Posted by John Yerou
on June 6th, 2017 15:33pm in
Last Updated on August 13th, 2019 15:30pm.
Estimated Reading Time: 11 minutes
You can make getting a mortgage as a self-employed contractor as hard or as easy as you’d like. Go the traditional High Street route and you’re in for a hard, dissatisfying slog. But find a contractor specialist broker? Your hardest job will be choosing matching curtains and carpet.
- The five elements essential to contractors to get the right mortgage – for them
- How to get the best from your broker;
- What types of contractor can get a UK mortgage?
- What types of mortgage are available to UK contractors?
- Why using accounts to get a contractor mortgage is just plain wrong;
- How much can self-employed contractors borrow for a mortgage?
- The affordability calculation;
- An example using real life figures;
- How long does it take to process a contractor mortgage application;
- The truth about underwriting contractor mortgages;
- Why getting the right information to the underwriters is so important.
The five elements essential to contractors to get the right mortgage – for them!
There are five essential elements that self-employed contractors need to get a mortgage:
- Up-to-date CV, including details of work history and their current contract;
- A copy of that contract, which should also show how long it has left to run;
- Three months’ bank statements (some lenders ask for personal, others business accounts)
- Proof of ID, UK passport, driving license and/or utility bills in your name;
- The telephone number/email address of a proven specialist mortgage broker.
Before we get into the meat of this guide, here’s a quick pop quiz. What’s missing from the above list that inexperienced advisors may have asked you for?
Anyone? The answer: accounts!
For genuine contractor mortgages, accounts aren’t amongst a lender’s list of criteria. Underwriters can’t base what you can afford moving forward on what you’ve earned in the past.
If you’ve only bought a home as a permie, an advisor not asking for payslips might seem odd. But such is the nature of contracting. Moreover, looking forward is a notion that (some) lenders have embraced.
What is important for working out affordability is the day rate on your contract. How long you’ve been contracting in your current niche is right up there, too.
Most lenders ask for bank statements showing that you earn what your contract states. The majority who do ask like to check your personal bank statements. This avails them of added insight, showing other expenditure you incur.
But there are some who’ll ask for your business bank accounts. You are, after all, a professional entity using a limited company payment structure.
Which bank accounts you need to provide will depend on your chosen mortgage lender. Our experienced advisors will help you decide the best lender for your individual situation.
How to get the best from your broker
Buying a home is a personal affair. You’ll share details with mortgage lenders and brokers that you’d usually keep private.
Now that you’re buying a home, you need to lower that guard a little. You have to be transparent from the off. Straight talking is key to helping you get the best mortgage deal for where you are as a contractor right now.
And it’s here where we’re different: we get to know our clients as people.
Experience has taught us that no two contractors are alike. That’s why our first chat is to understand you and your business.
Once we know a little more, we can often form an initial strategy. Your outlook and attitude to buying a home can help us plan your route to home ownership.
It’s important to form that strategy early on. When you call or email us, do have the four of the five essential elements to hand. Or if there are documents you’re waiting for, be sure to have set those wheels in motion.
As an independent brokerage, we can access the whole market. We can give you the freedom of options.
Unlike some brokers or the High Street, we’re not tied to a panel of lenders or one banking group.
We’ve taken time to build solid relationships with every UK contractor-friendly mortgage lender.
You can rest, assured. We have nothing to gain by nudging you toward one bank or building society or another.
What we will do is advise you which lender we think is best for you. We can also get you a Decision in Principle, often within 12 hours. Only when you’re happy with every last detail will we then move forward.
What types of contractor can get a UK mortgage?
Some of our clients won’t mind admitting that they arrived at our door wet behind the ears. One day they were quitting their day job and incorporating their business. The next, they were buying a home.
That real scenario underlines one of the beauties of contract-based underwriting. You can get a mortgage from Day 1 of your first contract. Other aspects about your situation must also stack up, of course:
- time served within the industry you’re contracting at time of application;
- the Loan-to-Value ratio, i.e. your deposit in relation to the house price;
- your contract rate and how affordable the home loan you want is;
- and lest we forget, your credit score.
Also, lenders’ perceptions of what a contractor is are far from uniform. Are you:
- an independent professional with a limited company payment structure?
- self-employed, working on ad hoc freelance projects?
- a self-employed tradesperson with a regular gig?
- an agency worker, hopping from one short term contract to the next?
- an umbrella employee: a contractor, but with payslips?
You and I know these are all different ways of working. The way each of those roles secures work and handles payment are polar opposites.
