The UK contractor job market is a pretty flexible career option which is why so many individuals are being drawn towards it. It offers independent contractors to be their own boss and work on their own terms, thereby, enabling them to manage a work-life balance in accordance with their priorities. Mortgage lenders
However, there can be uncertain times that can put contractors in tough spots. Buying a home can be one such situation as it can be hard for them to get their hands on a mortgage for their home. Mortgage lenders can be difficult to convince into lending to contractors. Don’t worry!
We have compiled a guide that will be answering FAQs around your mortgage application approval.
How much can contractors borrow on a mortgage?
Like any other loan application wherein the bank first assesses the amount of loan, an individual can afford to repay, mortgage provides also consider the same factors. This is known as the affordability assessment. You’ll have to show your earnings history(ranges from 6months to 3 years or more as per the convenience of the lender). Usually, the following three factors are taken into consideration:
- Your income
- Your expenses
- Future considerations and risk assessment
Income Assessment for a mortgage
When assessing your Income for a mortgage, most of the lenders use the same basic formula of averaging your income earned over the years as a self-employed individual. This average is generally treated to calculate the loan amount that you can afford. However, in case your income seems to increase or decrease with a large margin, then lenders usually prefer taking into account the latest (or maybe lowest) to assess your income. This can be a pretty valid reason why contractors can’t get the desired sum of the mortgage.
Assessing mortgage for Limited Company
For Limited Company owners, lenders prefer taking salary and dividend into account over the total earnings. Moreover, if you have plans to buy a property with a Limited Company partner, lenders may not regard income variations as the key criteria, however, consistent earnings are still a priority.
Mortgage for ‘day rate’ contractors
For contractors who have a year-round contract, a few lenders may also consider calculating your day rate to assess your income. Lenders will then multiply this rate with the total number of days and hours worked round the year(excluding holidays and other gaps). This is a great option for new contractors as it gives lenders an idea of your professional credibility and determines success rate based on the same.
Also, there is a myth amongst contractors that lenders usually charge are higher mortgage rate for contractors than regular employees. On the contrary, as a contractor, you may even receive lower mortgage rates.
Checklist for a successful contractor mortgage application
Follow the below tips to make sure that your mortgage application gets approved successfully without troubles:
- Ensure your contract is up to date
- Avoid lengthy breaks between contracts
- Take a realistic approach regarding your repayments
- Have at least a 10% deposit
- Try looking for mortgages that allow additional payments
- Maintain records of your earnings, expenses, bank statements, invoices, and other accounts
- If possible, offer a higher deposit amount
- Make sure your credit score is well-maintained
- For Limited Company, bring along your balance books too when applying for a mortgage
- Choose the right lender
Also See: Agency Workers Regulations