Steven Hargreaves from the Mortgage Co talks us through mortgages for contractors.
Are there specific mortgages for contractors?
It’s not a straightforward yes or no answer. There are lenders who treat contractors more favourably and some that look at them less favourably – but you wouldn’t call it a specific contractor mortgage.
It’s all based on how each lender assesses your income. There are a number of different types of contract – fixed term contract, construction industry, piecework, temporary… and all lenders have slightly different criteria to how they assess income.
So there isn’t a specific contractor’s mortgage and how lenders assess income will differ.
Do all lenders give mortgages to contractors?
I can’t think of a lender that doesn’t, but there can be a huge difference on how much a client can borrow. I had one case last year where one lender offered £110,000 and another would lend over £250,000.
Both banks would still lend to that client, but how much they could borrow differed significantly.
How much can contractors borrow on a mortgage?
There are standard income multipliers, but what’s important is the income figure that’s put into the multiplier. Whether a lender is offering 4.25 times your income or 5.5 times, it’s irrelevant if they are putting different numbers in at the front end.
I’ve just done a construction industry scheme mortgage this week, which is a contractor mortgage, and one lender classed the client’s income as £28,000 while another lender assessed it as £38,500. So there’s a world of difference in how lenders calculate income.
This particular client needed the higher income multipliers on the higher income, so we used that second lender. It can be a bit of a minefield. A lot of clients come to me saying that they’ve contacted their normal bank and they won’t lend. It normally isn’t a case of not lending – they just won’t offer enough due to how they assess income.
What if I have bad credit as a contractor?
Clients with poor credit may still be accepted, it can just be a little bit more difficult. Lenders in the current market tend to be a little bit cautious [podcast recorded in June 2023] . They are certainly looking for squeaky clean credit at the moment.
How is a contractor’s income assessed for a mortgage?
It’s very specific to what type of contract you’re on. If it’s a fixed term contract you will often be paid a day rate. With many lenders, if your day rate is £100 they would simply multiply that by 7 for a weekly rate, then take that over 46 weeks for a year. With some lenders they assume it’s 48 weeks. That would be taken as your salary.
If you are on the Construction Industry Scheme (CIS) some would class you as self-employed, in which case they would look at your tax calculations or what people call the SA302. Others would class you as employed and require payslips.
What documents does a contractor need?
Every lender has a slightly different criteria and guidelines to the paperwork they need. We would guide you based on the type of contracting you do. It could involve tax records, payslips, company accounts or current contract details.
The important thing about a contractor mortgage is how long you’ve been doing it and your experience. Most lenders look for at least two years’ industry experience and the majority are looking for at least a 12 month fixed term contract.
This slightly differs with some lenders but it does come down to track record. If you’ve just changed industries in your employment and the new employer’s offered you a fixed term contract, it would be very unlikely you could get a mortgage. You have no experience in that industry and no experience of working on a fixed term contract.
What can I do to improve my chances of a good mortgage deal?
Having all your previous contracts available is important. Recently I worked on a case where a contractor only had three months left on his current fixed term contract. The lender wanted to see their track record, so we provided them with all the details of contracts for the past four years.
It was important because his current employer couldn’t confirm whether the contract was going to be extended. It has been extended since, but it was that uncertainty that caused the concern. If you have a good track record with minimal gaps between jobs, the length of your current contract might not be a problem.
What about contractors buying on a joint mortgage?
It makes no difference at all. The lender would assess each person individually. I’d collect all the documentation for the contractor and at the same time the details for the other person, whether they were employed, self-employed or also a contract worker.
We assess everything at the same time. There’s no issues for a contractor here. Having another party on the mortgage just adds to affordability and generally increases how much you can borrow.
What else should we consider with a contractor mortgage?
You really do need to see an independent mortgage broker that covers the whole market, because there are so many different income calculations. One lender may not be able to lend as much while another will offer you a lot more.
You really do need to explore the whole of the market rather than just going to your own bank or building society, because they differ so greatly for contractors.
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