Even if you are a contractor with an impeccable credit record, it can be more difficult to secure a mortgage than it would be for an equivalent homebuyer in regular, salaried employment – particularly with mainstream mortgage lenders. If you are a contract worker who has experienced credit problems – from missed payments to more serious issues such as a CCJ or even bankruptcy – then you might understandably think that getting a mortgage would be impossible.
Fortunately, this isn’t necessarily the case. There are over 300,000 more self-employed people in the UK than at the time of the 2008-2009 recession, and with this massive shift in the workforce more and more lenders are developing policies and products that are better suited to self-employed people and contractors, as well as those who have poor credit scores. This is particularly true if you look beyond the big high-street lenders – there are dozens of smaller, niche lenders out there who have mortgages tailored for contractors and people with adverse credit records.
The Right Lender & the Right Broker Will Make the Difference
It is true that many lenders’ standard mortgage underwriting policies aren’t particularly suited to either contractors or those with a poor credit score. Lending policies are developed based on risk-based assessments of take-home pay and previous credit history, and can be fairly inflexible.
That means that those lenders with rigid lending policies and assessment criteria often fail to take into account the complexities of contractors’ finances – particularly if you operate as a limited company and draw a mix of salary and dividends to maximise tax efficiency.
However, lenders that do offer contractor mortgages are more likely to take a wider (and arguably more sensible) view of your income and earnings, for example by using your base contract rate to work out an annualised rate, on which they can then base their affordability calculations.
The Deposit Amount is Still Crucial
It is important to be aware of the realities of applying for a mortgage with a poor credit score. You may be more limited in the range of mortgage products available to you, which may mean paying a higher interest rate than you might otherwise be able to secure, at least initially – this is particularly true if you are taking out a mortgage specifically designed for applicants with an adverse credit history. You may also find that lenders ask for a larger deposit to be put down. This reduces the loan-to-value ratio on the mortgage, thereby limiting the lender’s exposure to risk.
For contractors with a poor credit score, there can be advantages in dealing with a suitably experienced mortgage broker, rather than approaching lenders directly. This route has two main advantages: you will have access to a wider range of potential mortgage options – including deals from more specialist niche lenders – and a broker who has dealt with similar mortgage applications in the past will have both the experience to help guide you through the process, and an understanding of how to deal with mortgage underwriters to ensure your application has the best possible chance of being successfully approved.