If you are working as a contractor and running your own company there may come a time when you are looking for contractor mortgages. When you do this, it does not have to be difficult. What’s more, you will need to obtain the right advice. Further to this, it is best to speak to a specialist who understands how you work. Regular mortgage advisers and brokers are less well versed in how Contractors earn their income and many do not offer mortgage for contractors. Therefore, it is often the case that they are not able to package your income for your mortgage application correctly.
Other policies for contractors
Two other policies that are specifically for contractors and may be worth considering are:
- Contractor insurances in general
- Critical illness
- Income Protection for Contractors
- Relevant Life Insurance
Now, back to mortgages. A contractor Mortgage Adviser will calculate your income by:
- taking your day or hourly rate, and
- multiplying this by how many days or hours you work a week
Then, once they calculate your weekly income, they will multiply this by how many weeks you work a year. Usually, this will be between 46 and 48 weeks per year. The resulting figure deemed to be your annual salary. How much you can borrow for your contractor mortgage depends on your ‘affordability basis.’ In the simplest terms, mortgage lenders will take into consideration your income and your outgoings. As a rough guide, you can look to borrow anywhere from 3 to 5 times your annual gross income. For example, if your day rate is £500 and you work five days a week, your annual salary will be around £115,000 to £120,000. In turn, this means that you can roughly borrow £345,000 to £600,000. It will depend on how many weeks you work in a year.
The evidence that you need for a Contractor mortgage:
Please note, the types of ID that you will need when you apply for a contractor mortgage are:
- Current contract
- Previous contract
- A contract extension (if you have less than three months remaining on your contract)
- Three months of business bank statements
Typically, a mortgage will last around 20 to 25 years. The same will apply with a mortgage for contractors. However, this can vary due to several factors. These include age, retirement plans, and monthly mortgage repayments. When you set up your contractor mortgage, you will decide the term (the length of the mortgage) according to your chosen repayment plan. The longer the term is, the lower the monthly repayment will be. You can still apply for a contractor mortgage, even if you have just started contracting. There needs to be evidence that you are in the same line of work, and you are in the same industry. It is key that you get an AIP (agreement in principle) from a mortgage lender before you start house hunting. What’s more, an AIP is based upon a credit search and your income details, and this indicates how much they would lend to you. Although not set in stone, an AIP is a helpful guide and assurance for an agent. To sum up, it helps show that you can afford the property that you are viewing.
The different types of contractor mortgages:
First-time buyer Mortgage:
If you are a first-time buyer and are looking for your contractor mortgage, you are in a good position as many Government-backed schemes can help you purchase your first home.
- Help to Buy ISA. By saving into a Help to Buy ISA, the Government will boost your savings by 25%. The maximum bonus you can receive is £3,000.
- Help to Buy Equity Loan. By applying for the Equity Loan, the Government will lend you up to 20% of the cost of your newly built home. You will only need a 5% deposit and a 75% mortgage to make up the rest.
- Shared Ownership. The Shared Ownership scheme is a cross between buying a home and renting. You can own from a quarter to up to three-quarters of a property. As part of this, you will rent the remaining part of the property from the Government at a reduced rate.
- Right to Buy. A Right to Buy scheme allows tenants who rent their homes from the local council to buy their home at a discount. The size of the discount depends on the area and the property type.
When considering a contractor mortgage, if you are looking to move to another property, or if your current mortgage deal has come to an end, you can consider Remortgaging. This process is switching onto a new mortgage deal, whether it be with the same provider or a different lender. In doing so, you could save money in the long run. You could also request to borrow more for home improvements.
Buy to Let Mortgage:
Buy to Let mortgages are available for contracting landlords. These will allow them to borrow money to buy properties to let. It is important to note, though, unlike normal mortgages, buy to let mortgages are on an interest-only basis. In turn, this means that for each month of the mortgage term, you will only need to pay interest on the loan. The amount that you have borrowed will have to be paid back at the end of the term. It can be good in the short term as your outgoings will be less each month. It is key, though, that you have a plan in place to pay off the loan or refinance at the end of your mortgage term. In contrast, with a ‘normal’ mortgage, your monthly repayments will cover the interest and a portion of the debt. As a result, over the mortgage term (and assuming you meet every repayment), the value of the loan will be paid back.
If you are a contractor and you are looking for a contractor mortgage or further mortgage advice, please feel free to speak to our trusted partners, Broadbench. Please note, the link above has currently expired and a new one will be replacing this very shortly.
Finally, I also have lots of other contractor tips that may be of interest to you.
Link to Contractor Advice UK group on LinkedIn https://www.linkedin.com/groups/4660081/