The UK housing market is getting more and more competitive as more people start to apply for mortgages. Apparently, getting contractor mortgages is even tougher as traditional mortgage providers assess applicants based on standard employment contracts and fixed monthly salaries, which aren’t applicable for contractors.
However, we know that with the right guidance, you can secure tailored mortgages. Let’s first start by understanding how professional contractor mortgages work with insights and tips for a successful application.
What Are Contractor Mortgages?
A contractor is someone who works on an agreement (contract) basis. They can be employed on a fixed or short-term contract. They can also be a self-employed person who works through a main company or a sole trader or director of a limited company. These professionals don’t exactly receive a fixed salary. When such individuals apply for a mortgage, it is classified as a contractor mortgage.
In a professional contract mortgage, a lender will use a gross contract rate to understand the applicant’s borrowing capacity through an approach called contract-based underwriting. With the help of this, you are allowed to borrow what a traditional employee might receive without the hassles of standard income verification.
So you don’t have to exactly worry about proving income consistency. Mortgages for contractors are a game changer for independent workers, and they can secure home loans based on their day rate or project-based income, which may fluctuate but remains sustainable.
How Does Contractor Mortgages Work?
Several factors affect how much you can borrow under a contractor mortgage, including:
- The size of your deposit
- The duration of your mortgage term
- Your credit history
- Existing financial commitments
- The length of your current contract and industry experience
- The number of dependents you have
Many lenders use a multiplier of around 4.5 to 5 times your gross contract income to determine affordability. They use a special formula to understand how much you can borrow for a contractor mortgage. The variants in the formula are.
Your daily contract rate x working days per week x weeks per year (assuming some time off) x lender’s multiplier (which can vary)
Suppose you earned £100 per day for 5 days a week and 46 weeks in a year while the lender’s multiplier is 4.5, the calculation would look something like this:
£100 x 4 x 46 x 4.5 = £82800
This is the approximate loan amount a lender may offer you on the basis of your contract income. However, while this reflects an estimate, this might not be the final offer, as a lot of other factors like deposit size, contract length as well overall credit history play a role. To get a more accurate estimate, you can use a contractor mortgage calculator.
Role of a Contractor Mortgage Calculator
To understand your standing on a mortgage application, it is a good idea to use a contractor mortgage calculator. These tools can give you an accurate estimate of how much you can borrow by considering the contract rate, deposit amount as well as mortgage terms. They are very helpful in giving you a clear picture of your situation, especially with a contractor mortgage broker’s consultancy and assessment.
Challenges Contractors Face with Standard Lenders
The general stereotype is that contractors are perceived as risky applicants when it comes to conventional mortgages. While this necessarily does not disqualify you, lenders may ask for several years of accounts, payslips, or proof of a stable income stream.
Lenders who are unfamiliar with contractor income may underestimate your capability, offering you unfavorable terms like bigger deposits and higher interest rates. If you have everything sorted, there’s not much to worry about but with special lenders, you mitigate the lack of understanding about contract-based work that can complicate things.
Should You Use a Contractor Mortgage Broker?
As contractor income is considered to be unique in nature, getting help from professionals can help you deal with the complexities. They understand your financial profile and present it in an ideal way to potential lenders. Here’s why you should consider using a contractor mortgage broker or specialist.
They understand your income structures.
Contracts can be of a variety, it can be for a limited company, an umbrella one, or a sole trader. An experienced specialist has worked with many such contractors so they know the differences between such arrangements and will guide you towards a successful application.
They have better access.
As they are experts in the field, they have access to appropriate stakeholders. For example, they can connect you to a manual underwriter who specifically works with contractors. At the same, they also have an idea of which lenders are contractor-friendly and can offer the best rates. This works in your favour as they are more likely to approve applications based on short-term contracts as well.
They ensure a fair deal.
A special broker can bring out your highest borrowing potential in your application and ensure that your mortgage offer reflects that as well, rather than just a narrow view of a traditional lender who might be unfamiliar with your situation or simply stingy.
They simplify the process.
Securing a mortgage is a lengthy process where accurate documentation and proper communication with everyone involved is extremely important. A broker helps you streamline the process, doing the legwork for you and saving you time and effort.
Here’s What You Can Do
- Make sure all your contracts are updated and the terms reflect your current earning potential.
- Build a solid work history of at least 12-24 months of consistent contracting work, with minimal gaps of no more than eight weeks.
- Work on your credit score by resolving any issues before applying, like settling any debts or missed payments.
- Save for a larger deposit to improve your chances of securing a better interest rate.
- Work with an accountant and broker who will work to help you get the perfect deal for you out there.
Common Misconceptions
A common misconception about contractor mortgages is that they can only be accessed by high-income earners. In reality, contractors come from all walks of life. One can work in IT, whereas another contractor may be working in construction. Despite varying day rates, contractors can benefit from the mortgage if they manage to find a lender who understands their financial circumstances.
Another big misconception is that contractors need to prove years of accounts to prove their income. While it is a huge plus point to be able to show records of multiple years, many people in the UK have secured a mortgage with 1 year’s accounts. Proof of current contract and recent work history is just enough for many flexible lenders.
Conclusion
Securing mortgages for contractors is not as daunting as it may seem. With contract-based underwriting as well as the right broker, you can enjoy competitive rates, higher borrowing limits, and a simple application process.
If you are ready to take the next step, get in touch with UK Mortgage Finder for expert consultation. Our team can help you secure a loan that meets your financial needs without the hassle and make your homeownership dream a reality.
