Mortgages for Contractors

Often times over the last few years it has felt as if contractors were under attack from almost everyone in the finance industry. Not only did contractors have to deal with all of the Managed Service Companies legislation and the dreaded IR35 legislation, but they also constantly found themselves as an afterthought when it came to common financial products available to everyone in more traditional ‘permanent’ employment.

This was especially true when it came to mortgages. Contractors constantly found themselves ineligible for high street mortgages thanks to the idiosyncrasies of contractor pay structures and routines. High street lenders saw contractors as being high risk, even when their actual earnings were far higher than ‘permanent employment’ borrowers. They were reluctant to lend to people who had an end date for one contract and no other contract lined up and they also questioned the inability of some contractors to produce 3 years worth of accounts. As a result they hardly ever made mortgage offers to contractors, or when they did, they did so at far higher interest rates.

Recently, however, as more and more people have started freelancing or contracting, lenders have woken up to the potential of the contracting sector and there are now a growing number of specialist lenders who are offering contractor mortgages. In this article, we will examine these contractor mortgages, what they are, where to find them and whether they are worth considering.

What Exactly Are Contractor Mortgages Then? Why Do I Need One?

As mentioned above, contractor mortgages came about because banks and building societies were reluctant to lend to contractors because they considered them high risk. But with 15% of the workforce now declaring themselves as self-employed, the banks quickly began to realise that you could be self-employed and still have stable earnings and a decent credit history! Thanks to this realisation, specialist contractor mortgages began to appear on the market.

How are these any different to normal mortgages? The chief difference between a regular high street mortgage and a contractor mortgage is in the way the mortgage application will be assessed. When lenders assess mortgages for contractors they have now realised that they cannot simply assess income and expenditure levels alone. Instead, they have learned how to assess the individual, their career, their earnings over the year rather than per month and their future earning potential alongside their current contract position.

The lenders now know that contractors work across a wide range of industries and work in a wide range of styles, organising their finances in a number of different structures. They can recognise more generally that a particular contractor will have the ability to pay the mortgage back over the year, provided they have been offered a flexible product that can adapt to the changes that come with contracting.

Ok, That Sounds Great! Where Do I Find Contractor Mortgages Then?

Despite the changes in the market, your high-street bank or building society is still probably not the best place to start. They are still not completely at ease with the contracting sector and contractors! When talking to high street banks most contractors will see that the moment you deviate from their ‘set script’ – asking for details of your employer, monthly salary etc – things start to go downhill and inevitably end with the familiar ‘computer says no!’

That’s why the first place you should look is a specialist contractor mortgage broker. Specialist brokers know which lenders to approach for your individual circumstances. They will have built relationships with those lenders and will know which mortgage underwriters are happy with which sorts of lending criteria. They can then approach them with calculations based on day rates or on salary plus dividends, or with a multiple based on your current contract alone, rather than having to produce 3 years of previous accounts. Knowing how they calculate their figures means your specialist broker can organise your finances in the correct way and will give you a real advantage when it comes to deciding how much you may borrow and at what interest rates. And because they know a number of different underwriters specialising in contractor mortgages they will be able to shop around to get you the best deal.

How Much Deposit Is Required For a Contractor Mortgage?

Sadly, (or perhaps thankfully, bearing in mind where it got us all) the days of the 100% mortgage are long gone. These days, the best interest rates go to the people with the best (and largest) deposits. Between 10 to 25% is where you should be aiming but if you can get any more than that all the better! If you can’t quite manage this much then don’t despair, you will still be able to find some mortgages out there. The only difference is you will end up paying a higher rate of interest. As with high street lenders, the more equity a borrower puts into a property in the form of a deposit, the less risk for the lender and the more willing they are to offer lower interest rates.

Ok, What Sort of Interest Rates Do They Charge?

Thankfully, there are now lenders out there willing to offer exactly the same rates of interest to contractors as they do to every other borrower. They now understand that just because contractors work on assignments for a specific time period, and are not in what they would describe as ‘secure’ employment, does not mean they are a worse risk. In fact, they have now realised that the reverse is often true. Because of the short, fixed nature of contracting assignments, contractors are normally paid more than their ‘permanent’ equivalents and therefore have more disposable income and larger deposits to offer. And as mentioned above, these larger deposits will, in turn, allow the contractor to access even lower interest rates as they will have more equity available. So contractors can now, provided they are willing to seek out specialist lenders, match the very best rates on the market. They are also no longer facing limitations in the type of mortgage they can get, with variable, fixed and tracker (and many more) now open to them.

Brilliant! What Can I Do To Make Sure I’m Eligible?

Aside from what’s mentioned above (saving a large deposit for example) contractors need to do the same things that anyone wanting a mortgage needs to do. That means the first thing to do is ensure that your credit rating is exemplary! You can have the largest deposit in the world and a healthy income but if you have a poor credit rating you are going to struggle to get a loan anywhere! What’s more, ever since the financial crisis, lenders have become far stricter, so it is essential to not give them any reason to say no. This means looking at your credit rating at least six months before applying and doing everything you can – getting on the electoral roll, clearing debts, keep credit cards open but with no balance, making all your payments etc – to make your credit rating as high as possible.

Secondly, you will need to make sure that your current contract is up to date. The lender will need to need to see a copy of the signed contract in which it is clearly stated how long the contract will last and how much the contract pays. This can then be used in place of the more traditionally accepted three years worth of accounts.

Finally, you will also need to be realistic in your expectations about the amount you can afford to repay each month. This is both for your own good and for the good of your application. A lender will be willing to offer you an amount based on a multiple of the rate of your contract and this could possibly mean you get a repayment figure that is more than you could realistically afford. So it is essential to be sensible and not overstretch, particularly when you remember that at some point interest rates might go up! And if you are too ambitious in your own estimates they might foresee this and turn you down completely.