The biggest myth surrounding contractor mortgages is that they’re nigh on impossible to secure. That banks don’t want to lend money to people who work for themselves is something that has plagued self-employment for years. But the fact of the matter is, it’s speculation and scaremongering and just isn’t true.
Sure, the financial challenges brought on by the pandemic led to a lot of hesitation among mortgage companies. However, a reluctance to lend impacted people in the supposed security of employment too – not just those running their own businesses. What’s more, as the UK economy reopens and business confidence begins to recover, the availability of affordable contractor mortgages looks to be on the rise once again.
So how can you get a mortgage if you are a contractor? While the availability of mortgages tailored to the needs of contractors has grown in recent years, there’s no denying that there are a few more hoops to jump through if you work for yourself – just ask any self-employed person who’s been through the process.
In this guide, we’ll share 9 priceless tips for any contractor gearing up to apply for a mortgage.
1. Consistent income is key
Mortgage companies prefer to lend to people who show a consistent or increasing level of income. So while taking time off and enjoying the flexibility of contracting is important, bear in mind that significant gaps between contracts might impact your ability to secure the money you need or a contractor mortgage at all.
2. Save more than the deposit
Let’s say you’re aiming for a 10% mortgage for your £300,000 property. While £30,000 will cover the deposit itself, there are a number of additional costs that you’ll incur. From solicitor fees to surveyor bills and stamp duty, the total cost of purchasing a property is greater than the deposit itself.
As an example, stamp duty is 5% on properties bought between £250,001 to £925,000, 10% on
£925,001 to £1,500,000 and 12% above £1,500,000. This means for your £300,000 property, you’ll need £2,500 cash to pay on top of the deposit.
3. Get interest rate savvy
The interest rate charged is how much you’ll pay over the length of the mortgage for borrowing the money. In simple terms, it’s the cost of the loan. It’s vital that you do your homework in this area and understand how much of any possible mortgage repayments are made up of interest – in other words, how much of your property are you paying off every month and how much is going to the lender?
Approaching a mortgage broker, who will have knowledge of the best available (and sometimes exclusive) rates might be worth thinking about.
4. Bigger deposit? Enjoy better rates (generally)
While you should never overstretch yourself when buying a property, the general rule of thumb is the bigger your deposit the better your interest rate is likely to be. So if you are in a position to put down a 15% deposit or even more, it may serve to your benefit.
5. Be conscious of your credit score
Other than income, lenders will assess the risk attached to lending to you based on your credit rating. If you don’t pass a mortgage company’s credit check then you won’t be granted a mortgage. So think twice about taking out new credit cards or applying for other forms of finance in the run up to your contractor mortgage process. And be sure to make any bill payments on time, every time. It goes without saying that you should look to avoid going overdrawn too.
6. Keep your business accounts in order
Your business accounts matter just as much as your personal ones. Making sure that all invoices have been paid, accounts reconciled and tax and reporting obligations met will factor into a lender’s thinking. With this in mind, you may want to engage a contractor accountant, who can get your accounts in order and help position you financially for the point we’re about to make now…
7. Map out your mortgage strategy
As limited company directors, contractors can apply for mortgages in a number of ways, including:
- Lenders assess the salary and dividends paid by your limited company to you, the director. To a degree, this is similar to how employees are assessed, via their wages.
- The profit your company makes can be used as a way to show suitability for a mortgage. This can be useful if you don’t extract the maximum amount from your company annually.
- Some lenders may accept your day-rate and length of your contract (which will be annualised) as a sign that you can afford a contractor mortgage.
Alternatively, if you work via an umbrella company, lenders tend to assess your eligibility based on your gross income and the length of time spent working on a particular contract – the longer the better.
Given there has been a significant rise in the number of people operating through umbrella companies in recent years, there are now plenty of tailored mortgage products and specialist brokers who can help you secure a mortgage as an umbrella worker.
So there are a few avenues to explore, irrespective of whether you work through your limited company or as an umbrella employee. However, having a clear idea of the options available to you from the word go is important, given it could dictate the way you work and how you are paid.
8. Check the small print
Make sure to read the terms and conditions of any contractor mortgage you’re considering. Clarity matters and it pays to have a firm idea of any additional charges – whether arrangement fees or even early repayment fines – that your lender may impose. The last thing you want is to agree to a contractor mortgage that simply isn’t right for you.
9. Don’t hesitate to ask for help
When it comes to contractor mortgages, knowing where to begin can be difficult. Having the confidence to find the right lender, get everything in order for your mortgage application and manage the process is even trickier.
And because contractor mortgages are still a niche corner of the market, despite the growth of contracting in recent years, having the support of an expert could make the difference. So don’t hesitate to contact a broker who specialises in securing mortgages for contractors.
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