Reports say, 14% of the world working population is self-employed. A UK data of 2016 confirms 4.75 Million people working in UK as self-employed.
People working on an hourly basis or not as a permanent employee share a big portion of self-employed people in the UK. Preferred because of lack of certain skilled resources, contract workers are in high demand and get a lot of benefit in the UK. The contractors get payed –
- Via a recrruitment agency.
- A contract can be a sole trader, thus managing his pay and taxation on his own.
- Or, they get paid through an umbrella company.
Contract Mortgages for Contractors
It can be a dauting process to get a mortgage approved for a self-employed contractor, limited companies, individual, and sole traders unless they have decent earnings. If their earnings are high they may be able to get the same kind of mortgage as a salaried person can.
Contract Mortgages – how to get them?
It isn’t impossible for a contractor to get a mortgage if he is able to show money, to be specific regularly flowing in money. The only reason for a lender’s concern is the contractual limitation of the contractor which relates directly with the irregular money. So till the time you are able to show the lender your backup plans and assure you can get enough money to pay the monthly EMIs, they are happy. It doesn’t matter where and how you get the money from, the consistency of money flowing in matters.
Evidence of earnings
The mortgage lender generally asks the contractor to show the evidence of earnings of past 6 months. Many mortgage lenders even ask for income records of past 2-3 years in order to look at consistency. Hence, if any contractor is in the early stage of his career than it becomes quite difficult to get the mortgage amount.
How much can you borrow?
The amount that mortgage lender will agree to disburse largely depends on the monthly EMI the contractor can pay. As a thumb rule, the banks and building societies shall allow the contractor to borrow up to four and a half times of the total income of contractor and anyone in partnership with whom the contractor is borrowing.
Mandatory Vs. Leisure
Beyond, these threshold values there are certain regulations to limit the borrowings. Lenders closely look at the expenses that are mandated and leisure expenses that can be quickly cut back. For example the fees of child or bill of a credit card, electricity etc. are mandatory expenses, however, going out for dinner, gym membership are leisurely expenses and can be eliminated.
Deciding the Loan-to-Value Ratio
The deals that are offered to contractor largely depend on Loan-to-Value ratio (LTV). LTV is nothing but the percentage of the price that the contractor is borrowing compared to how much he/she is putting in himself/herself. For example, if 10% deposit is there than LTV becomes 90% as the mortgage lender is supposed to cover 90% of property price. Lenders always set the maximum LTV for each deal they offer. The LTV should be as low as possible to get the overall deal cheaper.
Average annual income
For the contractors those have been working for quite a long time, their average annual income is taken into consideration for mortgaging. On the other hand, for contractors who earn based on per day earnings, for them, the mortgager shall take into account per day income multiply by a number of days per week and then multiply it with the entire year.
Mortgage lenders also take into account holidays and certain gaps hence they consider it for 46 or 48 weeks per year. This approach is mostly adopted if any full-time employment has been quitted by the contractor and contractor does not have an established track record. In this scenario, even mortgage lender also wants to see the evidence that the person is likely to succeed as a contractor and for this, they look upon previous experience and qualifications, existing network and signed agreements.
Strengthening of mortgage application
Good credit score act as a boon for any contractor while applying for a mortgage. Lenders shall be required to look for evidence of good financial management when the income is not guaranteed. In addition to this, giving a large amount of deposit and borrowing the smaller amount from lender strengthens the mortgage application to a significant level. The risk factor reduces in such a scenario for the lender.
Mortgage affordability for a limited company and with another person
Lenders apply different lending criteria for limited companies. For a company also, most of the lenders shall only consider the contractor’s salary and dividend as contractor’s income and not the entire earnings. Even if a contractor is at low salary but the company is at profitable stage than it becomes very easy to find the lender. However, the lender shall look into full bank accounts of the contractor. Contractor shall clearly distinguish between money held by him/her and the money held by the company.
In partnership with another person if the contractor plans to take mortgage amount than the chances increases if the other person is a full-time employee. If the income fashion of contractor tends to vary than the contractor can also consider applying for a guarantor mortgage. In such situations, parents or family members provides a guarantee on a mortgage against home or any other property.
Summary of points for Contractor Mortgage
In all of the sections explained above, it is quite evident that getting a mortgage without a permanent position can become quite tricky at certain times. However, few points if kept in mind before applying for a mortgage than it can make entire process flawless and risk-free.
- The contractor needs to provide the income evidence as much as possible for the last couple of years.
- For limited companies, the entire business accounts and balance books are required to be provided to the lender.
- A clear evidence of current and previous contracts along with qualification needs to be provided to the lender.
- The credit score needs to be improved before applying for a mortgage and higher deposit needs to be paid.
- A joint or guarantor mortgage should always be taken into account and thought for.
- Lastly, an appropriate mortgage lender needs to be identified who is a lender to contractors or freelancers specifically.
Need help in getting mortgages? Consult specialist Contractor Accountant. Email us at email@example.com