Contractor Mortgages

Buying a new home is complex enough without having to worry about how banks will react to the perceived insecurity of being a contractor.

Banks often prefer the security of employment because they are looking at the long term prospects of any borrower, but there are other factors too such as the ability to prove historic income through easily recognisable pay slips that make high street lenders more complex to navigate.

Yet provided you understand your options, getting a mortgage as a contractor isn’t as difficult as you might first think because the high street isn’t the best place to look for a contractor mortgage any more.

There are a number of brokers who work with non-high street lenders that understand the working practices of contractors and take a very different approach to lending.

The trick is to know where to look.

Meeting your mortgage adviser

Good contractor mortgage advice is a hard thing to find these days because the act of giving advice is regulated. As a result if you’ve ever had a chat with your bank about a mortgage you’ll have seen how they steer clear from “advising you” which is the best option instead offering you a range of “recommended” products to choose from.

In order to give you a range of products to choose from, it’s normal practice for a mortgage adviser to do a fact find with you. The fact find is often a lengthy document, but the more information you can fill in the better.

It’s important to remember that your potential provider will be looking for evidence of your past and future creditability, as such in preparation you should collect together recent documents like:

  • Payslips (if you’ve been in employment)
  • Limited Company Accounts (potentially for the last three years)
  • Current contract (including value and length)
  • Additional helpful information e.g. you may have contracted for one year but worked for the end client previously as an employee for a number of years
  • Bank statements
  • KYC documents e.g. passport & recent utility bill

Finally make sure you understand the options that are laid out in front of you by asking direct questions that help inform your own decision; don’t just try to get the adviser to make the decision for you because they can’t.

While your adviser can’t tell you which one to pick, they can tell you what each one means in their own context so word your questions carefully e.g. “what is a tracker mortgage & why would someone choose that”.

Getting a mortgage in principal

Once you’ve picked the best mortgage option for you, your adviser will help you fill in an application form so that you can apply for a mortgage in principal.

This sets out the amount that you can borrow when negotiating on a house price although it’s important to remember that it is not a cast iron guarantee of a mortgage.

A mortgage is often secured against a property or a piece of land, yet without actually owning or having an agreement to own the property in question a mortgage cannot be secured on it.

For this reason a mortgage in principal is the next best thing, because although it is not specifically for the house you want, it gives you a rough guide when picking that house moving forward.

Getting your mortgage approved

With an offer accepted on the house that you want, you can go back to the mortgage provider and begin the process to turn your principal offer into a mortgage offer.

This is by no means a certainty but it’s unusual for mortgages in principal to fail to become full offers without good reason.

Things your bank will look at are:

  • Your credit history
  • The valuation of your house compared to the price you’re paying
  • Any reason why the value of your house might drop

Should the results of the lenders final checks be satisfactory, you will receive a formal mortgage offer meaning that pending your solicitor’s searches, you are nearing the completion of your mortgage.

Useful facts about contractor mortgages

The average mortgage length is 25 years, although 30 years is common and shorter mortgages are available.

Lenders use different criteria on how much they will lend, but as a rule of thumb it’s typically four times the annualised contract rate.

Banks and building societies will usually calculate this by multiplying your day rate by the number of days worked per week, then multiplying that figure by 48 weeks. So someone on £500 a day for three days a week would have an annualised contract rate of £1,500 x 48 which is £72,000.

Times that by four and they’d be able to borrow roughly £324,000.

In addition to the above, any monthly commitments, such as loans or credit cards, childcare or recurring expenditure will be deducted from your predicted annual income.

For example, an annual childcare bill of £10,000 will reduce the amount you can borrow by £40,000 overall taking the amount someone on £72,000 can borrow down to just £284,000.

The above though does depend on your deposit. As a general rule, a 10% deposit is the minimum you’d expect to put down.

Your deposit is in addition to the amount you can borrow, so a £36,000 deposit and a £324,000 mortgage would mean that your house value is £360,000 overall.

It’s generally a good idea to try to maximise your deposit to house value ratio, aiming for a 15-20% deposit because this will give you access to more attractive interest rates.