Contractor mortgages: how to make the impossible possible
Contractor mortgages are currently a hot topic in the world of brokers. I’ve noticed an increasing number of contactors this year in the City, especially when I’m out and about at client meetings and from the types of business we are placing with lenders. A few of the reasons for this trend could include the fact that in some cases contracting pays more than the permanent market, there can be more flexible working options and just the sheer nature of project management work which can be short-term.
Some ‘specialist’ mortgage brokers like to imply in their posts on social media that getting a mortgage for a client working as a contractor is tricky. I don’t agree. I personally think they say this to justify the broker fee they choose to charge for the advice. In reality, mortgages for ‘high value contractors’ are generally relatively simple to arrange once you understand the client’s profile and situation.
Unfortunately, I think clients worry that their status as a contractor affects their ability to get a mortgage. Whilst this might be true of some of the high-street, this is not the case for the whole of the market.
A couple of my close friends work in this way and both were panicking about getting a new mortgage when it was time to move home. I’m pleased to say that both sailed through the lenders’ underwriting process without any questions being raised.
For high value contractors (typically earning £75k or more per annum) the rules are relatively simple. Every bank has its own policy of course and a good broker can guide a client towards the right lender for their situation. There is one high street bank who should spring to mind for any broker looking to place a high value contractor case and are a lender that really understands the nature of contacting.
The policy key points are as follows:
• If a contractor is earning more than £75k per annum the lender will generally class the client as employed when assessing the income.
• The lender works off the current contact rather than some other old school lenders who look at the last two- or three-year contacts and average the day rate value.
• The lender wants a two-year track record in the industry the contract is in but will accept a first-time contractor as long as they have two years in the same role previously, even if this two-year period was employed.
• Ideally the lender wants to see that there’s six months left on the contract at the time of application, but this is not always essential.
• The contact can be short-term or fixed contract.
• IT contractors have no minimum income to fit the above policy the lender will work off whatever the day rate is.
Now for the maths. As you can see the above will cover most contactors with a day rate of £315 per day or more as long as they have experience in the current role they are looking to work in. The lender typically takes day rate x 5 days x 48 weeks to allow for four weeks annual break when assessing a client’s annual income.
A client with £500 as a day rate would have an income of £120k in the lenders opinion. A typical income multiplier would be 4.5 x sole or joint income, with the lender also looking at client debts or childcare costs in the background. The minimum deposit would be 5% of the purchase price although I would encourage a client to aim for 10% for better long-term value.
For a buy-to-let case the policy is very similar albeit with a different lender.
Contractor mortgages really don’t need to be overcomplicated, it’s simply a matter of knowing which lender is most likely to be able to interpret a client’s situation and understand their income patterns. As I always say in my blogs this is where a good broker can make the whole process a lot simpler for you.
If you’d like to know more, please get in touch for a chat.