Many believe that mortgage lenders prefer permanent employees, and it is quite challenging to get a mortgage or go for a good deal if you are an IT contractor. We have come across many clients working as a contractor who believe that it is impossible to find a deal appropriate for them with a high street lender and have been amazed when they find a deal appropriate for them.
In this short guide, we look at the myths of IT contractor mortgages. There are also useful tips on securing a mortgage for an IT professional and how mortgage advisors can help you find the most suitable lender and the deal.
1) IT contractors need to have at least two years of accounts to secure a mortgage.
You can get a mortgage based on your day contract rate. A contractor specialist mortgage broker will work with several contractor-friendly lenders and will be able to give mortgage advice based on your current contract. You do not need two years of limited liability company accounts filed with companies house.
2) The IT contractors need a big deposit.
Some IT professionals believe lenders expect a big deposit if they need a mortgage. Fortunately, a bigger deposit is not required. Of course, if you put more towards a deposit, this will reduce the risk to the lender.
Therefore, to secure a lower mortgage interest rate, a large deposit will help as it reduces the Loan to Value (LTV) ratio. Banks and building societies will also consider mortgages with a 5% deposit. However, there are strict lending criteria for 95% LTV products.
3) IT contractors fall into the high-risk category.
IT contractors will be treated similar to a permanent employee by some contractor-friendly lenders for income assessment. However, the contractor should have been in the same line of work for two years and have a few weeks left in the contract.
4) Contractors need to have at least six months remaining in the contract.
Contrary to popular belief, it is not necessary to have six months remaining on the contract.
An IT contractor can secure a mortgage with current continuous employment of twelve months or more with six months of the contract remaining, or the customer has two years of uninterrupted service in the same type of jobs. The lender may require proof of the employment track record.
5) Fees and initial interest rates are much higher for IT contractors.
Mortgage lenders don’t discriminate on cost or initial rates. IT contractors can select from the standard product range.
Fees include valuation, booking, arrangement, and product fees.
6) IT contractors have to pay big broker fees.
Not at all. Some brokers offer zero-fee service. Among these brokers, there are fintech mortgage brokers who provide an end to end digital solution. Going digital can help speed up your application and lessen your admin with a mortgage application.
1) Offer a free initial consultation.
It is a good idea to consult an independent whole of a market mortgage broker. Many mortgage brokers offer a free initial consultation and have no restrictions by a particular bank. This meeting will help the broker to get to know your circumstances.
2) Provide tips to strengthen your mortgage application:
Tips may include:
3) In-depth analysis of the circumstances to find the correct lender.
High street banks will look at your current contract and offer mortgage deals based on your daily rate. Contractor-friendly lenders will include and are not limited to Halifax, NatWest, and Nationwide. Income assessment differs from lender to lender.
A handful of banks offer mortgages for new contractors. Only a few prefer new contractors within IR35. Some of them like longer-term contracts, some don’t mind. An experienced mortgage broker is likely to know the best-fit mortgage provider and mortgage products.
4) Finding deals which match your daily rate.
A mortgage broker can help daily rate / hourly rate contractors source deals.
Lenders have deals packaged in different ways. Examples include lower interest rates but higher product fees or vice versa. Mortgage brokers will have tools to work out the cheapest workable deal over the initial term.
5) Find a lender who would consider self-employed income instead of day rates.
Some lenders would consider your taxable income or net profit. They will investigate your company history, and most will require at least two-year limited company accounts or self-assessment tax returns. Therefore this option may be more for an experienced contractor.
If you invest in a Buy to let mortgage, most lenders will require the taxable income figures. However, some lenders would consider a new contractor for a buy to let mortgage too.
All high street lenders and building societies cater to the growing requirement for contractor mortgages. However, each one has its conditions, which sometimes makes it tricky. Bespoke underwriting has helped contractors obtain the funds required to purchase their dream house or remortgage with a better deal. Mortgage lenders have evolved to be more flexible in underwriting mortgage applications for contractors.
In the perspective of lenders, contractors are categorised into the following:
The lender does not consider all contractors the same. Employment history is vital for all the above categories; however, assessing the income is different from each mortgage lender to lender. The following is just a glimpse of how most mortgage lenders perceive contracting income.
Fixed-term contractors are similar to permanent employees if the contract is long term and that the contractor has been with the same employer for a considerable period. Most high street lenders and building societies need evidence of the existing contract, past work history, payslips, and P60s. They may even require employment reference letters from the current employer. The mortgage borrower will have to prove that there is scope to extend the contract beyond the current end date.
Contractors operating via a limited company may have several routes through which they can evidence their income. They could use self-assessment figures, accounting figures (profits of the company along with the salaries). They can also use the day, hourly or weekly rate multiplied at the lenders assumed hours and the number of days worked in a year. The latter mostly works best in terms of affordability for most.
If its the self-assessment route, tax returns/SA 302s coupled with the tax overviews by HMRC would be needed.
If it’s the limited company profits route, signed annual accounts would be needed. These are accounts of contractors filed with companies house. The Accountant signing the Accounts has to be from a recognised Accounting body. Often a chartered accountant.
If it’s The contractor day route, generally, one year’s worth of contracts would be needed along with the tax returns and the tax overviews.
However, in most of these scenarios, business bank statements, and personal bank statements would be required to evidence income received by the company and the funds withdrawn from the company.
Contractors working under an umbrella company are similar to those employed; hence, they would require payslips to evidence their income. Furthermore, mortgage lenders would require the contract in place with the client and sometimes may need a curriculum vitae and previous agreements to establish the employment history.
Contractors may have had unpleasant experiences in securing their desired mortgage in the past, or have been subject to higher mortgage rates. However lenders in recent years are more understanding of contractor needs and therefore it is a myth that contractors still find it difficult.
Specialist brokers, can help to match the contractor circumstances with the mortgage lenders’ lending criteria. We provide advice based on each client’s unique requirements and try our best to secure a hassle-free mortgage offer. WIS Contractor Mortgages Ltd is part of a mortgage club, and therefore, we are entitled to exclusive offers from banks.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.