1. Always Use a Contractor Mortgage Broker
Many contractors are convinced that they can secure mortgage on their own without the assistance of a contractor mortgage specialist. This attitude quickly changes after they have approached several banks only to be declined. The problem lies with many local bank branch staff or call centres. There’s nothing worse than being told by some young graduate quoting their standard script that you can’t obtain a mortgage because you have insufficient income to support the mortgage loan you are applying for. Or a call centre based in Delhi who simply don’t understand your employment status as a contractor. Unfortunately, they are not trained to understand the contracting environment that you work in let alone the trading structures and payment mechanisms that contractors use. So if you’re fed-up of being asked questions that have no relevance to your employment status, like employer’s details, evidence of time employed, pay slips and so on, our recommendation is that you contract a contractor mortgage specialist who has experience arranging contractor mortgages.
2. Secure a mortgage based on your contract rate
If you’re fortunate enough to find a lender that doesn’t flinch after you’ve told them that you’re a contractor, they will then want to assess your affordability using their self-employed criteria for Limited company directors. This means that they will want to assess your mortgage borrowing based on a narrow measure of your director’s remuneration, which may not fully reflect the total earnings that you have at your disposal. They will need to see three years accounts, which exclude contractors who haven’t been working long enough to produce three years audited accounts. For those contractors that can provide three years accounts, they will be assessed on the physical drawings they are taking from their limited company, not taking into account retained profits.
Most contractors who operate through their own limited company don’t draw all their annualised income in salary and dividend drawings. For tax purposes, it makes no sense, instead the majority of contractors operating in a tax efficient way draw a minimum salary and also restricts dividend drawings to avoid higher rate tax. While this makes perfect sense from a tax planning perspective, it has the undesired effect of reducing the amount that contractors are eligible to borrow under the standard criteria used by most lenders.
Contractor mortgage specialist have worked hard over the past 10 years to develop strong relationships with high street banks in relation to simplifying what qualifies as relevant earnings for lending purposes for contractors. They have been influential in changing the underwriting criteria for contractors.
There are a now a number of high street lenders that will provide mortgages for contractors based on gross contract earnings. The mortgage loan can be as much as 4-5 times your annualised contract earnings. This means that you don’t have to rely on the traditional method of using accounts.
In order to calculate how much you can potentially borrow based on contractor based underwriting, you need to multiply your daily contract rate by the number of days you are working in a week followed by 48 weeks. In most cases you can secure a mortgage of up to 4 times this figure. For example, a contractor on a daily rate of 500 can potentially borrow:
500/day x 5 days x 48 weeks then multiply the product to 4 = 480,000
The following documentation is required to package a contractor mortgage application:
1. You current contract stating your daily/hourly rate of pay
2. C.V outlying your skills and experience
3. Completed “Fact Find” Questionnaire (mandatory for all regulated mortgages)
3. Maintain a good credit score
Many contractors don’t realise the importance of maintaining a good credit score. This score may be the difference between the lender accepting your application or declining it.
The first step of the mortgage process is obtaining an “agreement in principle”. This involves the lender carryout a credit search on you to determine your credit score.
Irrespective, of whether you can put a large deposit down or even large income, lenders will still decline your mortgage application if your score is poor. The current economic client has forced lenders to tighten their criteria and to cherry pick those applicants with good credit scores.
So ensure you keep a clean credit history to avoid giving the lender an excuse to say NO.
You can you ensure that your credit rating is good by observing the following steps:
• Ensure you are on the electoral roll register with your local council
• Don’t apply for lots of credit in a short space of time e.g. mobile phone contracts and credit cards. This will leave a footprint on your credit history.
• Cancel any credit cards that don’t use and try and pay off any existing debt.
• Paying your bills on time is critical as lenders hate to see late payments.
• If you don’t have a credit already, then get one. Banks need to see that you have a history of successfully managing credit – staying within your limit and making payments on time.