So, you’ve taken the plunge and stepped out from predictable traditional employment to reap the benefits of the flexible and profitable contracting world. But does this mean you are going to struggle to be accepted for a mortgage by the major high street lenders?
You may have heard that getting a mortgage when you’re self-employed is near impossible, but this is not the case. Lenders are generally far more understanding of the incomes and situations that come with being a self-employed contractor than they were long ago before contracting became popular.
There is a lot of confusing and conflicting information out there regarding contractor mortgages, so we have outlined and debunked some of the most common myths circulating the contractor community.
1. You will need to put down a large deposit
Contractors are generally able to take advantage of the same competitive rates and deals offered to traditionally employed borrowers. The minimum deposit typically accepted by lenders, regardless of the borrower’s employment type, is 5% of the property’s value. It is worth noting that a larger deposit can qualify you for lower rates, but there is no set deposit amount that is mandatory for contractors to secure a mortgage that differs from that required for employed applicants.
2. You will be charged a higher interest rate
The interest rate you are charged by your lender is dependent on the mortgage deal you are applying for, not your employment type. This means that contractors will commonly receive the same interest rates to those offered to employed borrowers.
3. You need years of personal tax returns or company accounts
Historically, many lenders viewed contractors as fully ‘self-employed’ and therefore they required up to three years’ copies of company accounts when considering them for a mortgage. However, in recent years lender’s criteria has changed, and some are now offering contractor mortgages based upon contractors’ daily rates rather than an average of their net profit before tax over the last few years. Lenders typically do this by annualising the contractor’s rate over a 240-working day year.
4. You need to have been contracting for at least six months
This is no longer the case as there are contractor-friendly lenders that are willing to lend to contractors with no track record of prior self-employment or contracting. With all else being equal, a person who has been contracting for as little as a day should be just as acceptable as someone with over 20 years’ contracting experience in the eyes of a lender. However, often they will want to see that the contractor is still in the same industry as when they were employed.
5. You will be viewed as ‘high risk’ by lenders
Attitudes are changing amongst banks and building societies and they are beginning to accept that contractors are not necessarily any higher risk than full-time employees. Contractors with adverse credit or no deposit will obviously be considered high risk, but this is not due to their contractor status. Many lenders that offer mortgages to contractors are happy to lend up between 4 and 5 times your annualised day rate.
6. You need a self-certified (or non-status) mortgage lender
Controversial self-certification loans that allowed borrowers to self-verify their income without providing payslips or tax returns as proof were banned in the UK by the regulator, at the time Financial Services Authority (now the Financial Conduct Authority), in 2009. These mortgages were originally aimed for those with irregular incomes such as freelancers and the self-employed who struggled to prove their income to banks. Now with many contractor-friendly lenders available there is no longer the need for contractors to supply self-certification.
7. You will need to jump through numerous referencing loops
References are not mandatory for a contractor to be accepted for a mortgage. Lenders typically require suitable proof of ID and address, a copy of a CV, last three months bank statements and possibly a copy of a contractor’s current contract when they are applying for a mortgage. If your contract has been renewed or is about to be renewed, underwriters will want evidence of that too.
With the right advice from a mortgage specialist with extensive contractor mortgage expertise, arranging your mortgage as a contractor does not need to be the daunting task it once was. John Charcol has over 40 years of mortgage broking experience for busy clients with complex situations and specialised mortgage requirements.
We understand that contractor work schedules can often be intense and unpredictable and that is why we manage your application every step of the way. Our independent status allows us to scope the entire market to find you the best possible mortgage arrangement for your circumstances. For more information on contractor mortgages, or to speak to one of our mortgage experts, simply contact us on 0333 363 4436 or visit our website here.