Posted by John Yerou
on July 8th, 2015 10:00am in
Last Updated on December 23rd, 2018 17:38pm.
Estimated Reading Time: 2 minutes
The whole mortgage process can be stressful. Completion dates, exchanging contracts, even getting an application in a format underwriters can use. They can all put the often calm contractor on the edge of despair. Especially if they’ve tried the High Street, only for the lender to let them down at the last minute.
But there are three milestones along the whole process that bring joy. There’s:
- informing the contractor that they have a firm mortgage offer
- letting them know the mortgage has completed;
- but before those two, there’s telling them how much they can borrow based on their contract rate.
When people use our contractor calculator, they often call to make sure the numbers are correct. They can’t believe what the screen’s telling them they could borrow.
That’s because we’ve negotiated the deals with the lenders ourselves. They allow us to offer those who qualify to borrow between 4½ and 5 times their annualised contract rate.
What’s an annualised contract rate?
Employers pay permies an annual salary. Based on that gross value, a lender has a firm idea of how much an applicant can borrow.
It’s different for contractors. There aren’t many contracts that stretch for a full twelve months.
So, first, we have to take your daily or weekly rate. Then we extend that figure over a year (46 or 48 weeks) to give a theoretical equivalent to a permie’s salary.
It’s this process that results in the ‘annualised’ base figure that lenders can use.
An example of a annualised contract for lending purposes
Say that you’re an IT contractor and your contract stipulates that you earn £500/day. That’s the base figure we’d use.
If your contract states an hourly rate, multiply that hourly rate by the hours you work per day to achieve your day rate.
We then take that day rate and multiply it by five. Five being the standard work week; if you work less, please amend your calculation accordingly.
So, with a base day rate of £500, your weekly income is £2,500 (£500 x 5). We then take that weekly figure and multiply it by the amount of weeks you work per year.
Lenders will use either 46 or 48 weeks, depending upon their own guidelines. Erring on the side of caution, let’s go with 46 weeks. So, your £2,500 per week x 46 weeks = £115,000. This is your annualised contract rate.
But that’s not the final figure. A lender then adds their own ‘affordability factor’. Again, the lender decides this figure, but it’s often between 4½ and five times your annualised rate.
Again, using the glass is half empty option, let’s go for 4½ for this example. The final calculation is your annualised rate multiplied by the lender’s affordability factor. In figures for this example, that’s £115,000 x 4½ = £517,500.
If you’re a £500/day contractor, you have the potential to borrow £517,500 to buy your home. And that’s using the cautious figures.
Our mortgage calculator can work this out for you. But please be aware, the result is only a guide.
No two contractors work the same, nor are their situations apt to be similar. Once you’ve got an estimate, you must speak to an adviser before putting in an offer on a home.
They’ll talk to you and get to know you and your business. This is critical to the whole process. The more we know about you, the greater our chance of success with finding a mortgage product that’s a comfortable fit.
We don’t want to weigh you down with repayments you can’t meet. It’s in our interest to build a relationship with you. When you come to move or remortgage in the future, we want us to be your first port of call.
So much relies on us understanding your unique circumstances. Once we do know more about you, we’ll approach a contractor-friendly lender whose products we know to be your best option.
It’s this two-way relationship that sets us aside from everyone else. he relationships with the underwriting team is there, cast in stone. We’d love for you to leverage that benefit and gain that same confidence. It is the blueprint for our ongoing success; let it be the template for yours.
Author: John Yerou
John Yerou is the owner and founder of C&F Mortgages; a trading style & trade mark of the award winning Mortgage Quest Ltd. One of the most recognised names in providing mortgages for contractors and freelancers across the UK.
In 2004 John began his career in Financial Services as an independent mortgage adviser and broker. John has been instrumental in negotiating bespoke underwriting for contractors with high street lenders.
His presence in the industry as a go-to expert is growing by the day and he is regularly cited and writes in publications both locally and nationally.