Working as a contractor gives you freedom and flexibility, but there are some downsides as well. Many contractors find that obtaining a mortgage working as a contractor is difficult, if not impossible. So, can you get a mortgage if you are a contractor?
The answer is yes, but you will find a limited number of options from high street lenders. However, because contracting is becoming increasingly popular in the UK, more and more specialist lenders are setting up to service this lucrative market.
So, in this article, we are going to explore how contractors can successfully apply for a mortgage. We've tried to cover all bases here because no two cases are alike, so we’ll take a look at short-term contracts, bad credit, agency work, umbrella companies and more.
find me a mortgageFirst of all, we should define what we mean by a contractor. For the purposes of getting a mortgage, a contractor is any individual that is either registered as self-employed with HMRC or working through an umbrella company.
Contracts can be structured in any of the following ways:
Your income will be assessed differently depending on the length of time you have been contracting and the way your contract is structured.
Most contractors are self-employed and are assessed for a mortgage in the same way as other self-employed people. The total amount you can borrow will be based on your gross income (before tax).
Self-employed contractors typically need at least 12 months accounts before a lender will consider them for a loan. There are some exceptions to this rule, however, so it's always worth discussing your situation with a broker before applying.
New contractors with less than 12 months accounts may find it difficult to get a loan, but it’s not impossible. In some cases, lenders may let you use your previous salary to establish your earnings.
If a lender will not accept your previous salary, you will need to show that you have future contract work lined up for a period of at least 6 months. While the number of lenders willing to consider your case will be limited, you may still get approved for a loan.
Contractors working on fixed-term contracts are often refused credit by mainstream lenders, but there are specialist lenders that will consider you for a loan at competitive rates. Ideally, your fixed term contract should be 12 months in length.
Contractors on short-term contracts of less than 12 months can improve their chances of being approved by proving they have a history of getting new contracts. At least 12 months of work history is desirable, but each case is considered on its own merits.
Working under an umbrella company can make it difficult for lenders to establish whether you have a sustainable income. For this reason, it can be more difficult to obtain a mortgage working through an umbrella company than being self-employed.
Having said that, if you have at least 12 months of history working through an umbrella company and can show several contract renewals, getting approved for a loan should be pretty straightforward, so long as you approach the right lenders.
At WIS Mortgages, we are specialists at obtaining mortgages for contractors working through umbrella companies. Get in touch today to discuss your case and we’ll help you find a lender willing to fund your loan.
Professionals that work on a self-employed basis, such as locum doctors, barristers, accountants, IT specialists and teachers, can often obtain a mortgage at favourable rates without a documented work history.
This is because contractors working in a professional field have a specialist skill set that makes it easy for them to find work, but professional contractors still need to make sure they apply to the right lenders to get the best rates.
Lenders use different criteria for assessing the affordability of a loan. This is made more complex by the fact that contractors are not paid a monthly salary, and are not entitled to holiday or sick pay.
To find out how much you can borrow as a contractor, you must first work out how much you earn in a year. Most lenders use the following calculation to assess your annual income.
Contract day rate x number of days worked = weekly income
Weekly income x 48 weeks = annual income
Annual income x 3, 4 or 5 = your maximum loan amount.
Use our contractor mortgage calculator to find out how much you can borrow.
The amount lenders are prepared to loan you will depend on the stability of your occupation, the length of time you have been contracting, the length of your contract, your monthly outgoings and any other loans you have.
The size of the deposit required varies from lender to lender, but as a rough guide, you should aim for at least a 10% deposit. Some lenders will consider loans below this amount but the interest rates on these make them unattractive.
Generally speaking, the larger the deposit you put down, the better. A deposit of between 10-15% should allow you to benefit from the most competitive rates, but some high-risk applicants may need a deposit of 25% before being considered for a loan.
Lenders decline mortgage applications for several reasons. This could be because you have too much existing debt, have an adverse credit history or are not deemed to have a sustainable income.
The following are often cited as reasons for declining a mortgage application:
All lenders have predefined lending criteria which must be met if you are to secure a loan. The trouble is each lender has its own criteria, so a person considered high-risk by one provider may be deemed suitable by another.
The misunderstanding of different lending criteria is one of the main reasons why mortgages are declined. Presenting your application to the right lender will improve your chances of being approved.
That’s why contractors should use a knowledgeable broker such as WIS Mortgages. We know the lending criteria of each provider, which allows us to present your case in the best possible light.
Can you get a mortgage if you are a contractor with bad credit? Yes, most lenders will consider you for a mortgage if you have maintained a good credit history for at least two years.
So, if you have old CCJs or missed payments on your file from two or more years ago, this shouldn't pose a problem. If you have more recent bad credit on your file, this will make it more challenging to get a loan, but it’s still worth chatting to an adviser about it.
If you are a contractor looking for a mortgage, you should partner with a broker that specializes in contractor mortgages. Many mainstream lenders simply won’t entertain an application from contractors, no matter how solvent they are.
At WIS Mortgages, we are specialist brokers for contractor mortgages. Get in touch today to discuss your application and we’ll help you to secure the best loan at the most competitive rate.
Contact UsAlways remember that a mortgage is secured against your property. If you fail to keep up repayments, it may be repossessed.
Self-employment growth rates in the UK: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/articles/trendsinselfemploymentintheuk/2018-02-07
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