What contractor mortgage lenders look for in a borrower
Customers often ask us “can I get a mortgage as a contractor?” and the answer is likely to vary from lender to lender, based on a wide range of variables. Along with the usual criteria – such as your age, credit rating, income and the property type (which we will cover in more detail later).
Contractor friendly mortgage lenders take the following factors into account when deciding whether you’re eligible for a mortgage…
- The type of contractor you are
- How long you’ve been contracting for
- How long you’ve worked in that industry
- If you have had contracts renewed before
- How long you have left on your contract
What type of contractor mortgages are there?
There are mortgages for the following types of contractors in the UK (usually in any industry)…
Self-employed contractors:
On day one of a contract, as long as it’s at least six months long
Employed fixed or short term contractors:
Previous contractor experience is usually required
Umbrella company employees:
12 months working history usually needed
Zero hour contract workers:
With at least six month’s working history.
Agency workers:
12 months of working history is typically needed.
Why you should speak to a specialist contractor mortgage broker
Contractors in the market for a mortgage should always start by seeking bespoke advice from a specialist contractor mortgage broker because mainstream lenders may not understand the complexities and challenges faced by borrowers who make their money this way, and may therefore offer you less favourable rates or turn you away altogether.
For example, Halifax contractor mortgages for those employed on zero hour contracts require the borrower to have been working this way for at least 12 months (with the same employer or different employers in the same field) but specialist lenders can cater for borrowers with 6 months’ history.
With specialist advice from a whole-of-market advisor, like the ones we work with, you will have access to all of the best mortgage lenders for contractors in the UK, and can rest assured that you will be introduced to the right one for a borrower with your needs and circumstances.
Getting the best mortgage rates for contractors
Customers often ask us “what are the current contractor mortgage rates?” and we always point out that they can fluctuate and change at the drop of a hat, depending on the market conditions.
The key to getting on the most favourable contractor mortgage interest rates is by meeting the eligibility requirements at as many contractor mortgage providers as possible and seeking advice from a whole-of-market mortgage broker who specialises in contractors.
Requirements:
Information on how long you have been trading, how long remains on your current contract, contract renewal details, the type of contractor you are.
Age limits:
Depending on the lender you may need to be over 25. Upper age limits between 75 and 85 may also apply.
Bad credit:
As lenders in this sector are already taking on a level of risk, getting a contractor mortgage with bad credit will be very difficult but not impossible if the adverse credit is over 2 years old.
Mortgage types:
Most lenders will only offer repayment mortgages however, with the right advice, other mortgage types may be possible.
Can I get a contractor mortgage with no broker fee?
Whilst its true that some brokers don’t charge fees, fee free contractor mortgage brokers tend to focus on simpler cases. We are often approached by those who have been turned away, and the experts we work with are able to help.
The contractor mortgage advisors we work with only charge on success, so they will refund any upfront broker fees if they fail to secure an agreement in principle for your contractor mortgage – and will even do so if the deal breaks down at a more advanced stage than this.
How much can I borrow on a contractor mortgage?
This depends on:
- The contractor mortgage calculator your lender uses,
- The type of income you have and
- How the mortgage provider works out your affordability.
If you’re a PAYE contractor seeking a mortgage, the lender will usually take into account your gross basic salary along with any regular bonuses and overtime you evidence (although some providers place a cap on the percentage of this supplementary income they will accept).
If you’re self-employed, finding a specialist lender who will offer you a contractor mortgage based on your daily rate could be the most viable option.
They will calculate your income by taking your day rate and multiplying it by the amount of days you work each week x48. If you multiply this figure by four (a typical lending multiple), you will get a rough idea of how much you could borrow.
However, you should note that some mortgage lenders for contractors are more generous than others are more generous than other and may go up to five or even six times that figure.
For example, a contractor on £300 per day could potentially raise £288,000 from a lender who offers x4 income multiples, but from a lender who goes up to x5, they could get a £360,000 mortgage.
How much deposit do I need for a contractor mortgage?
For lower-risk borrowers, it should be possible to get a contractor mortgage on a residential property with a 10% deposit. This means that the loan would be offered with a 90% loan to value ratio, and to get the lender to agree to that, it will help if your contract has been renewed at least once and has a minimum of six months left to run on it.
Most lenders will accept a 10% deposit for a contactor mortgage, but some might expect 15-20% if there’s risk involved in the deal (e.g. bad credit, non-standard construction). A few, however, might consider offering mortgage with a loan to value (LTV) ratio of 95%, under the right circumstances.
It may be possible to get a contractor mortgage from certain specialist lenders with a 5% deposit, thanks to government schemes such as Help to Buy.
Can I take advantage of the Help-to-Buy scheme?
The government’s Help to Buy scheme provides a low interest loan to beef up the size of a borrower’s deposit to help them get a foot on the property ladder.
Some contractors will be eligible for the scheme, and like everyone else, they will need to contribute 5% of the deposit themselves and the property they’re in the market for must be a new build worth up to £600,000.
It must also be their main residence and the mortgage type is limited to capital repayment.
The equity loan will cover 20% of the cost of your home, so you will need a 5% deposit and a 75% mortgage. You won’t be charged fees on the loan for the first five years of your home ownership.
Although it’s very much possible to apply for the Help to Buy scheme if you’re a contractor, the way some lenders assess your affordability and declarable income could complicate the deal and put you at risk of ending up on unfavourable rates or being turned away altogether.
It’s therefore essential to seek specialist advice from a broker with access to the entire market if you’re after a Help to Buy contractor mortgage. The advisors we work with can connect you to the lender best positioned to offer you a good deal under these circumstances.
Are there offset mortgages for contractors?
With an offset mortgage, you can balance your savings against your outstanding mortgage balance. To qualify for this product the borrower’s mortgage and linked savings account must be with the same lender. The balance in your savings account is ‘offset’ against the mortgage balance and you would only pay interest on the difference between the two figures.
Offset mortgages are popular among contractors with substantial savings as they are often flexible and can help borrowers avoid savings interest. Offsetting a mortgage against a savings pot allows you to overpay one month and pay less the next, should that be your preference, and that can be useful for anyone whose income is likely to fluctuate from one month to the next.
Not all lenders provide offset mortgages, so you will belong to two niche categories if you’re a contractor seeking one. With this in mind, it’s essential to seek whole-of-market advice to make sure you find the lender best positioned to arrange offset mortgages for contractors in the UK.
Are there buy to let mortgages for contractor?
Yes! And the complexity of your income won’t be an issue with some buy to let lenders. Many mortgage providers in this sector will be more interested in the viability of the investment, i.e. whether the BTL property’s forecast rental income will cover the mortgage payments. As long as the expected rent covers the mortgage payments by 125-145%, most BTL lenders should be happy.
As long as the lender is confident you can cover the mortgage this way, factors such as how long you have been in your contract and how long is left to run on it will be of lesser importance to some BTL providers, although others may insist that you have a minimum amount to run on your contract.
Furthermore, certain BTL mortgage lenders have minimum income requirements (around £25,000 is standard) and are more likely to demand this if you’re a first-time landlord.