What are contractor mortgages?
Contractor mortgages are mortgages for those who have jobs as contractors. This means they are employed on contracts which have an expiry date. The contractor could have contract jobs for 3 months, 12 months or even 3 years.
The fact that a contractors job has an expiry date is why many mortgage lenders have created specialist contractor mortgages to cater to contractors.
Contractors may also have a varying rate of pay throughout their working life and this makes it much harder for mortgage lenders to ascertain their mortgage affordability over the life term of their contractor mortgage.
Some contractor mortgage brokers will even request to see your CV to be sure that lending to you is good business for them
A contractor mortgage broker will have specialist knowledge on what mortgage lenders offer contractor mortgages, their lending criteria and which contractor mortgage lender to approach with your case.
Can you get a mortgage if you are a contractor?
Yes, you can get a mortgage if you are a contractor.
Tips for getting a contractor mortgage?
Due to the fact that contractor mortgage lenders find it hard to determine what the average monthly disposable income of a potential contractor mortgage borrower making sure your income is easy to trace and verify will be the first step to ensuring you can get a contractor mortgage.
As a contractor you will usually be required to show evidence of your last 6 month earnings as the initial benchmark before the lender will offer you an agreement in principle. Once you have overcome this first barrier the mortgage lender will then take a deeper look into your finances over the past few years to see if they could offer you a contractor mortgage.
This means you must keep good accounting records that can be independently verified by a contractor mortgage lender.
The contractor mortgage lender will likely require that you present them with the following documents for them to be able to assess your income:
- Your contract agreement with the employer
- Your tax returns
- Your bank statements
- SA302. You will need to contact HMRC to get a printed copy of your SA302.
- Any accounts you have.
Contractor mortgage lenders will usually require to see at least 12 months worth of accounts and if you have less than 12 months worth of accounts then you may struggle to get a mortgage.
Your credit score
Contractor mortgage lenders, as all mortgage lenders, will be more willing to lend to people who have a good credit score.
If you have a bad credit score or history or you don’t have much credit at all due to recently moving to the UK then you may want to look into some ways to build credit.
If you have negative marks on your credit file such as county court judgements, debt management plans, Individual voluntary agreements, bankruptcies or defaults then you may find it much harder to get a contractor mortgage even with a bad credit mortgage broker.
Ensure you have checked your credit file before approaching a mortgage broker or mortgage lender so you have an idea of what you need to do to increase your mortgage affordability.
Your mortgage deposit
A bigger mortgage deposit will usually increase the likelihood of you getting a mortgage in most cases and this is the same with contractor mortgages. Some will say it is of even greater significance with contractor mortgages as the mortgage lender may find this type of mortgage as a much riskier one and the best way to improve your chances of getting a mortgage offer is by reducing the mortgage lenders loan to value.
If you are struggling to save a mortgage deposit for your contractor mortgage then you may be able to get help with a home buying government scheme which could increase your mortgage deposit or reduce the total cost of the property purchase.
Not all Government schemes may be a benefit to you and you should consider each one based on your current needs, its pros and cons.
Some of the government schemes you may be eligible for include:
- Lifetime ISA- gives you a government bonus of £1,000 if you save the maximum £4,000 a year.
- Help to buy ISA- gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. [Lifetime ISA vs Help to buy ISA.](https://blog.huutimoney.com/lifetime-isa-vs-help-to-buy/)
- Help to buy equity loan- gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
- [Shared ownership](https://blog.huutimoney.com/shared-ownership-pros-and-cons/)- You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
- [Armed forces help to buy](https://blog.huutimoney.com/forces-help-to-buy/)- similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
- [Rent to buy](https://blog.huutimoney.com/rent-to-buy/)- This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
- Right to buy- allows you to buy your home at a discount price.
- Preserved right to buy– same as above.
- Right to acquire- same as above.
There may also be some private market schemes which may assist you in getting on the property ladder.
Avoid long gaps between contracts
If you have long gaps of over 2 months or 6 weeks between your contracts then mortgage lenders may worry that there may be periods where you are unable to make your mortgage repayments on your contractor mortgage.
They will usually look over the past few years to see how often you have been without a contract and if this adds up to a lot of time then there is a reasonable chance that the mortgage lender may decline to offer you a mortgage.
Mortgage lenders will also be using an average of your total earnings over the past few years to work out what you can afford and if you have many periods where you went without work then this may significantly affect your chances of getting a contractor mortgage as it could pull down your total monthly average earnings.
Contractor mortgage lenders will, of course, prefer borrowers who have long term contracts than shorter ones. So even if you have long gaps between your contracts, if your contracts are usually long enough then a mortgage lender may look at this as a positive rather than a negative.
Getting a contractor mortgage if you are on a day rate
If you are on a day rate then there are some contractor mortgage lenders that will use this as the basis of your mortgage affordability.
You will have to show evidence of a contract for your day rate for a minimum of 12 months but there are some mortgage lenders that will accept a much smaller time.
The mortgage lender will work out what you can afford by multiplying your day rate with the average number of days you work per year, taking into account holidays and then work out what you can afford per month based on your average monthly costs.
Getting a contractor mortgage under a limited company
If you have set up a limited company and you get paid from your limited company then the mortgage lender will likely consider your salary and dividends from the limited company. If you, however, don’t take a big enough salary from your company but your company is very profitable then you may be able to get a contractor mortgage lender who offers more specific and in-depth underwriting to look at your companies income and consider this.
You may need a contractor mortgage broker who has experience of these types of mortgage lenders to advise you on this.
The mortgage lender will not take into account any funds that may be put aside to pay tax or VAT.
Getting a contractor mortgage with a partner
Getting a joint mortgage where one of you is a contractor and the other is full time employed may be significantly easier if the fully employed person has enough in their wage to cover the monthly mortgage repayments.
The mortgage lender will still like to see that you have some regular income but may be more likely to provide you with a mortgage offer if you apply with someone who is fully employed.
Alternatively, you may be able to get a guarantor mortgage as a contractor if you are unable to qualify for a mortgage on your own.
Guarantor mortgages and variations of it essentially place a charge on the assets or funds of the guarantor if you default on your mortgage repayments.
They are also a certain type of mortgage known as a family springboard mortgage, they include mortgages from lenders such as the Barclays family springboard mortgage, the lloyds lend a hand mortgage or the post office family link mortgage.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.