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Mortgage Advisor & Director
How do I get a mortgage as a contractor?
As with any mortgage application, a lender assesses three key elements: your income, your outgoings, and your level of risk. You will be required to demonstrate at least six months of earnings history as an absolute minimum. Most lenders will ask to see two to three years of accounts.
If you have enough of an earnings history, lenders will usually take an average of your recent annual income to calculate how much you can afford to repay each month, and how much you can borrow. If your income has varied significantly from year to year, they may choose to look at just the lowest amount, or just the most recent 12 months. This may result in being offered a lower amount than you were expecting.
How to improve your options with a contractor mortgage
The less you apply to borrow, the less risk a lender is required to take. Therefore, a large deposit can improve your chances of a successful application.
Providing as much information as possible around your income and outgoings will help a lender improve their confidence in you. If you have gaps or drops in earnings, you will need to demonstrate that you can recover from such drops. For example, contracts or long-term working agreements with clients will play a part in reassuring lenders. If possible, avoid long stints of time off in the lead up to your mortgage application - a two week holiday is likely to be fine, but two months of unexplained income loss may be more difficult to overcome.
As with any mortgage application, check your credit score. Look at address history, credit repayments, whether there are open accounts that should be closed, and whether anyone else’s names are listed on it. There are four major credit agencies in the UK, so make sure you’re checking the information held by all of them.
Can I apply for a mortgage as a director of a limited company?
Lenders will use different criteria to assess your application if you’re registered as a limited company.
Many will only look at your salary and dividends, not overall company income.
If you’re deliberately paying yourself a low income for tax reasons, finding a lender that offers specialist underwriting is advisable. Make sure any bank accounts and statements clearly differentiate between yourself as an individual and your business. Any funds you have put to one side to pay future tax or VAT will generally not count towards your personal assets in an application.
Will it help my application as a contractor if I apply with someone else?
If you’re applying with a partner who is in full-time employment, you may find that lenders are more willing to consider your application. You’ll still need to show consistent earnings over time, but variations in your monthly or annual income may be of less significance.
If you’re not applying with a partner, you may choose to consider a guarantor mortgage. This allows a friend or family member to provide security against your borrowing, often in the form of their property, or sometimes as a lump sum of funds.
What if my earnings are based on a day rate?
Some lenders may be open to using your day rate to calculate your annual income, though a long term contract with a client may be required.
To do this, lenders will look at how many days you typically work in a week or year, and simply multiply this by your day rate, taking holidays into account. This may be helpful to you if you are more recently self-employed. Other evidence of a reliable income will also help in this case, such as industry qualifications or signed agreements with clients.
How do I choose a lender for a contractor mortgage?
If you can demonstrate consistent earnings over several years, you may be able to apply to high street lenders.
However, many lenders utilise an application process based on full-time employment, with less flexibility for self-employed patterns of working. This can result in being offered a smaller sum than you need, or even having your application declined. Some lenders will be willing to refer you to an underwriter, who can take a more broad-minded and less rigid approach to assessing your level of risk.
It may be easier to avoid high street lenders altogether, and instead, choose a lender that specialises in contractor and freelancer mortgages. A mortgage broker will help you find a lender that’s right for you. Remember that a declined application will be recorded on your credit file and will affect your chances of being accepted in future, so it’s best to choose the right lender first time.
Key points when applying for a contractor mortgage:
- Show as much evidence of your earnings as you can, including full business accounts and balance books
- Bring evidence of your current and previous contracts, or other long-term arrangements with clients
- Bring certifications or qualifications (if relevant)
- Check your credit score in advance
- Consider saving for longer to increase the deposit you can put down
- Identify the best lender for you, likely one that specialises in contractor and freelancer mortgages
Choosing an Adviser
Selecting a qualified and experienced mortgage adviser is of great importance. To choose a suitable adviser, evaluate their qualifications, experience, and reputation, and ensure they are regulated by the Financial Conduct Authority (FCA).
Read reviews from previous clients and make sure they provide a clear explanation of the products and services they offer, as well as the fees and charges associated with them.
