Mortgages for Contractors? Yes You Can!

At Fenero, we know that people love contracting because of the freedom and flexibility it brings. But does that freedom come at a price – the price of not being considered a good prospect by mortgage lenders?

The great news is that times have changed in the world of lending. Whichever contracting solution you choose, you should be no worse off, and may even be in a better position, than your full-time employed peers, in achieving your goal of buying a home. Check out our Q & A to find out why.

Q: I’ve heard that as a contractor, there’s no point applying for a mortgage as lenders always say no. Is that true?

A: No! There’s no reason why a contractor should be in a worse position than a full-time employee, and three reasons why contracting may even give you an advantage:

? the more you earn the more you can borrow, and?professional contractors can often earn anything from 15% to 40% more than their permanent equivalents.

? contracting can be a fantastic way to speed up your savings and build a substantial deposit. This makes you a better candidate for a mortgage and may even secure you a lower interest rate.

? demonstrating that you have savings and manage your finances responsibly (Fenero can help with the paperwork!) can help reassure lenders that you have the capacity to meet the repayments, even if interest rates rise.

Q: How big a deposit do I need to apply for a mortgage??

A: The minimum deposit you need is 10% of the property value, with the remaining 90% funded by the mortgage. But 10% is just the minimum. The more you can offer as a deposit towards the purchase, the better. You’ll need to borrow less and your monthly mortgage repayments will be lower.

Q: How do I work out how much I’ll be able to borrow?

A: Lenders calculate how much you can borrow based on your average gross earnings over a period of time. If you’re an Umbrella PAYE contractor, they will base your gross income on your current earnings. They take an average from your most recent 3 months’ payslips, and compare it to the gross income figure on a salary certificate, which Fenero can prepare for you. The lower of the two figures is your gross income for borrowing purposes.?

If you’re an Umbrella Company Director, the lender would use an average of your last two years’ gross income. They would request the same information as for Umbrella PAYE contractors, plus your last two years’ income tax returns.?

Q: I’ve been contracting for six months. Is that enough of a track record to apply for a mortgage?

A: It depends! For Umbrella Company Directors, this would be a no. The lender would need an income tax return before you can apply, and this wouldn’t be available until the following year from when you started contracting.?

If you’re an Umbrella Company PAYE contractor, and you were in employment before taking the contracting role, while we have seen a trend recently of lenders preferring to see a minimum of twelve months of contract experience, you could potentially apply for a mortgage after six months.

? Useful tip #1: If you want a mortgage and you don’t have an income tax return for the previous year – for example, if you weren’t self-employed for that year – then choosing the Umbrella Company PAYE rather than Director option might be better, as an income tax return isn’t a lender’s requirement.

If you have a Personal Service Company (PSC), you’ll need to have traded for two years before qualifying to apply for a mortgage.

? Useful tip #2: If you plan to start contracting and intend to apply for a mortgage, it’s best to hold off on setting up your PSC until you’ve secured your loan.?

Q: My current contract has three months to run. Can I apply for a mortgage?

?A: If you’ve been consistently contracting for the last few years, the length left on your current contract is less important than it is for someone in their first year of contracting. This is because you’ve shown your employability by regularly getting new contracts or contract extensions. The lender may ask for proof that this contract has been extended before in the past, or ask for a letter confirming that your contract will be extended at the end of the three months.?

Q: I like to take a chunk of time off between contracts. Could I get a mortgage?

A: Yes, as long as you’re working when you make your application. The main thing the lender wants to see is that you’ll have the means to cover your mortgage repayment for the duration of the mortgage. So, if you choose to work for only half the year but you can show you’re consistently earning the same amount each year, then the lender would feel confident that you can earn X amount every year without working a full year.

Q: How important is my credit history when applying for a mortgage?

A: Your credit history is important when applying for a mortgage, but it’s not essential to have a positive credit history built up. The main thing is to avoid missing regular payments, such as direct debits. A history of this is bad news for your mortgage application. If you have an overdraft facility, try not to use it, as lenders will see it as evidence you aren’t able to live within your means. If you like a bet, it’s also best to avoid gambling websites, as lenders can take a dim view of these. But don’t worry too much if you missed the odd loan repayment years ago. The past six months are the most relevant for your application.?

Q: What documents or records do I need to apply for a mortgage?

A: Umbrella PAYE Contractors:

???????6 months’ statements from your personal bank accounts (this includes Revolut or N26 accounts) and savings accounts, if you have them, plus statements from credit cards, personal loans or car finance.

???????P60 (now called Employee Detail Summary) for the previous year

???????last 3 months’ pay slips

???????copy of your current contract

???????salary certificate

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Umbrella Director Contractors:

As above, plus:

???????confirmation from accountants that your tax is in order

???????at least one income tax return

PSC Contractors:

As above, plus two years of company accounts from your PSC. The good news is that Fenero can help with organising all the paperwork relating to your contracting business for you, so you’re fully equipped to make your application.

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Q: I’ve been turned down for a mortgage. What should I do next?

A: Don’t despair! Ask your mortgage advisor exactly why the lender turned you down, and what you can do now to improve your chances of approval next time you apply.

If your mortgage advisor says now isn’t a good time to apply, or that your circumstances need to change first – go to another broker or lender! Until your application has been assessed by an underwriter, this is just an opinion. You could be successful elsewhere.

Whether you’re a first-time buyer, want to switch lenders, or extend your mortgage, Fenero can help you organise your business finances and maximise your take-home pay so you’re in the strongest position to navigate the mortgage maze. Contact our friendly team of experts today [email protected].

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