Mortgages for contractors, although still more difficult to obtain than standard mortgages, are available in greater numbers now than they have been for many years.
How hard is it to get a contractor mortgage?
It is harder – sorry, there’s no way around that. But it’s not just contractors that have difficulties in securing mortgages, sole traders, partners, and directors of limited companies all face additional struggles in their first few years of business.
You’d do very well to get an offer from a high street bank or major lending institution. They generally want to see three years’ accounts before they’ll consider your application.
On the subject of accounts, remember that your accountant’s job is to try to make your profit as small as possible so that the corporation tax you pay goes down.
And as a major part of a mortgage lender’s approval is related to the amount you earn compared to the price of the property you want to buy, your accountant may actually be making things harder by wanting to keep your taxes down.
Will banks and building societies look at me?
It depends. It’s not just all down to your declared profits and the cash you extract from your company.
Other important factors come into play like a poor credit history or a record of bad payments. These two issues weigh heavily on an underwriter’s decision to grant you a mortgage or not.
Banks and building societies will be concerned about how much money you actually receive from your limited company.
It makes a lot of sense for tax purposes to minimise your salary and maximise your dividends but any high street financial institution you approach will, more likely than not, see things differently from you and your accountant.
Every time you apply for a mortgage with a bank or a building society, it gets recorded on your credit file. This is one of those cases where, even though you might not like to do so, it’s better to pay a mortgage professional fees rather than trying to do it all yourself.
How many years’ accounts will I need?
There are specialist mortgage lenders on the market who understand the fluctuations and cash flows within a contracting business and how you, its director, get paid by it. For many of these specialist lends, they will only offer their mortgages through a broker who will “package” an application before they send it over for consideration.
You don’t need to have three years’ accounts but, at the same time, if you’ve just started out, you might be asking too much of a mortgage broker. Either way, evidence counts. A copy of your CV showing a solid and dependable track record in your area of contracting will help your application as will copies of the contracts you have currently running with clients and contracts with clients whose dealings with you have recently ended.
Many mortgage brokers argue that there is little to no harm in applying for a mortgage after you’ve won your second contract but make sure that, as mentioned above, your CV supports your earning potential.
What sort of interest rate could I expect?
Mortgage interest rates are affected by many different factors.
Contractors are in a good position here. As you’d expect, the mortgage industry as a whole pays keen attention to the demographics of customers likely to keep up repayments and those who struggle and default. Contractors’ rates of keeping up with their mortgage are actually better than directly employed staff.
From a lender’s point of view, you’re actually less of a risk. Find the right mortgage provider through your broker and you might actually pay less for your mortgage than the employees working with you on situ when you’re on contract.
Are self-certification contractor mortgages still available?
Self-certification was banned in 2008 by the then Financial Services Authority shortly after the impact of the major financial crisis that hit the world in the same year.
UK lenders don’t offer them. For a short while, a company based in the Czech Republic offered self-certified loans for UK borrowers however the offer was so oversubscribed that the firm do not believe they’ll be able to offer new mortgages again for at least 3 years from time of writing.
Try to resist any companies offering a fast track service. The direction of travel in the mortgage market currently is currently strongly against mortgage deals which appear to circumvent the rules laid down by the now Financial Conduct Authority.
How will my application be considered?
Again, go to a mortgage broker. They’re used to answering honestly and openly the questions that a mortgage lender would ask you if you approached them directly.
Remember that, as mentioned earlier, your line of business is a safer bet for mortgage lenders than your employed colleagues. Take the strain away from yourself by letting your broker answer the difficult questions on your behalf from lenders.
Are mortgages for contractors based upon my contract values?
Those specialised mortgage lenders who want to lend to contractors like you will look at your average contract value over the year. They will then allow you to borrow money based upon a multiple of your historic annualised total contract value.
It’s best to show that the contract or contracts you have are ongoing and that you have a reasonable expectation of work from your client base. That said, if you’ve just switched from an employee to a contractor and you’re working for the firm who used to employ you, this counts as a big positive to underwriters.
What if I have a poor credit history?
Poor credit or payment histories do make the process harder but certainly not impossible.
You will need, via your broker, to present lenders with a positive picture of the way your contracts are going and demonstrate that your previous credit problems are a thing of the past. If your credit problems are less than 2 years old, your broker may struggle to find a lender for you.
Should I use a financial advisor?
No, but probably yes.
Every time you make a mortgage application, a record of it will appear on your credit file. As most traditional lenders are not geared up to cope with contractor mortgages, your likelihood of failure on each application is higher. The more and more applications and declines you get on your credit file, the more and more it will become difficult to persuade lenders to say “yes”, even the lenders which were set up specifically to offer mortgages to contractors.
You will pay a commission to your broker. It could vary from a few hundred pounds to a couple of thousand pounds and become payable on the day you move. In most cases, you will pay an upfront fee of up to £500.
The question you need to ask yourself as a professional and would-be homeowner is whether you’re willing to pay someone to take you through what is a difficult and complex process where most suitable mortgage providers will not consider direct approaches from potential borrowers.
What are the main types of contractor mortgages?
The types of mortgages available to you are identical to the types of mortgages available to other borrowers.
You can go for a repayment mortgage, where your repayments pay off both the capital (the amount of money your mortgage provider lent you) and the interest payments on the capital.
Interest only mortgages where you only pay the interest and not the capital are available but are traditionally difficult to obtain unless you provide proof of how you’ll pay off the capital.
You might choose a fixed interest or fixed-rate mortgage which offers guaranteed mortgage payment amounts no matter how interest rates fluctuate.
Variable rate mortgages change when the interest rate changes.
Offset mortgages are combined mortgage and savings accounts. The more you have in the savings account, the lower your mortgage and the interest payments attached will be.
Flexible mortgages allow you payment holidays and over-payments without penalty.
The interest rate you pay will also depend on how big a deposit you are able to place on your property. Generally, the lower the Loan To Value ratio is, the better interest rate you’ll get.
Wise Accountants tip – If you buy a house for £500,000 and you put down a £50,000 deposit, the Loan To Value ratio is 10%. If, on the same house, you have a £100,000 deposit, the Loan To Value ratio is 20%.
How long does it take to get a contractor mortgage?
Securing a decision-in-principle (called a DIP in the mortgage trade) is the first step of your mortgage journey. The second and final stage is securing an actual offer.
DIPs can be received within two working days based upon the contracts you have ongoing right now, any previous contracts you’ve had, 24 months of bank statements, the value of and equity in any other assets you have (like buy-to-let properties) and more. They will almost certainly need to see your personal bank statements too.
Once you have your DIP, your lender starts a much deeper investigation into you and your personal and business circumstances. Some providers can take a couple of weeks to make an offer, others up to two months.
What information and documentation will lenders need?
The more documentation you can provide, the better. Try to go back as far as you can to provide a potential lender with as much comfort as possible.
As a bare minimum, you can expect to be asked for:
• your CV
• your current contract and any previous ones
• three months of limited company and personal bank statements
• your proof of ID
• your current address
• proof of funds for your deposit
• if there has been any unexpected or unusual activity in either bank account, an explanation for the reasons it occurred.
Start looking when you get your offer
When you get your offer, the offer will only usually last for three months.
It’s better to start looking for your new house before the final offer but, if you’re being cautious, make sure you start booking appointment to view potential homes as soon as the firm offer comes in.