Contrary to popular belief, mortgages for those employed on a contract basis or who are freelancing does not have to be so complex.
If you have just started your first fixed term contract, or are perhaps considering making the switch from an employed position to a more flexible, contracting role, one question many ask themselves is “how will this affect my chances of getting a mortgage?”
For a contractor or freelancer, lenders do not have the luxury of assessing guaranteed employment and income. They therefore need to makes themselves comfortable that the income currently being received is going to continue. In order to do so, they will want to assess factors such as experience of the applicant in the given industry, their history of contracting, the length of the current contract and the likelihood of it being renewed. Lenders offering mortgages to contractors will each have their own criteria in line with this, and that is where it can get quite complex.
As a contractor you will go through 3 stages in a lenders eyes, assessed against the level of experience you have working on this basis. Below we have set out these stages and how this will affect your ability of obtaining mortgage finance.
Stage 1 – First Time Contractors
The first stage is a new entrant to the contracting world. Even at this very early stage, you are now able to be considered by certain lenders. These lenders would be able to consider an applicant on their first contract as long as they have a minimum of 6 months remaining on a contract with at least a 2 year uninterrupted history in the same line of work, be that on a full time employed basis or otherwise. There would be a minimum daily rate requirement of £312.50 unless you can be regarded as an IT Contractor where no such minimum rate applies. Once you have 6 months experience and if you have a further 6 months remaining on a contract or can evidence an extension to cover this time the minimum daily rate can also be waived for all other professions.
Stage 2 – The ‘Gold Standard’ Contractor
Once you have at least 2 years history of working on fixed term contracts in the given industry, a much greater number of lenders will be able to consider your application. These lenders will want to have seen contracts renewed previously, whether this has been on a 3, 6 or 12 month rolling basis and at least 6 – 12 months remaining on the existing contract, although as low as 3 months can be considered on a case by case basis. Once they have comfort that this criteria has been satisfied they will then look to assess the lending amounts available. With 2 years’ experience the requirement for a minimum daily rate will be far more relaxed.
A typical approach to lending multiples is to look at the daily rate, not including VAT, multiple this by 5 to give a weekly rate and then multiply this weekly rate by between 46 and 48 to allow for small gaps in employments and breaks for holidays. This will provide a lender with the ‘targetable’ annual income to assess affordability and the application.
Stage 3 – Mortgages for Self-Employed
Mortgages for self- employed are an alternative option for experienced contractors working on a gross pay basis. After you have been working as a contractor for a good length of time, typically 3 years +, and assuming you are responsible for paying your own tax, a whole new host of lenders will become available to you as you can now be regarded as truly “Self-Employed”. The vast majority of lenders are happy to lend to self-employed applicants, working as a sole trader or as a director of a limited company, as long as they can demonstrate earnings through three years’ accounts.
When assessing Self-Employed income lenders will fall in to two categories; those that take only the Net Profit Before Tax figure, and those that will look to assess the Directors Remuneration/Salary plus Dividends into account. A good broker can review business accounts, select the most appropriate lender and advise the best options and lending limits accordingly.
Many banks and building societies are more than happy to lend to contractors and freelancers, from those right at the start of the journey through to more experienced, long term contractors and business owners. The key is to identify the most appropriate lender and structure the right approach, which of course is best achieved working alongside an experienced, professional broker well versed in the requirements of contractors and freelancers.
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