Contractor Mortgage
Deposit - What you Need to Know

Perhaps the biggest concern for contracting clients when they decide on buying a house is the deposit required by the mortgage lenders. Most high street banks and building societies prefer a higher deposit as it lowers their lending risk.

Do contractors need a bigger deposit than PAYE applicants?

Contrary to popular belief, contractors do not need a bigger deposit. Mortgage lenders, including banks and building societies, treat contractors based on the standard rules. Hence, contractors will not be discriminated against in terms of the deposit, subjected to an affordability assessment, and acceptable credit history. However, most high street banks and building societies perceive contractor applications as a relatively higher risk due to employment nature. Therefore, such applications should be submitted to the mortgage lenders cautiously to avoid the risk of decline.

In terms of the deposit, all mortgage lenders provide competitive rates starting from deposits of 10%. However, several specialist lenders offer mortgages with a deposit as low as 5% of the property value. Lower deposits will demand stricter underwriting and it is prudent to have a larger deposit as one would benefit from a better rate.

How can deposits be accumulated?

Mortgage deposits can be accumulated from any legitimate source. It’s the solicitor’s and advisor’s role in making sure that the deposit is in adherence to anti-money laundering regulations as lenders require proof of deposit when processing the mortgage application.

The following are common sources of how deposits can be accumulated:

  1. Personal Savings: This is the most common deposit source and is also the most convenient way for lenders to check if they are legitimate. Money saved in a bank account will show how the funds transacted towards building up the savings.
  2. Gifted deposit: Most mortgage lenders accept gifted deposits from close family members. However, specialist lenders may consider gifts from non-family members if there are clear trails of how the income was sourced and why it was given.
  3. Sales proceeds: Funds from the sale of an asset such as jewelry, cars, etc. can be used towards the mortgage deposit.
  4. Credit cards and personal loans: Although most lenders would not accept this, specialist lenders may consider it.

Why is it better to have a bigger deposit?

  1. High street lenders and building societies perceive higher deposit applications as less risky; hence is charged a lower interest rate. Therefore, one will be benefited from significant cost savings across the mortgage term.
  2. A larger deposit can also reduce your borrowing amount, which may also reduce the interest cost over the mortgage term. That means you will not need to stretch the mortgage payments for a more extended period and, in turn, will also reduce the repayment amount.
  3. In cases of having a bad credit score mortgage lenders may lend at a higher rate or would agree for a lower borrowing amount, based on the severity of the adverse credit. So, if one has a larger deposit, mortgage lenders will be more likely to accept the application.

We at WIS consider each mortgage application uniquely, discuss the complications with the underwriters of the banks directly if required, and provide you with the best possible rate as we operate the whole market.

Please note that most lenders have temporarily ceased to grant high LTV loans, given the current pandemic situation; however, it is best to discuss your options with a mortgage broker.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.