How Just Mortgage Brokers Can Help You
Many contractors and other self-employed people have concerns about whether they will be able to get a mortgage, how much lenders will be prepared to let them borrow, and whether they will have to pay higher interest rates than other mortgage customers. It is unfortunately true that some lenders – especially the more traditional high-street banks and building societies – have often been less willing to lend to contractors, in comparison to individuals with a permanent job who they perceive as being lower-risk borrowers.
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Mortgages for IT contractors
The attitude towards self-employed lending is often driven by a lack of flexibility in assessing contractor income – in the absence of employer’s payslips, a lender has to work harder to understand the level and consistency of a contractor’s pay, and therefore their ability to repay the mortgage.
If you’re reading this as a contractor – particularly an IT contractor – you’re likely to see the irony in this position. Many IT contractors are established professionals who can command pay rates exceeding those of similarly experienced PAYE employees. The typical IT contractor also tends to manage their finances carefully; many maximise tax efficiency by operating as a limited company, while others may pay tax and National Insurance contributions through an umbrella company. So are there lenders out there who recognise that contractors aren’t automatically “mortgage misfits” who represent a greater lending risk?
The good news is that it is becoming easier for contractors to get a mortgage. Not only are there a number of smaller niche lenders on the market who specialise in lending to contractors and the self-employed; some of the more mainstream lenders are also recognising that the make-up of the UK workforce is shifting and that they need to take this into account in their lending assessment criteria if they want to retain their share of the mortgage market.
Different lenders have taken different approaches to contractor mortgage lending. Some specifically offer products labelled as “contractor mortgages”. For others, it has been more about making behind-the-scenes changes to the ways they assess income and calculate affordability – incorporating more flexible underwriting criteria to allow them to evaluate the income of applicants who don’t have the benefit of employer’s payslips to prove their income. What this ultimately means is that it is far from impossible for contractors to get a mortgage, and providing you meet the lender’s affordability assessments, you will most likely have access to the same types of mortgage rates and products as anyone else.
How do I prove my income?
A decade or so ago, it was possible for contractors applying for a mortgage to declare their income without providing any evidence. For better or worse, so-called “self-certification” mortgage is now a thing of the past, and Financial Conduct Authority mortgage rules require lenders to fully verify every applicant’s income with the necessary documentation. Lenders can use quite different criteria to verify your income and assess affordability, and this will also vary depending on whether you are self-employed as a sole trader or partner, operate a limited company, or work via an umbrella company. Here we’ll look at some typical approaches.
Many lenders assess contractor income in the same way as for self-employed applicants, by asking for full business accounts prepared or certified by a chartered accountant. Lenders vary in how many years’ accounts they will ask to see, but be prepared to submit accounts for up to the previous three tax years. Some lenders may ask for SA302 year-end tax calculations (with corresponding tax year overviews), either in addition to or instead of full accounts. Depending on how you submit your tax return, these can be printed from the online Self Assessment portal, via your accounting software, or requested directly from HM Revenue & Customs. Be aware that while many lenders accept SA302s printed at home or by an accountant, others will ask for HMRC originals.
If you run your IT contracting business as a limited company, lenders will typically use only income and dividends drawn from the company in calculating your income for affordability purposes. However, some more specialist lenders may base their calculations on your share of net profits; this can potentially make a considerable difference in how much you will be able to borrow.
Some lenders take an alternative approach to calculating contractor income, by simply taking the day rate from your current contract, multiplying it by five to give a weekly income, then multiplying by 48 weeks to give an annual income (taking into account holidays periods). They will then use this figure against their usual affordability calculation to work out how much you can borrow – this varies but is typically four or five times the annual income figure.
How we can help
At Just Mortgage Brokers we understand the complexities of contractor finances, and that contractor income by its very nature can be inconsistent. We can help you not only find the right mortgage for you, but also match you to the lender whose assessment criteria best meet your past and current financial circumstances. Contact us today to discuss how we can help you find a contractor-friendly lender.