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Listen below as Michael Webb talks all about mortgages for Contractors.
Are there specific mortgages for contractors? How does it work?
There are sometimes some specific deals and mortgages for contractors and there are lenders that specialise somewhat in contractor applicants.
But generally speaking, a contractor would just apply for the best rate that suits their circumstances and overall situation from any relevant lender. So whilst there can be specific mortgages for contractors at times, they won’t necessarily be the most suitable. What’s more important is the lenders’ specific criteria to assess a contractor for a mortgage application.
Do all lenders provide mortgages for contractors?
Yes, but they will all treat the individual application differently. Each has their own assessments and requirements of that contractor. We’ll get into some of those requirements as the podcast goes on but, in essence, as long as you have an income you can apply for a mortgage.
It is then just finding the lender that best suits your situation and will be most beneficial to you – whether that means better rates, better income multiples or a better assessment of how your income is structured.
How much can contractors borrow on a mortgage?
Assessment for a contractor is a little bit different to someone who is PAYE employed. How much they can borrow will differ quite significantly from lender to lender, depending on how that lender works out what income to use.
Different types of people fall under a contractor setup. One of the most common contractors we will deal with for mortgages are IT contractors. Typically they are paid a day rate and have a contract for three, six or 12 months. Contractors tend to move around for employment and regulations have been brought in so that they can’t contract for the same employer for longer than about 24 months – otherwise they start to be deemed employed.
Some lenders will assess that day rate annually, over 46 or 48 weeks, to allow for holiday that you’re not paid for. Some contractors will run a limited company for tax benefits. They take PAYE income from the limited company and possibly dividends. A lender may assess a couple of years’ company history and take income as salary plus dividends.
The other popular area is CIS (Construction Industry Scheme) contractors, and we can look to assess mortgage applications in a couple of ways here as every lender treats them differently. In effect, these individuals are self-employed and the CIS allows flexibility so that a company doesn’t have to hold contractors on their PAYE books when they’re not needed for the construction project. Plus it allows contractors to do different jobs.
Because you are taxed at source on CIS and typically get a payslip, 20% tax is deducted by the employer and you have to do a tax return. Again, there’s a couple of ways this can work. If you have a history of at least three months in the CIS, a lender may well just treat you as employed because you’re taxed at source. That’s a very common way. The lender Halifax is very good with CIS mortgages.
The other route is for the lender to ask for your SA302 – your tax returns – to see what your net income is. However expenses can affect that net income, so CIS individuals can typically borrow more if the lender uses their payslips pre-expenses.
Generally it’s difficult to say how much you can borrow until we can assess actually what income is being used. Then we need to assess whether you’re looking for the maximum possible borrowing, in which case we’ll go to lenders who will give you the highest income via their own calculations. Typically you can borrow between four and five times that figure.
How do contractors get a mortgage?
It’s not too different from an ordinary mortgage application. You’ll go through the same process, to gain an Agreement in Principle and then submitting a full mortgage application.
The difference is whether you’re working with a mortgage broker who understands contractors, their income sources and structure, and lenders’ criteria. A good broker can maximise the usable income and present that case to a lender that’s most suitable.
We very often help people who have tried to do it themselves – usually applying to their own bank, and that bank isn’t so good at underwriting for contractors. They might ask for things that don’t line up with the individual circumstances and in the end the application is rejected.
So the first thing if you are a contractor is to speak to a mortgage broker and get some advice on how the lenders will assess your income. We’ll explore how long is remaining on your contract, whether it will be renewed and if you have other contracts lined up. Then we’ll take your application from there – it can be very complex to navigate by yourself.
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How is a contractor’s income assessed for a mortgage? What documents will I need for a contractor mortgage?
CIS workers typically need payslips. Most construction contractors are paid weekly so the lender will ask for 13 or 14 weeks minimum and take an average of your earnings over that period. A lot of CIS workers have been in the scheme for many years, which makes it fairly easy to assess your income.
The other documents you would need are bank statements showing income received and your outgoings.
With other kinds of contractors, most lenders are going to ask for some form of CV detailing the history of your employment. They will ask for your current contract to show what your rate is and then apply their own calculation on how much of that they will take. They will also ask for details of any future contracts. For example, if you’re on a contract with a month to go and it’s been renewed, they will ask to see the renewal.
You will also need bank statements to show income received. It’s very common for contractors to run limited companies, in which case you may be asked for your company accounts and bank accounts as well as your own personal tax returns: the tax calculation and tax summary overview.
If the lender is just going to go off your contract day rate over a 46-week total for the year, that income will be more than PAYE and dividends from a limited company.
Some lenders might even allow for 48 weeks work in a year, while others might only take 45 weeks. A good mortgage broker that works with contractors regularly will be able to direct you to the most suitable lender for your application and get it right the first time. How do you strengthen your mortgage application as a contractor?
It’s the same with any mortgage application, really. Keeping your credit file in good order is first and foremost. Manage your bank accounts well – don’t go overdrawn where possible, don’t have lots of debts, pay your bills on time, and avoid missed payments… all of those will strengthen your overall credit score.
The other thing that helps your mortgage application – although not essential – is longevity within the contractor industry. That’s why some lenders will ask for your CV. They want to see a history of working and getting new contracts. If you can demonstrate that you have no big gaps in your contractor history over a long duration, that will give the lender more confidence.
If you have six months remaining on your contract and you’re asking a lender to commit money to you for 25 years, they need to be confident that you’re able to pay that money for the long term.
How does it work for contractors seeking a joint mortgage?
The contractor part of the application would be underwritten as I’ve described, and then it depends on the other person’s situation. If they’re just PAYE employed then they just need three or six months’ payslips and corresponding bank statements. That’s very simple.
If they’re self-employed it’s the usual self-employed underwriting. There’s nothing stopping someone on a contract from applying with their partner for a mortgage. The underwriting requirements to get a mortgage as a contractor will not change in relation to who they’re applying with. Each lender will have their own criteria for how clients need to pass underwriting for the mortgage.
What else do we need to know about contractor mortgages?
I would just stress that if you’re looking to get a mortgage as a contractor – be that a CIS contractor, an IT contractor or any other kind of contractor – there are regulations about how your income works. These carry over into how the mortgage is underwritten.
Even on the high street, the criteria across lenders varies significantly, as does their attitude to risk on lending to contractors. So take the time to speak with a mortgage broker and get advice. Contractors need to get the correct advice from a professional – it’s even more important for these individuals.
Your home may be repossessed if you do not keep up with your mortgage repayments.