Contractor Mortgages: Tailored Solutions for Self-Employed Workers
The world of mortgages can be daunting, especially if you’re a contractor. While the flexibility and variety of work in contract roles are appealing, securing a mortgage may feel challenging due to the nature of your employment.
At Kerr & Watson, we understand contractor mortgages offering tailored advice to help you secure the mortgage you need.
What is a Contractor Mortgage?
A contractor mortgage is designed for individuals who are self-employed or work on short-term contracts, as opposed to those in permanent employment. This type of mortgage is tailored to accommodate the unique income structures that contractors often have. Generally, contractors include:
- Self-employed individuals working under their own business, such as IT contractors.
- Fixed-term contract workers who are employed for specific projects, perhaps 12 months at a time.
- Agency workers on a short-term basis.
- Zero-hour contract employees with fluctuating hours.
Given the variability of income associated with contract work, securing a mortgage can be more complex. However, with the correct lender, it is possible if you are meeting criteria, and working with a knowledgeable broker can make the process smoother.
Can Contractors Get Mortgages?
Yes, contractors can absolutely secure a mortgage. However, the types of mortgages available and the eligibility requirements can vary significantly depending on your employment status and history.
Key Considerations:
- Nature of Your Contract: Lenders will want to understand the type of contract you have, whether it’s a fixed-term, part-time, or freelance arrangement.
- Length of Time in Contracting: Some lenders prefer applicants with a longer history in contracting, typically at least 12 months.
- Income Fluctuations: If your earnings vary widely, lenders will closely assess your income history to establish how much you can afford.
- Gaps In Contracts: Some lenders get concerned if there are large gaps between contracts, either having a maximum gap criteria, to meet or needing an understanding to ensure the income is stable.
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How Do Lenders Assess Contractor Mortgages?
When applying for a contractor mortgage, lenders will assess your financial situation more rigorously than they would for someone in a permanent position. Here’s what you can expect:
Income Verification
Lenders often require proof of income, which may involve:
- Tax returns and assessments: Most will want to see your Self-Assessment (SA302) tax calculations and your tax year overview for the last two to three years.
- Contract details: A copy of your current contract is necessary to validate your day rate income and confirm how long your work will last.
- Bank statements: Providing several months of bank statements can help demonstrate consistent earnings.
Affordability Assessment
Lenders will conduct an affordability assessment to evaluate your ability to repay the mortgage. This includes:
- Assessing your average income: Many lenders will average your income over a period (usually 12 months) to determine what you can afford. Some lenders will use the value of your day rate and calculate that by the week rate and then a certain amount of weeks in a year, such as 46, to calculate the annual income. For instance, a day rate of £500 equating to £115,000.
- Debt-to-income ratio: They will look at your existing debts and financial commitments to ensure that the mortgage payment will be manageable alongside your other expenses.
How Much Can a Contractor Borrow?
The amount you can borrow as a contractor is typically calculated using income multiples. Most lenders will allow you to borrow anywhere from 4 to 5 times your annual income, depending on their criteria and your individual circumstances. As a result, you should always take professional advice to determine what you may be able to borrow in your own unique circumstances.
Factors Impacting Mortgage Eligibility for Contractors
Beyond income and deposit, several other factors can influence your eligibility:
Credit History
A good credit score is needed for some lenders. Lenders will look at your credit report to assess your financial reliability. There are lenders that can help borrowers with adverse credit and your mortgage adviser will be able to guide you here.
Age
Some lenders have age limits for mortgage applications, typically ranging from 25 to 75 years old. Your age can affect the term length of the mortgage they are willing to offer.
Contract Duration
Having a longer remaining period on your current contract can positively influence your application with some lenders.
How Kerr & Watson Can Help
The mortgage market can be complex, but at Kerr & Watson, we are committed to helping you secure the best possible deal. Our expert advisors understand the unique challenges faced by contractors and can provide tailored advice based on your specific circumstances.
If you’re ready to take the next step or have any questions about your eligibility, please contact us today. Our team of experienced advisors is here to support you every step of the way.