But it doesn’t matter what type of professional contractor you are. The typical High Street mortgage lender will still try to pigeonhole you. They see you as self-employed and try to make your accounts fit a PAYE model.
For self-employed tradespeople and subcontractors, that’s often enough. Accounts-based mortgages will work for you. But even then, a specialist self-employed mortgage broker is your first step.
But for independent contractors? You need a lender who will underwrite your mortgage using your contract rate.
The vast majority of mortgage lenders won’t give you that access in branch. A specialist broker is your only true option to get the loan your income deserves.
What types of mortgage are available to contractors?
Here’s the flip side. Contractor mortgages aren’t the sole provenance of first-time buyers. We have clients who’ve used our service time and again. Some for home mover mortgages, many for a remortgage.
Now, why would they remortgage? They don’t want to poke the credit search and application bear again, do they?
In some cases, you may be right. Many contractors are so glad to have got a mortgage at all, they stick.
Perhaps gratitude for the mortgage lender is a British thing. We’re so polite, we don’t want to offend them by taking our mortgage business elsewhere.
It needn’t (and shouldn’t) be that way!
Here’s a point that a contractor will understand better than an employee. Mortgages at their basest level are just that: a business transaction.
We don’t have to settle for the higher variable rate once the introductory rate expires. It’s our prerogative to move lenders to get the best interest rate.
Yet many homeowners think remortgaging’s too much hassle. Most, especially contractors, won’t countenance it or don’t want to upset the lender.
Why? Let’s take a different financial transaction as an example.
Say you buy a new car every two years. This year, two dealers have the model you want. You’ve used them both before and have no special loyalty with either.
The price is the same at both dealerships, as is the finance term. But one has a more competitive interest rate than the other. Which dealer do you buy your new car from?
You wouldn’t pay a higher interest rate if you didn’t have to. Would you?
You don’t have to settle for the higher variable interest rate with a mortgage, either. That’s how we help clients save money time and again.
Before your introductory term is about to expire, call us. If you’ve continued to work as a limited company contractor, you’ll be fine. If anything, remortgaging will strengthen your credit rating, not damage it.
Why using accounts to get a contractor mortgage is just plain wrong
Using your limited company accounts to try to get a contractor mortgage isn’t advisable
Why not? Because your accountant streamlines your income for tax efficiency. It’s why you incorporated your limited company in the first place.
Now, remember the High Street lenders’ PAYE pigeonhole tactic we mentioned? Using it on contractors is why most in-branch advisors get your affordability wrong. Let’s expand.
Your accounts will show that you take a low salary. Just enough to cover your NICs. It may well show drawn dividends, too. Again, they’ll be low.
The bulk of your income, however, you keep in your business as retained profit. This way, you pay Corporation Tax on the profit, not income tax and NICs.
That’s great strategy for retaining the bulk of your income. But for an ill-educated mortgage advisor trying to work out how much you can borrow? It’s a disaster waiting to happen.
They won’t know that you keep your salary low on purpose. They won’t understand retained profit, either.
Moreover, their outdated, permie-biased calculation can’t utilise anything held in your company.
All they can put in the income column is your low salary and dividend drawings. As we’ve just alluded, they don’t amount to a fat lot.
With such a low starting figure, the amount they will lend you is almost offensive. That is, if they make you a mortgage offer at all.
How much can self-employed contractors borrow for a mortgage?
So, what’s the answer? Go back to PAYE just to get a mortgage?
Well, no. The answer is twofold:
- contract based underwriting;
- a specialist contractor mortgage broker.
Contract based underwriting uses your gross contract rate to work out your mortgage affordability. Not accounts, salary or dividend drawings. Your top line day rate.
In the hands of a specialist broker, this will open all manner of doors for you. For one, they understand the way you work. Moreover, they get why you structure your limited company income as you do. Or rather, as your accountant does for you.
Knowing this, they can showcase your income, thus affordability, to an amenable underwriter.
Any broker worth their salt will have built relationships with such underwriters.
Whole of market brokers, like us, will have these relationships not just with one or two lenders. They’ll have direct lines to all the major contractor-friendly lenders in the UK.
Armed with your information and these relationships, well. That’s when the magic happens.
The affordability calculation using contract-based underwriting
Before getting into a specific calculation, we must clarify a point. All lenders, even contractor-friendly ones, use their own affordability calculation.
The FCA has no definitive rule about how much a contractor can borrow for a mortgage. Each lender outlines their own risk factor by which they’ll assess contractors’ affordability.
That said, given our experience, we can offer an example using industry averages. So here’s how it works.
