Why don't lenders use annual contract earnings? Does that mean I can borrow more against my contract day rate?
The way lenders work out your affordability is crucial to getting a competitive rate. Most High Street lenders work to a salary model. For contractors, this is of little to no use.
What you need is for a mortgage provider to understand your contract. Not only that, but also how you keep drawings low for tax purposes. Now you can begin to see where it gets confusing.
You take home, in effect, a low salary. As such, you don’t fit their affordability criteria.
Lenders we deal with base their calculations on your contract rate, not net pay. They then project that rate to an annualised earnings total. This allows contractors to borrow a substantial amount more than High Street lending models.
I've just started contracting; will that affect my ability to get mortgage?
The calculation to work out how much you can borrow is quite straight forward. First, find out how much you earn per week. That’s day rate multiplied by 5, assuming you work the accepted work week. If not, times your day rate by however many days you do work.
Once you have your weekly total, multiply that by 48, how many weeks you work each year. This will give you your annualised earnings total.
The lender will then use a factor of either 4.5 or 5 to determine how much you can borrow. So if a contractor’s day rate is £300, they can potentially borrow up to £360,000. Or at the lower 4.5 multiplier, £324,000.
This is a lot less complicated than you’d expect. High Street lenders can ask for two or three years’ accounts to verify what you earn. Contract-based mortgage underwriting is different. It only calls for a copy of your current contract as verification. You must also submit your CV and last three bank statements to back it up.
There's only a short while left on my contract. Does that matter?
That you’re new to contracting will have no effect on your ability to secure a mortgage. Our relationships with senior underwriters mean we can still get you a mortgage, even if it’s your first week.
- A child or stepchild of the employee whose expense the child is maintained; or
- Resident with the employee and for whom the employee has parental responsibility.
You’ll not get access to such service in the vast majority of High Street mortgage lenders.
I've heard contractors need bigger deposits. Is that right?
We mean no disrespect to those advisers at your local branch’s front desk. But if they look at your take home and see that you’ve only a few weeks to run on your contract, they give up.
True, even contractor-friendly lenders like one month remaining on your contract. But if you have less than one month and your agency can express the likelihood of an extension, we have leverage.
If you’re in that position, speak to your agency or client. Most understand your predicament and may even offer you or negotiate a new contract to help your application.
Why do banks ask for two- or three years' accounts?
That contractors need a bigger deposit than permies is a myth. Even with just 5% deposit for a mortgage, we can secure competitive interest rates.
But that’s not to say you need stop at 5%. The more you can put down, the lower your interest rates over the mortgage term. Or at least the introductory period, if applicable. But that’s the same for mortgages whether you’re in gainful or self-employment.
Are interest rates higher for self-employed people?
We will help you prove your earnings in the way we package your application. Most High Street lenders perceive contractors as self-employed, thus a potential higher risk. That is why they demand 2 or 3 years’ accounts as proof of income.
As a contractor, this ‘evidence’ doesn’t reflect your limited company tax efficiency. That’s when you need a specialist broker on side to highlight your affordability.
We talk to senior staff and help them see your true earnings potential. They then base their offer on an enlightened view of what you can afford. Using annualised contract earnings gives you access to much more in most cases.
Is a self-certification mortgage still an option?
Through a specialist broker, that you’re a self-employed contractor won’t have a negative impact on your interest rate. It will at least align with rates that lenders offer permanent employees.
As stated above, the more you put down, the lower the rate your deposit will secure you. But you can still get decent fixed rate mortgages with 10% or 15% deposit.
If you’re a first time buyer you can get a 90% LTV mortgage at just 3.90% APR*, 2-yr fixed. A remortgage deal on 2-yr fixed at 85% LTV is even less, at 3.70% APR*.
*Rates are correct at time of print (Feb 2015). Your credit rating may affect the interest rates lenders offer.
What's to stop me going to a bank, now you've told me what I need?
The FCA banned self-cert mortgages in 2008. They’re not going to make a comeback any time in the foreseeable, either.
