Buying a home is a significant milestone for many people and can be more difficult when working as a contractor. Unless you are fortunate enough to purchase the property outright, it will involve taking out a mortgage – a loan specifically designed for buying property. With the high cost of living and rising property prices in the UK, getting a mortgage as a contractor can be a daunting and complicated process. However, with the right approach and preparation, you can increase your chances of securing a mortgage and buying your dream home. In this article, we will discuss some key tips for getting a mortgage in the UK.
Check your credit score
Your credit score is a crucial factor that lenders consider when deciding whether to approve your mortgage application. Given many lenders still view contractor mortgages as a higher risk than a mortgage for those in permanent employment, ensuring your credit report is in good shape is essential. Your credit report reflects your financial history and your ability to manage credit. Before you start the mortgage application process, it’s advisable to check your credit score and address any issues that may negatively impact it. You can obtain a copy of your credit report from credit reference agencies such as Experian, Equifax, and TransUnion. If your score is low, take steps to improve it by paying off any outstanding debts and ensuring that you make timely payments on your current credit accounts.
Save for a deposit
Saving for a deposit is a crucial step in getting a contractor mortgage. The larger your deposit, the better your chances of securing a mortgage with a lower interest rate. In the UK, most lenders require a minimum deposit of 5% of the property’s value. However, saving for a larger deposit, such as 10-20%, can help you secure a more competitive mortgage deal. It’s essential to start saving for a deposit as early as possible, and you can do this by setting up a savings account specifically for this purpose.
Consider your budget
Before you start looking for a mortgage, it’s crucial to have a clear understanding of your budget. This involves assessing your income, expenses, and existing debts. Be realistic about what you can afford as a mortgage, as taking on more than you can comfortably handle can lead to financial strain and potential default on your loan. One of the advantages to contracting is your ability to earn more than if you were in permanent employment therefore it’s good practice to assess how moving into a perm role in the future would impact your ability to cover the mortgage payment.
Use a contractor a mortgage specialist
When it comes to contractor mortgages, you must be presented to the right lenders correctly. Failure to present your case correctly will almost certainly lead to a declined application. Your broker will be able to shop around and compare different lenders’ offers. A good contractor mortgage specialist will consider factors such as interest rates, fees, and repayment terms when comparing different mortgage deals.
Be prepared for the application process
The mortgage application process can be lengthy and involves a lot of paperwork. To make the process smoother, ensure that you have all the necessary documents ready, such as proof of income, bank statements, and ID. You may also need to provide details of your employment history and any outstanding debts you have. Being organised and having all the required information readily available can help speed up the application process. As a rule of thumb, ensure you have the following to hand:
- Proof of identity
- Proof of address
- Current signed contract
- Up-to-date CV
- 3 months personal bank statement
- 3 months business bank statements – If outside IR35
- Umbrella Payslips – If inside IR35
Be honest and transparent
When applying for a mortgage, it’s crucial to be honest and transparent about your financial situation. Lenders will conduct thorough checks to verify the information you provide, and any discrepancies could lead to your mortgage application being rejected. It’s also essential to disclose any additional sources of income, such as bonuses or investments, as this can positively impact your application.
In conclusion, getting a contractor mortgage requires careful planning, budgeting, and research. By following these key tips, you can increase your chances of securing a mortgage and buying your dream home. Remember to check your credit score, save for a deposit, budget accordingly, use a specialist broker, be prepared for the application process, and be honest and transparent throughout the process.
My Contractor Broker is a specialist contractor mortgage broker serving UK contractors and freelancers. You can get started by finding out how much you can borrow below or contacting us on 02394 211122 and one of the team will be on hand to help.