A Guide to Contractor Mortgages

Eligibility for a Contractor Mortgage

The good news is that being a contractor does not disqualify you from obtaining a mortgage. However, the application process may be more complex compared to individuals in permanent positions. Lenders typically require additional proof of income to assess your ability to afford mortgage repayments.

While salaried employees can often secure a mortgage based on their last three months of payslips, contractors may face more stringent requirements. Some lenders prefer to see two to three years of accounts to ensure financial stability. This means that you may need to provide self-assessment (SA302) tax calculations and tax year overviews for the past two or three years.

Additionally, lenders may have concerns about the temporary nature of your contracts. Even if you earn more than full-time employees, lenders want assurance that your income will continue beyond the contract period. Your confidence in securing future contracts may not be sufficient for lenders, as they evaluate employment stability through their affordability assessment.

However, don’t lose hope. By working with the right lender and providing evidence of your ability to afford mortgage repayments, you can access the same deals and rates as other borrowers.

Documentation Required for a Contractor Mortgage

To prove your income as a contractor, you will need to provide certain documents during the mortgage application process. These documents typically include:

• • Current Contract – To calculate your yearly income, these lenders multiply your contract rate by the average number of days you work per week and then by the number of weeks you expect to work throughout the year. If you are paid a day rate, a mortgage broker with expertise in contractor mortgages can assist you in finding a lender who accepts day rates as proof of income.

• • Current CV – Providing your CV demonstrates your recent work history and experience in your field, adding credibility to your application.

• • Umbrella Payslips – If you have chosen to work via an umbrella company, lenders are likely to request 3 months payslips to understand the frequency of you income.

• • 3 Month Personal Bank Statements  – Bank statements serve as proof of your income, validating the amount stated in your contract. Bank statement also give the lender a view on how you manage your monthly finances.

• • 3 Months Business Bank Statements – If you are working via your own limited company, business bank statements will be required to show you contract income being paid on a regular basis. Whilst the requirement is for 3 months, the lender will want visibility of 3 months worth of income so bear this in mind if you are billing infrequently.

• • Proof of Identity and Address – Similar to any mortgage applicant, contractors must also provide proof of identification (such as a passport or driving license), proof of address (like a council tax bill), and utility bills from the past three months.

It is important to note that lenders will also assess your expenses and living costs to ensure you can afford mortgage payments alongside your other financial obligations. They may inquire about childcare costs, travel expenses, credit card repayments, loan repayments, and general living expenses like clothing, groceries, and entertainment.

Determining Borrowing Capacity for Contractors

The amount you can borrow as a contractor is not easily quantifiable, as it depends on your unique circumstances. Lenders conduct an affordability assessment, considering factors such as the property’s value, your monthly income, and your expenses. This assessment helps lenders determine whether they are comfortable lending to you, the loan amount they are willing to offer, and the applicable interest rate.

Tips for Successfully Obtaining a Contractor Mortgage

Similar to any mortgage application, certain factors can increase your chances of securing a contractor mortgage. These include:

• • Maintain a Good Credit Score: Lenders are cautious about lending to individuals they consider to be higher risk. A strong credit score demonstrates responsible borrowing and repayment habits. If your credit score needs improvement, there are various strategies you can employ to raise it

• • Save for a Larger Deposit: A bigger deposit reduces the lender’s risk and affects the loan-to-value (LTV) ratio. LTV is the size of your mortgage relative to the total property value. A lower LTV leads to lower interest rates and monthly repayments. Saving for a larger deposit can significantly impact your affordability and the terms of your mortgage.

• • Ensure Regular, Reliable Income: Lenders prefer applicants with consistent income streams. Gaps in employment can lead to missed payments, potentially damaging your credit score. As a contractor, it is advisable to minimize breaks between contracts, ideally not exceeding eight weeks within any 12-month period.

The Benefits of Working with a Specialist Mortgage Broker

The Benefits of Working with a Specialist Mortgage Broker

Navigating the mortgage landscape as a contractor can be challenging. To simplify the process and increase your chances of success, working with a specialist mortgage broker is highly recommended. These brokers possess in-depth knowledge of contractor mortgages and have access to deals and exclusive offers from contractor-friendly lenders.

One such option is the MyContractorBroker, with over 15 years experience in the contractor mortgage market, we understand the intricacies of applying for a mortgage as a contractor and have built strong relationships with key decisions makers in most of the high street banks.

To summarise, while obtaining a contractor mortgage may involve additional documentation and requirements, it is certainly possible with the right approach. By understanding the lender’s perspective, gathering the necessary documentation, and considering the tips outlined in this guide, you can increase your chances of securing a mortgage.