There were more than five million self-employed in the UK by the fourth quarter of 2019 (as per the office national statistics). There is no doubt that this change in the workforce has changed the demand in the UK mortgage market. Among the self-employed are independent professionals and locums who work as contractors.
In this guide, we have tried to summarise everything you need to know to secure a mortgage as a first-time buyer who is a contractor and help you step up the property ladder.
We also explain how our mortgage advisers can help find the most suitable lender and the deal.
Below are some important factors to consider for your mortgage application:
Select a broker who has access to the whole of the market, which means you are not restricted to one or a few lenders. You may need hand-holding if you are a first time buyer.
The right mortgage will vary from person to person. However, most contractors will primarily seek a mortgage, which has the lowest overall costs across the deal period.
It may not always be the deal with the lowest overall cost, which is the most appropriate mortgage for a particular contractor. There might be features of a specific deal such as flexibility to exit (no early repayment costs), offset facility that may make a specific deal more attractive than the rest. It is best to speak to a mortgage advisor and discuss your circumstances and expectations.
Buying a house for the first time can be challenging. A digital mortgage broker can speed up your application. You may need a broker who is flexible with timings and someone who can guide you end to end of the mortgage. Brokers with online chat facilities can help answer your quick questions. Mortgage advisers may have access to intermediary only deals, which can be more suited than those offered by the bank directly. A mortgage broker can assist in finding the most suitable fit for you.
Typically, a high street bank will accept a new contractor with a two-year employment history in the same line of work. There are however other lenders in the market who are happy to work with contractors on a day rate, so with the right supporting documentation you can be assessed for mortgage eligibility.
If you have only been a contractor for less than 24 months, mortgage lenders will require at least six weeks remaining on the contract. This is because the underwriter requires an assurance of your income.
Mortgage lenders will usually require the duly signed contract and personal and business bank statements to arrive at a decision.
If a contractor works through an umbrella company, payslips will be required. Some banks consider umbrella company contractors to be zero-hour employees. Therefore, 12 month work history may be required.
Similarly, a fixed-term contractor on the client’s payroll may have to prove their track record on a fixed-term contract. They, too, might have to show 12 months of contracting history with the client and prove guaranteed future work.
1) Contracts and agreements
Typically, an independent contractor will get a contract agreement when he moves to work under a new client. This contract includes the terms of the working arrangement. Generally, contractor-friendly lenders require the current contract to assess the income of the contractor.
Most contractor-friendly lenders require evidence for 24 months of continuous employment in the same profession, where there are less than six months remaining in the current contract. In this case, some lenders will require a copy of the contractors’ resume and P60s from the past.
2) Tax documents
Most of the lenders will require a minimum of two-year self-employed history. A few lenders will consider one year trading history as well. If you are going through the self-employed route when applying for the mortgage, it is compulsory to show the tax documents.
Generally, the lenders will request the tax calculation (SA302), tax return (SA100), and the tax overview. Tax calculation shows income for the year, your personal allowance, and the resultant tax bill due on the year. SA302 includes the amount of income that will be considered in the mortgage application. Most lenders will consider the salary and the dividend income and are likely to exclude other income.
3) Signed business accounts
The industry norm is to provide two-year limited company accounts. However, some lenders consider one-year accounts as well. The latest accounts should not be older than 15- 18 months. It is always good to get the latest final accounts from your accountant. It is also suitable to file the statements with Companies House.
Apart from the above documents, the lenders will require personal bank statements and business bank statements.
Most mortgage lenders prefer accepting applications where a client has a clean and accurate credit file. It is always good to check your credit file before applying.
Experian, Equifax, and Credit Karma are some popular credit reference agencies. Check my file is an agency that is good for the purpose as it looks at various providers and consolidates the credit score. Most providers have a free month’s trial, and you can cancel the membership before it ends.
A contractor needs a minimum of 5% to 15% of the property value as the deposit. During the coronavirus pandemic, the minimum deposit went up to 15% with most lenders. A contract worker can use cash, savings in ISAs, dividend income as the deposit.
The first step in approving a mortgage application for contractors is looking at their affordability. Banks will assess the contractor’s income and expenses before deciding the amount they can lend. Mortgage lenders have several methods for determining contractor income.
Contractors are typically self-employed and work through a limited liability company. Some contractors have their spouse as a shareholder. If you work through a company, conventional mortgage lenders will either look at the company accounts or the self-assessment tax returns. However, contractors are privileged in many ways, as banks have adopted a third method to assess their income.
The following are the methods used by lenders to assess the income for contractors.
Most contractors work on a day contract rate and are therefore known as day rate contractors or hourly rate contractors. Some mortgage lenders are willing to assess your income based on the day rate. Try our contractor mortgage calculator to check your mortgage potential.
In assessing income, mortgage lenders will consider the contractor day rate and multiply it by the number of days you work per week and multiply it to account for 12 months. This is known as the annuals gross contract value. The mortgage provider will adjust for holidays and gaps between contracts. Therefore, typically banks assume contractors work between 41 and 48 weeks.
To consider day rate as income mortgage, lenders require at least a one-year track record of contracting history or two-year experience in the same business line.
If the contractor operates through a limited liability company, there are mortgage lenders who will provide specialist underwriting based on company Accounts.
Mortgage lenders will require at least two year’s accounts filed with HMRC if the company accounts are used for assessment. Most lenders take an average of the last two year’s profit after tax, and some banks look at a profit before tax. If the latest year profits are lower than before, the lender will assess based on the latest years’ profits. In exception scenarios, the latest years’ profit can be used where the profit is increasing. The mortgage providers will also add the director’s salary as income on top.
This is the most common method of income assessment used by mortgage lenders. If you are self-employed and receive salary and dividends, mortgage lenders will consider the addition of the two to calculate contractor income.
Mortgage lenders will take an average of the last two years’ salary and dividends received if the income fluctuates across several years. However, if the latest year’s profit is lower than the prior year, the lender will consider the most moderate income.
Using the self-assessment route, self-employed contractors will require to produce SA302’s and HMRC tax overviews for a minimum of two to three years, depending on the lender’s requirements. In the absence of an SA302, an Accountants’ calculation certificate may be acceptable.
As the criteria differs from a lender to a lender, it is always good to seek a mortgage broker’s assistance. We are here to help you by assessing your circumstances and by recommending you the most suitable lender and the options.
It is always good to seek the assistance of a mortgage broker. We provide mortgage advice by assessing your circumstances and recommending the most suitable lender, products, and service you require. We are a digital contractor mortgage broker who can guide you with your first purchase. We will send you updates when you reach specific key milestones. We also will send you updates about products if we feel there is a more suitable deal before you complete the purchase.
We can also assist with first time buy to let applications for contractors.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the repayments on your mortgage.