Securing a contractor mortgage isn't as difficult as you may have been led to believe. Granted, you've probably heard many tales of woe from peers about their struggles on the High Street. And therein lies the crux of the problem.
Whilst many employers are seeing the benefits of hiring contractors, hence the growth of the sector in the UK marketplace, High Street mortgage lenders are not so amiable.
For the time being, that doesn't look set to change. So do you simply accept that you can earn more, but have to forego being creditworthy? Absolutely not.
Where High Street Lenders fail contractors
In a nutshell, lenders, at least the minions on the front desk, simply don't grasp the way contracting works. In fairness to them, much of their ignorance stems from the way they've been taught to appraise candidates based on set criteria.
This doesn't mean that you, the contractor, isn't creditworthy. It simply means that banks and building societies can't pigeonhole you. Your length in service, irregularity of payment and guarantees of continued employment based on history and/or current contract all count against you in their eyes.
The net effect is both parties get frustrated, both consider the application a waste of their time and these sentiments get entrenched.
Yet many of these self-same lenders do accommodate contractor mortgages. You know they do because your colleagues or accountant have perhaps recommended the lender, so what gives?
A fundamental problem is that mortgage companies are wary of the short-term nature of the contracts. This ingrains an irrational fear that you may not get an extension or new contract. Ironic, given the fact that you're eminently more employable than the average building society manager!
Even if you make it over the first hurdle and a lender consents to peruse your application, it will fall down if there aren't a minimum of two years regular employment to back it up (see where this is going?). When they get around to calculating your affordability based on your drawn salary and dividends, that really is the final nail in the coffin.
Any retained profit not distributed as salary or dividends simply doesn't get taken into account. As we all know, it's this bulk of a tax-efficient contractor's income that reflects their true earning capacity.
Where should contractors turn if the High Street draws a blank?
This problem is not new. It's a little more prominent recently due to the escalation in demand for skilled freelancers and contractors. This has been compounded by so many individuals realising that they can earn significantly more than their permanently-employed counterparts fulfilling that demand.
Over time, specialist brokers who facilitate self-employed people and who've worked with lenders to secure mortgages based on a contract rate alone have come to lead the market in "contractor mortgages".
We've teamed up with one such specialist, Freelancer Financials. They're an established firm of specialist mortgage advisers who can help you secure the same competitive rates commonly available to salaried employees.
Choosing to work with a specialist cuts out the sales prevention officers in branches and at call centres who instigate the initial problems you're experiencing.
How? Because such brokers have dealt directly with underwriters to establish a precedent. This not only means that they know how to present your mortgage application, but often which underwriter is most applicable to your unique circumstances, also.
All of a sudden, the need for reams of irrelevant accounts and your entire work history are negated because only what's needed to secure your mortgage is presented to the underwriters. As this concise process means that underwriters can instantly calculate your true affordability, it cuts down the workload at every step, often speeding up the entire process.
How much can I borrow on my contract rate?
Working out the amount you can borrow is also an extremely simple calculation for contractors. You'll be happy to know. There are several "multiplies", but the more of those, the greater your upper mortgage threshold.
First, take the number of days per week you work and multiply that by your day rate. Then, multiply that figure by 48, the number of weeks you work per year; this gives you your annual income.
Finally, multiply that figure by the lender's affordability factor - in the case of contractors, five times your income - to give you a guide as to the maximum amount a contractor with your earning capacity can borrow.
As an example, a contractor who:
•works 5 days a week;
•is on a day rate of £350;
•works 48 weeks per annum;
•and who's attained an affordability factor of 5 x income;
•is eligible to borrow £420,000 to buy or remortgage a property.
Or, expressed numerically as a calculation: 5 days x £350 day rate x 48 weeks x 5 = £420,000.
Proving your earning capacity is also a lot less fraught through a specialist, compared to the documentation you'll be asked for at a High Street lender. All an underwriter needs to see is your current signed contract, the last three months' bank statements and your CV. That's it.
What about a deposit?
Again, once you've breached the lender's defence mechanism, you'll be treated no differently than your permanently-employed colleagues. Whatever LTV (Loan To Value) ratio you opt for will determine how much deposit you'll need.
Obviously, the greater the deposit, the less the interest rate is likely to be on the amount you borrow. Nevertheless, even if you only have 5% to put down, you may well still be eligible for the Government's Help To Buy scheme.
What if I've only just begun contracting?
If you're brand new to contracting, the documentation is slightly different. You'll need to prove that you've been in the same trade or line of work without any gaps for the last two years. This will help endorse your credibility as a contractor and business owner in the field of work you've entered.