When it comes to contractor mortgages, you may find yourself pondering the question, “how much can I borrow?” This is a crucial inquiry that must be addressed before embarking on your search for the perfect home.
When you apply for a mortgage, the lender will conduct an affordability assessment to determine the maximum amount they are willing to lend you. This assessment takes into account factors such as your income, expenses, and the perceived stability of your earnings.
Many contractors assume that they won’t be able to borrow as much as permanent employees who receive a consistent monthly salary. However, by engaging with a specialist contractor mortgage broker like My Contractor Broker, early in the mortgage application process, you can secure the best possible deal tailored to your specific circumstances.
How Much Can I Borrow?
To provide you with a starting point, here’s a simple calculation to help you estimate the value of a potential mortgage. Multiply your current daily rate by the number of days you work each week. Multiply this by 48 weeks. Multiply the total by 4.5.
For example, if your current contract day rate is £700 and you work five days per week, you could potentially borrow £700 x 5 x 48 x 4.5 = £756,000 for a mortgage. However, different lenders may take different approaches when assessing your borrowing capacity, depending on your individual circumstances.
The size of your income is not the sole factor that influences your borrowing capacity for a contractor mortgage. There are several additional considerations, including:
Your deposit amount
Saving towards a mortgage deposit early on is advisable. Providing a 15 to 25% deposit will enable you to secure a better interest rate compared to a 10% deposit, for example. However, contractors do not necessarily need to provide a larger deposit than permanent employees to obtain a mortgage.
A substantial deposit is beneficial for all mortgage applicants as it helps avoid issues like negative equity and provides access to a wider range of mortgage options. Various methods can be employed to boost your deposit, such as releasing profit from an existing rental property. My Contractor Broker can assist in arranging a remortgage that allows you to switch to an alternative scheme and release equity from your rental property simultaneously
Your long-term security
Mortgage lenders prefer applicants who can demonstrate long-term financial stability. Supplementing your mortgage application with an ongoing agreement letter from your client or evidence of past contract renewal agreements can enhance the appeal of your application.
Additionally, minimising lengthy breaks between contracts prior to applying for a contractor mortgage is advisable.
Your credit rating
Your credit rating can impact the amount you can borrow. This is particularly relevant for contractors as it showcases good financial management to lenders, despite the lack of guaranteed income. Therefore, it is recommended to work on improving your credit score before applying for a mortgage.
Buying with a significant other
Mortgage lenders may be more willing to lend a higher amount if you are purchasing a property with a partner who is in full-time employment. Alternatively, you could explore the option of a guarantor mortgage, where a parent or family member provides a guarantee on your mortgage against their own home.
Other financial commitments
Dependents and regular outgoings can affect your borrowing capacity. Since the Mortgage Market Review in 2009, all mortgages are based on an affordability assessment that considers both income and outgoings. Therefore, it is advisable to evaluate your expenses, operating costs, standing orders, and other regular payments at least three months before applying for a mortgage.
Streamlining your outgoings prior to your mortgage application can potentially increase your borrowing amount.
Conclusion
In conclusion, answering the question “how much can I borrow?” for contractor mortgages can be challenging without thorough review of your situation. Since contractors often fall outside the criteria used by many mainstream lenders, not utilising a specialist contractor mortgage broker to enhance your chances could result in a rejected mortgage application. Furthermore, a failed application can have a negative impact on your credit rating and future mortgage applications, so caution is advised.
At My Contractor Broker, our team have been advising contractors for over 15 years and has direct access to underwriters who understand how contractors operate. One of our team will only need 10-15 minutes of your time before being able to give you an accurate indication of your borrowing potential. Alternatively, use our online calculator