Our professional contractor earns £x/day, or £y/hour. For our underwriters, we need to extend that rate to an ‘annualised’ amount. That’s so that they can have a pro rata gross income figure to begin the calculation.
Now, contractors have holidays, too. Some have breaks between contracts, to which some lenders are more amenable than others.
That means we don’t use 52 weeks to ‘annualise’ as the term may suggest. Instead, most lenders use 46 or 48 weeks to convert a contractor’s income into ‘salary’.
Once they work out the annualised income, they apply an affordability factor. That’s a figure by which they multiply your ‘salary’ to generate a borrowing ceiling.
Most use 4.5 as standard, some 4 or 5. Other factors such as credit score may also affect your affordability factor. So, let’s look at that in an example:
An example using real life figures
Lloyd is a professional contractor working in the oil and gas industry. He’s two months into a six-month contract, which commands a day rate of £333.75. We generate that day rate using his seven-and-a-half hour day at £44.50/hour.
He wants an non-IT contractor mortgage with the Halifax. That’s great. He meets the lower earning threshold Halifax sets (£312.50*). He also has four months left on his contract, which also meets their criteria.
He comes to us to process his application. This is how we work out how much the Halifax allows contractors to borrow:
- Take his daily rate of £333.75 and multiply it by 5 to give us a weekly figure;
- this gives us earnings of week of £1,668.75
- Halifax uses 48 weeks to annualise a contract, so we’d multiply the weekly figure by 48;
- this gives us a gross annualised figure of £80,100;
- Lloyd meets all Halifax criteria, so they give him an affordability factor of 5, so:
- we multiply Lloyd’s annualised £80,100 income x 5 to give us a borrowing ceiling of £400,500.
And that’s it. Accounts don’t come into the equation. There is no mention of payslips.
We see that Lloyd has more than six weeks left to run on his contract. This satisfies underwriters’ risk factors. He’s also given us his CV, bank statements and certified proof of ID.
Using this documentation alone, we can secure Lloyd’s mortgage using his gross contract rate.
*If Lloyd was an IT contractor, Halifax would not ask for a minimum day rate.
How long does it take to process a contractor mortgage application?
If you’ve had a mortgage as a permie in the past, you’ll know the pain. Mortgages take forever to complete. Not so with contract-based mortgages. Often, 4 to 6 weeks is all it takes, from application to completion. Sometimes it’s even quicker.
Here’s why there’s such a big difference. The paper trail of normal residential mortgages has a lot to do with weighing down the process.
Contractor mortgages are different; they’re not encumbered by reams of documents. But they can be, in the hands of inexperienced advisors!
Instead, you need a specialist broker who works with underwriters day in, day out. This is the fastest, safest way to get a mortgage as a contractor.
The truth about underwriting contractors
What you, as a contractor, have to realise is this: you’re a niche market; you:
- employ a specialist accountant to work out your accounts;
- pay yourself through a limited company structure;
- work on short term contractors, often with less than six months’ cover.
Now, also consider this. Shareholders own most banks and building societies. This in turn means lenders must be efficient to remain profitable.
Lenders must also ensure they do everything by the book. In the case of mortgages, that means adopting Responsible Lending guidelines.
Why getting the right information to the underwriters is so important
In most cases, it’s not in a lender’s interest to train their advisors to cater for contractors. That’s why many contractor-friendly lenders are ‘intermediary only’. That is, you can only approach them through a specialist broker.
Specialist brokers know how to package a contractor mortgage application the right way. They get how contractors work and can interpret this for a potential lender.
You know, underwriters: they’re busy people. They want to see elements that reflect an applicant’s mortgage affordability at a glance.
They don’t want to:
- have to wade through accounts to find a salary or net income figure they can use;
- see applications marked high risk;
- waste time processing mortgage applications vetted by untrained staff.
If you apply through your High Street branch, you’ll struggle to complete at all. The advisor won’t understand your accounts. All they’ll use is the figure they see in ‘salary’.
Using this as a starting point will make any offer derisory, if they make an offer at all. That’s because the advisor could mark your application ‘high risk’. When they then send it to head office, that stamp prejudices the recipient from the start.
So, how do contractors get the best mortgages for their circumstances? You can make it as easy or hard for yourself as you like:
- go the High Street route, but prepare for a long, hard unrewarding slog;
- use a specialist mortgage broker and be in your new home six weeks from now, tops.
It’s your call.
Author: John Yerou
John Yerou is a pioneer of contractor mortgages and owner and founder of Freelancer Financials, Contractor Mortgages®, C&F Mortgages and Self Employed Mortgages, trading styles and brands of the award-winning Mortgage Quest Ltd.