Finding the mortgage deal that’s right for you can often be a headache, and the process is made no easier if you’re a contractor or freelancer. It is not uncommon for contractors to find lenders' lending criteria too rigid to fit their requirements, and as a result are left confused about what mortgage options are available for them.
The problem that contractors and freelancers face when they try to find a mortgage is often down to income - with no guaranteed salary provided by an employer beyond a set contract term, banks and financial institutions can be more selective on who they will and will not lend to.
The good news for contractors and freelancers is that there are a wide range of contractor mortgage specialists and lenders who are willing to consider applications from borrowers with irregular income.
In regards to the mortgage deal itself, there is no difference. The same mortgage deal is available to both contractors and those who are in regular paid employment; the main difference between the two is the assessment criteria and underwriting process.
Whilst standard mortgage lenders tend to assess your affordability based on your salary, the majority of contractors operating in a tax-efficient way draw a minimum salary and restricts dividend drawings to avoid higher tax. Although this may be advantageous from a tax planning perspective, it also means that you reduce the amount that you can potentially borrow under the criteria used by high street lenders.
A contractor mortgage is based on your gross contract earnings, which means you can borrow substantially more than you would if you were applying for a trading account.
You should also consider what repayment option is most suitable for you based on your personal circumstances before committing to a mortgage. Similarly to traditional mortgages, as a contractor there are three different ways in which you can repay your mortgage.
In order to have the best chance of having a competitive rate mortgage accepted you should:
Have a recent copy of your contract – In order for lenders to gain a clear picture of your income, you’ll need to have an up to date copy of your most recent contract handy. This will give an indication as to your typical payment rate and the duration of your contracts.
Have savings to put down on a deposit – The higher the deposit you are able to put down on a property; the less the perceived risk is in lending you money. A hefty deposit can also result in lower interest rates. For your best chances of securing a competitive mortgage deal you should aim for a 10% to 25% put down.
Have a clean credit history – Having a good credit history reassures lenders that there is no issue with you making repayments on your mortgage, and will be more inclined to lend to you.
Know what you can afford – It is worth taking into consideration that the figure a lender offers you (based on a multiple of your contact rate) might be more than you can afford to payback. Additionally, you should recognise that if you’re on a variable rate that these repayments can change, and you should be certain that you will be able to meet these fluctuating payments.
Ensure your accounts are in order – When considering your application, lenders will want to see around 2 years of accounts plus your most recent SA302 form. This form will help given an indication as to how much tax you owe in a given tax year.
We work with the majority of UK mortgage lenders, which means we have access to contractor friendly lenders with flexible criteria and competitive rates for contractors and free lancers. Our team of mortgage specialists can help evaluate your personal situation, and find a mortgage that fits your contractor needs.