There are all sorts of horror stories about contractors and mortgages, and while it’s true that there will always be some people who struggle to get finance, that struggle generally has more to do with credit status than employment status. As a successful contractor you are likely to be earning more than a permanent employee at the same level, which means you can potentially save more for a deposit and borrow more for a property. Despite this, certain myths persist; here we’ll take a look at six of the most common ones and consider them in context.
Top Contractor Myths Busted
1. To even be considered for a mortgage, contractors need to be able to put down a huge deposit – at least 50% of the purchase price
While 100% mortgages effectively disappeared from the market following the 2008 financial crisis, today most lenders are willing to lend up to 90% of the purchase price to those who gain approval, whatever their employment status. The government’s Help to Buy schemes have also helped make 95% mortgages more widely available to those who meet the eligibility criteria. While it can be to your advantage to put down a bigger deposit if you can afford to – a lower loan-to-value ratio often means more attractive mortgage deals – it won’t be a barrier to your being granted a mortgage if you are not able to.
2. Contractors are charged higher rates of interest
Generally speaking, contractors can expect to have access to the same mortgage interest rates as people in permanent employment. In fact, since contractors’ professional rates of pay will likely mean your income is higher than that of someone doing an equivalent job as an employee, you might well qualify for deals with a lower mortgage rate as a result of being able to put down a bigger deposit.
3. Contractors need an established history of success – either several years’ worth of accounts or a minimum of six months as a contractor
While not all lenders are equally sympathetic to mortgage applications from contractors, with some lenders it’s possible to arrange a mortgage based on your current contract rate, or with just one year’s accounts. You usually won’t need to be able to prove that you have been working as a contractor for however many months or years, or be asked to produce two or three years’ worth of accounts.
The key issue is whether you can show your ability to repay the loan – so you need to be able to prove income, whether it comes as net profits, a salary and/or dividends or simply a copy of your current contract. Certain lenders will even consider those on zero-hours contracts; although if this is the case, you would very likely need to be able to offer proof of income for a longer period, say a full year.
4. Contractors are higher risk than people in permanent employment
Ultimately, every lender decides whether or not to approve a mortgage application based on an assessment of risk, using both the information you provide and your previous borrowing experience. If you have the necessary deposit available, a good credit rating and are able to show you can make the monthly payments by supplying the relevant documentation as required by the lender, then it doesn’t matter whether you work for yourself or someone else – you’re classed as a low-risk borrower. Similarly, if you have little or no savings, a poor credit rating and insufficient evidence of your ability to repay the loan, then it’s likely you will be regarded as a higher-risk borrower, irrespective of your employment status.
5. Contractor mortgage applications take longer to be approved
Provided you fulfil the necessary criteria, it will not take any longer to approve a contractor mortgage than any other type of mortgage. One thing that can often slow things down in non-contractor mortgage applications is the process of obtaining the necessary number of payslips, but as a contractor these may not even be required – provided you have the necessary documentation such as your current contract, that’s possibly all you would need.
6. Contractors need to be in a long-term contract to be able to get a mortgage, and even then they can’t borrow much
Lenders – especially non-mainstream lenders that specialise in providing contractor mortgages – assess each case on its individual merits. While the majority of lenders prefer to see at least 8 weeks remaining on a contract, this isn’t a hard-and-fast rule and, as mentioned above, some lenders will even consider those on zero-hours contracts. As to how much you may be able to borrow, here’s a quick calculation to give you a ballpark figure (assuming a 5x income multiplier):
(day rate) x (days worked per week) x (number of weeks worked per year) x 5 = lending limit
For example, if your rate is £200 per day, assuming you work a five-day week, and after taking into account bank holidays and personal holidays, you work on average for 48 weeks per year, then your potential borrowing could be up to:
£200 x 5 x 48 x 5 = £240,000
The figures speak for themselves: the simple fact of being a contractor need not prevent you from getting a mortgage, nor borrowing the amount you need to.