign that you are struggling to find replacement contracts. We know however that in some cases you might deliberately plan gaps between contracts to allow for holidays, down time or childcare. If this applies to you your adviser will potentially need to exclude some lenders when looking to make a recommendation.
Lenders can sometimes seem old fashioned in how they assess risk. We live in a world where contracting and flexible working is more common than ever, however lenders still consider contractors to be slightly higher risk than an employed applicant. Due to this some lenders have put in place a Minimum Income Criteria which means that in order for your income to be considered in the application you need to have a minimum income above a set threshold which is typically around £50,000 and can be as much as £75,000. Not all lenders have this in place and so please don’t be alarmed of your income in below this level, it just means that your adviser will exclude those lenders from their search when they are looking at the most competitive interest rates for you.
If you work under an umbrella company on a PAYE basis, some lenders will ask for additional documents such as payslips and P60’s in addition to your contractor information in order to verify the umbrella company. From the payslips and P60’s they will be able to establish that tax in being paid correctly on your behalf.
In summary, whilst there are additional factors to take into account when it comes to assessing your income as a contractor, working with an adviser can significantly increase your chances of getting a mortgage. Most importantly working together with someone who has expertise on mortgages for contractors at an early stage in preparation for this step will give you a much greater chance of getting the best deal for your circumstances.
If you would like to talk to someone in more detail please contact Kind Financial Services today on 0121 796 6655 or [email protected]
A MORTGAGE IS A LOAN SECURED AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.