Securing a contractor mortgage in the UK can be challenging, as many lenders do not fully understand the unique circumstances of contractors and view them as higher risk compared to salaried employees.
Unlike a typical salaried employee with a regular, fixed monthly income, a contractor's income can vary significantly and is not guaranteed.
However, with the help of a contractor-friendly lender and a specialist contractor mortgage broker, the process can be straightforward.
Here are 10 best tips for securing a contractor mortgage, designed to help you navigate the unique challenges of financing your home as a contractor. With the right preparation and approach, you can enhance your chances of approval and find the perfect mortgage for your needs.
This is by far the most important point out of all the 10 points. We cannot emphasise enough the importance of working with a contractor specialist mortgage broker.
An experienced contractor specialist mortgage broker understands the unique financial circumstances of contractors. They know which lenders are best suited for them and have access to a range of lending options tailored to contractors' needs, ensuring that their clients receive personalised advice and competitive rates.
With the help of their expertise, they can help you streamline your mortgage application process, avoid common pitfalls, and ultimately help you secure the mortgage deal available in the market.
Traditional high-street lenders often struggle to assess contractors, as their rigid lending criteria don't account for the fluctuating income patterns contractors face. This lack of understanding can make securing a mortgage far more difficult than expected. In contrast, contractor-friendly lenders are well-versed in assessing the unique financial circumstances of contractors and can offer more flexible terms and competitive rates. As a result, working with a contractor-friendly lender can significantly simplify the mortgage process. Therefore, it’s crucial to choose a lender who specialises in contractor mortgages.
As a contractor, it is quite possible that your income may see a change from time to time, resulting in a fluctuation in your daily pay rate. So, it is advisable to lock-in your mortgage rate when the situation is favourable to take the maximum advantage of your pay rate and get the best mortgage deal. Some contractor friendly mortgage lenders allow contractors to lock-in their mortgage rate months in advance.
One way to negate the chances of getting your mortgage application rejected or to increase the chances of your application approval, is by increasing your mortgage deposit. A larger deposit can greatly increase the chances of approval. Not only that, you it can also help you in securing mortgage at competitive rates. Aim for at least 15-20% deposit of your property’s value.
Your credit score play a very important role in securing a mortgage. Maintain a healthy credit score by keeping up with loan payments, and reducing outstanding debts. Plan ahead and stay away from any new debts and credit applications in the months leading up to your mortgage application.
Operating through a Limited Company may help in increasing the amount you can borrow as some lenders will base your mortgage application on your business’s net profits and director’s salary, rather than simply your income.
Not all lenders are well versed with the umbrella company pay structure, so if you are working through an umbrella company, your payslips maybe interpreted in the same way as an employed person’s income. So, it is important to choose a lender who has experience of dealing with umbrella company employees and are familiar with their pay structure. A specialist contractor mortgage broker knows which lender is good for contractors working through a limited company and which ones are best suited for umbrella employees.
This is yet another key factor that helps lenders decide. It is very important to keep your contracts up-to-date. To assess your earning potential, lenders may want to look at your current and future contracts. They might even look at your previous contracts.
If you can provide evidence of new clients, future contracts, or repeat business, it can significantly boost your credibility and increase your chances of approval.
Some contractors prefer to take breaks between contracts. While having a time-off is completely understandable, having long gaps between can significantly reduce the chances of approval. If you are planning for a mortgage, it is advisable to avoid any gaps between contractors, and maintain a continuous employment and steady income. Continuous employment will give lenders confidence in your earning capacity. Lenders appreciate stability, if you have been contracting for 2 years or more, you’re more likely to be approved.
Self-employed contractors need to ensure that their accounts are organised and transparent. Use a professional accountant who understands contractor-specific financial situations. Many lenders will want to see two to three years of accounts, so make sure they are accurate and up to date.
Last but not certainly not the least, take full advantage of your daily rate. Some lenders offer contractor mortgages based on your daily contract rate. They’ll multiply your day rate by the number of days you work annually (typically 46-48 weeks), which can demonstrate a higher potential income than simply providing tax returns. Make sure your broker knows which lenders operate this way.
From the outset, it may look like securing a contractor mortgage can be a challenging task, however, with the right approach and with the help of a contractor friendly mortgage lender and a specialist contractor mortgage broker, you can secure the best mortgage deal.
By following these 10 tips, you’ll be in a much better position to get approved and move closer to owning your dream home. We hope this guide helped you be better prepared to meet lenders' requirements. Always consult with an experienced broker to ensure you’re getting the best possible advice for your specific circumstances.
Remember to stay organised, work with professionals who understand your contractor status, and present your finances in the best possible light.