Believe it or not, contract-based underwriting was around even before the self-cert’s demise. But it was often easier for IFAs to ask contractors to self-certify their earnings. No one checked, advisers got paid and contractors were just glad to get a mortgage. Everyone was happy.
At least with self-cert gone, you can now get rates that reflect your earnings. Using your contract gives you far more options and better reflects your affordability, anyway. Some bemoan the passing of the self-cert mortgage; we’re not amongst that number.
How long do contractor mortgage applications take?
You’re more than welcome to test out what we say on the High Street. Under any other circumstances, we’d maybe even suggest that you do.
But knowing that failed credit searches impact your rating, we must advise against it. You might think you’re being smart by avoiding paying a small fee. But we’d suggest that going direct is not worth taking the chance. Here’s why…
…we’ve spent years dealing with senior underwriters at these banks and building societies. Even at the highest level, some lenders will not countenance contractors.
Yet they do not advertise this fact on the shop floor. You walk in, tell them you’re a contractor, they process your application. Great! What’s all the fuss about?
The problem is, they’re classing you as self-employed. They will ask for your accounts, accounts which show low drawings. They will use this figure to work out how much you can afford. They may even give you an agreement in principle. And that’s where it all falls down.
When that application gets to their underwriters, it will fail. They’ll take one look at your take home pay compared to the amount you want to borrow and reject it.
Understanding contracting as we do gives us – and you – an unparalleled advantage. We’ve already done – and continue to do – the leg work. Senior underwriters, trust us because we go to these lengths. As a result, they’ll assess your application on only the points that matter.
Even if you go direct to these same lenders, you cannot guarantee the same result. Advisers in branch are rarely trained to understand the way contractors work.
Their default mortgage process asks for two-to-three years’ accounts from the self-employed. They’re indifferent to the fact that you’re a contractor with high potential earnings.
If you’ve only just begun contracting, this is where your quest for a mortgage ends at the high street at least. Any hopes you had of getting a mortgage there, will go up in flames.
Do remember the effect that failed credit applications have on your history. You’re risking a black mark against your name that other lenders will see when you go to them. Even if they’re ‘contractor-friendly’, you don’t want to give them an excuse to find fault in your application.
Okay - I need contract based underwriting. Who can help me?
Your first step is to secure an Agreement In Principle (AIP). This will give you more bargaining power in the market as it shows you’re serious. It is not, however, a firm mortgage offer. Don’t fall into this trap and don’t commit to anything until you have that firm offer.
The reason we say this is because lenders unfamiliar with contracting offer AIPs based on your gross earnings. They don’t relate them to your accounts, but send your application to head office anyway.
Once that application gets to the underwriter, they reject it. Branch staff don’t understand how to package your application to show your true earnings potential. Again, this is why going through a specialist broker is so critical.
I digress, but it had to be said. Anyway, before we can get you a genuine AIP, you must first complete a “Fact Find” questionnaire to enable us to pre-assess your situation which will give us more information about the way you trade and your contract details. This includes a signed copy of your contract, bank statements and ID. This information is necessary to give your application its best chance of success.
But compared to other applications, there is very little information. A contractor mortgage application can complete within three to six weeks. Only if there’s a problem or build-up of applications will it take longer.
Now that you’ve grasped the basics of contractor mortgages, you’re going to want more. Especially if, like so many, you thought mortgages were beyond your reach.
There are plenty of ‘Contractor Mortgage Specialists’ in Google. Or so they claim.
The reality is that many companies you see are agents on commission. Most don’t understand contracting and freelancing. Even more offer mortgages from lenders who don’t have bespoke policies for contractors.
But how do you tell the difference between affiliates and genuine brokers? It’s too difficult to tell from the scant information there.
We had to think of a way to save our loyal readers (that’s you!) time, hassle and money. So we did. Freelancer Financials will offer you free advice over the phone or you can fill in a form and ask them to call you when you’re ready. Talk about service!