You may have been led to believe that securing that elusive contractor mortgage was impossible without two or three years accounts. It’s just as likely you’ve heard that such mortgages attract huge deposits and high interest rates. It’s just not so.
Where this misinformation comes from is somewhat understandable. From the many tales of woe clients have brought to our door, we also know why there’s so much myth clouding what is a very simple truth: contractor mortgages are not hard to secure if you go through the right channels.
If you have a bona fide signed contract, whether it’s your first or the current one in a procession of many concurrent engagements, the chances are that there’s a mortgage out there for you. It’s simply knowing where to look.
There’s no need to get years of backdated accounts from your accountants. Nor is there the need to face ill-advised advisors who simply don’t understand how contracting works.
Are we magicians? What is it that we’ve found that High Street lenders haven’t?
The vast majority of well-known UK banks and building societies have the means to provide contractors with competitive contractor mortgages if they so choose. Our partner deals directly with underwriters who work for many of those household names.
You’re wondering why, then, have these financial institutions already turned your application down flat?
Contractors, as it stands, represent a small percentage of the UK labour market. That number is growing and we’re not saying that these lenders won’t change their opinion eventually.
However, such a change is only likely to come into effect when the slice of the market represented by Umbrella Company workers and Limited Company Directors becomes too large to ignore. Alternatively, it may happen when so many employees from the UK’s permanent workforce opt for contracting that their collective volume detracts sufficiently from the number of standard mortgages they’re processing that they have no choice but to cater for contractors if they want to hold onto their share of the market.
However, at the current time, the way contractors draw low salary to remain tax efficient is not an aspect with which most lenders want to burden their in-branch mortgage advisors.
With lending criteria so strict and so many other self-employed people applying for mortgages, it’s much simpler for the big lenders to simply decline contractors, often without even considering their application.
If you’re new to contracting, struggling to convince a lender that you’re creditworthy might seem like a new conundrum. You may even have jaded opinions about what types of mortgages you can obtain given how many contractors were (unadvisedly) offered self-cert mortgages and the fact that such finance became unaffectionately known as “liar loans”.
Well, let’s set the record straight. Firstly, the problem is not new. For years, specialist brokers have been sitting down with underwriters from leading lenders to fine-tune which details are most important in a contractor’s application to procure an informed decision about an applicant.
Secondly, self-cert mortgages may have served their purpose for self-employed people who, for whatever reason, didn’t declare their true earnings. But for contractors, there’s always been a better way to fund the purchase of their home than the self-cert.
What it all boils down to is that, for contractors, the past two years accounts may not represent their future earning capacity. The salary documented in said accounts certainly won’t reflect their true affordability status.
Given their penchant for paying themselves very little compared to the profit their limited company makes, in the eyes of a branch advisor, contractors simply cannot afford the mortgage they’re applying for.
Now we all know the low salary is there for the purpose of the taxman and doesn’t reflect how much of our income is truly at our disposal. It’s this nuance that escapes most advisors on the High Street.
We’ve teamed up with one of the specialist contractor mortgage brokers who have actually been there, sat at the table with underwriters and brought them around to their way of thinking. Namely, that contractors are no less risk than permies.
Moreover, if a permie and a contractor were doing the same job and even getting the same wage (although that’s unlikely as the contractor would typically be earning a lot more), a contractor would be a lot more able to meet monthly repayments than their colleague.
Why? After the pre-tax earnings had been put through their company accounts, the contractor would have much more disposable income compared to the direct employee, whose pick-up would have been subject to “Pay As You Earn”.
For the sake of this article, that’s a theoretical supposition. In real life, Freelancer Financials has already set that precedent. They know what the underwriter needs to see to process your application. More importantly, they know what the underwriter doesn’t have to see.
All of this adds up to a much speedier turnaround and, given the favourable status a limited company director is afforded, often access to much greater funds than they’d be offered on the High Street if they managed to find a contractor-friendly lender there.
Working out how much you can borrow is an extremely straightforward calculation. It assumes that you work 5 days per week, have a set contracted day rate and work for 48 weeks of the year. Multiply each of those numbers together to give you your annualised contract earnings. Finally, multiply that total by 4.5 to determine how much you can potentially borrow.
So, for example, if you’re earning £250/day and work 5 days a week for 48 weeks of the year, the most you could borrow would be £270,000 (4.5 times your annualised contract).
The documents that Freelancer Financials needs to send off with your application are extremely concise, too.
They will need your current signed contract, your last three months bank statements and a copy of your CV. Your CV will help the underwriter see that, even if you’re new to contracting, you’ve been working continually in the industry in which you’re now contracting for the last two years.
As with all responsible lending, your credit score will have an effect on who you can borrow from. Very often, if the best contractor mortgage for your circumstances has strict lending criteria, Freelancer Financials can find lenders who are sympathetic to a less-than-perfect credit score.
Once the underwriter has accepted your application, you’ll be able to access the same interest rates as your permie colleagues. There are many things that can affect the rate, including how long you tie down your lender to their introductory rate (usually 2 or 3 years) and how much of a deposit you have set aside.
It’s worth mentioning here that if Freelancer Financials can secure you a contractor mortgage for a poor credit rating, the interest rate may reflect the higher risk the lender is taking. However, that’s the same whether you’re freelancing, contracting or are a permanent worker with a low credit score.
For your deposit, the same rules apply as would to a normal mortgagee. Whilst a deposit of between 15-20% will secure you a very competitive rate, there are also providers who’ll lend with only a 10% deposit (90% Loan-To-Value).
If saving a deposit is a real issue and you can only muster a 5% deposit, you may qualify for the Government’s Help-To-Buy scheme.
There are many options available for contractors looking to get their foot on the property ladder, or even re-mortgaging to make use of the more competitive interest rates available on the High Street today.
However, avoid disappointment and shoe leather. For hassle-free contractor mortgages, dealing with people who understand the way you work and with direct access to decision makers, use Freelancer Financials to make owning your dream home a reality.