Read on below for a guest article by CMME.
This article is for information purposes only and should not be seen as financial advice. You should always check the terms and conditions and consult with your accountant or a finance expert for any tax advice.
Contractor Mortgages: All Your Questions Answered
Are you thinking about your next mortgage or maybe taking your first step onto the property ladder? If so, you might be wondering how recent changes will affect your mortgage application? We understand that your circumstances as a contractor may be a little more complex than a ‘typical’ mortgage client and applying for a mortgage may seem more challenging. That is why we have enlisted the help of our expert mortgage partner CMME to address some of the most frequently asked questions by contractors.
What is a contractor mortgage?
A contractor mortgage is specifically designed for professionals without a permanent position – usually associated with contractors, independent professionals, freelancers and umbrella employees. Many lenders may turn down contractors because they prefer applicants in full-time employment, who they see as ‘lower risk’.
Whichever category you fall into, if you have gone through the mortgage process before, you may have experienced a few hurdles along the way. This is because many lenders may be deterred by a contractor’s complex remuneration structure that does not neatly fit within any of the high street lenders’ standard box-ticking criteria. This is where a specialist mortgage broker with experience in dealing with contractors comes in.
What are the common pitfalls of securing a mortgage when self-employed?
A contractor mortgage is no different from any other mortgage in terms of pricing. The difference is how the lender assesses your application. Before they agree to lend you money, they will want to see evidence of your income and your finances in general, so you may need to take steps to prepare your accounts and documentation to improve your chances of meeting the lender’s criteria.
Findings from CMME’s 2020 research on self-employed homeownership in collaboration with IPSE (The Association of Independent Professionals and the Self-Employed) revealed that 96% of respondents had to provide more paperwork when applying for their mortgage because they were self-employed.
However, it is important to note that different lenders have different lending criteria; some might request proof of spending a ‘substantial’ time in their current role in order to minimise the risk of lending to you. This can cause problems for contractors who only spend a short time in each role, though there are underwriters who can skip this aspect of the assessment process altogether on the understanding that contractors do not conform to the expectations one might have from someone in traditional employment.
So, even if you are new to contracting, there should be lenders who will understand your situation and make you an offer based on their understanding of the nature of the work.
Will a rolling contract cause any issues with my mortgage application?
A rolling contract is acceptable in this case, but will normally need to be supported by a letter from the end client or agent to confirm how long they expect the contract to continue. There is flexibility on this, however, it should provide a guide for an underwriter to follow.
Will using an agency umbrella payroll company affect my chances of getting a mortgage approved?
Working through an umbrella company should not cause any issues as long as the lender’s underwriter can clearly see the income via the payslips, contract, and bank statements.
Will significant breaks between contracts have an impact on being approved for a mortgage?
Most lenders will have a different approach to gaps in contracts, however, many will take an open approach to this if they can see a clear view of the client’s history leading up to the gap and an acceptable explanation for the break in work. A new contract would need to be in place at the point an application is submitted. Every lender will take a different view of the length of the gap, so it is important to discuss this upfront with underwriters before an application is submitted.
Will I need a big deposit as a contractor?
The average deposit requirement is usually in the region of 10%-25%. However, from 19th April 2021, first-time buyers are able to benefit from various help-to-buy schemes.
The mortgage guarantee scheme was designed to help buyers with lower deposits pursue their mortgage plans by offering 95% mortgages with just 5% deposits up to a property value of £600,000. Now in full swing and available until December 2022, the scheme is accessible to both first-time buyers as well as existing homeowners.
I’m a first-time buyer – is there anything I can do from a self-employed perspective to help my application succeed?
Although the mortgage process may seem daunting at first, whether you’re a first-time buyer or an existing homeowner – there are certain steps you can take to improve your chances and get yourself in the best position to secure a contractor mortgage:
1. Check your credit report: maintaining a high credit rating is an essential step and although it will not guarantee approval, it will certainly increase your chances.
2. Improve your credit score: if your score is not currently in the best position for a mortgage application then naturally, improving it is the next step. Here are a few tips to get you started:
register on the electoral roll;
– pay off existing debt;
– don’t miss bill payments – pay on time;
– check for any errors and have them removed;
– don’t undertake credit searches before you look at mortgages;
– consider a credit score tracker, such as Credit Karma, for tracking and helpful tips for improving your credit score.
3. Get your paperwork ready: whether you are self-employed or have switched over to umbrella employment, obtain a copy of your current contract, as this will be used to demonstrate your earnings.
4. Review the marketplace: research the marketplace to determine what type of mortgage might suit your individual needs and investigate all costs associated with the property, e.g. a leasehold flat may incur monthly and annual charges in England and Wales, including council tax, insurance and utility bills.
5. Speak to a specialist: the reality is that some mortgage lenders have little understanding of the self-employed sector, which means that their standardised procedures may not accommodate contractors.
Speak to an expert
Our partner CMME specialises in providing mortgage advice for independent professionals, with access to some of the most competitive rates on the market. So however you choose to work, CMME will fight your corner and ensure the right mortgage deal is available to you. Learn more here.
Your property may be repossessed if you do not keep up repayments on your mortgage.
