Contractor Mortgages: The Best Way to Secure a Competitive Mortgage

 Sadly, contractors and freelancers have always struggled to get a competitive mortgage. As the financial crisis deepens, this means that contractors will often miss out on the dream home as they face even more barriers towards obtaining a competitive mortgage rate from high street lenders. Whereas, people in permanent employment have attracted favourable rates due to lenders having an unfair bias towards them. This is because lenders view permanent workers as less of a risk than contractors.

commercial contractors

Unfair as it may seem, this bias is still strong today if not worse due to the financial crisis. Unfortunately contractors are neither seen as employed or self-employed, somewhere in between the two, which makes it hard for lenders to determine the potential affordability of contractors. It is made even more complicated by the fact that many contractors work through a number of trading structures and payment mechanisms, including Limited company, UK Payroll umbrellas, Tax efficient offshore trust. Since the credit crunch many lenders have streamlined their underwriting and processing, underwriters are not trained to understand the unique nature in which contractors are paid, which is why many contractors fail to get a mortgage

Help is at Hand!

Over the years, as the contractor market has grown and expended, a number of professional organisations and institutions including PCG, Social Networking sites, Contractor Accountants, Recruitment agencies, and Financials advisors have worked hard to convince a number of banks to view contractors differently.

This has given birth to Contractor Mortgages! This enables contractors working through different trading structures to obtain a mortgage. A number of contractor mortgage specialists have lobbied to get lenders to alter their lending policy towards contractors. This has meant that lenders are reviewed their traditional underwriting criteria to accommodate contractors.

It is now possible, irrespective of whether you operate through a limited company or umbrella company to be assessed on your contract rate. In essence this means that you no longer have to provide financial accounts, pay slips or P60s which often don't reflect your potential affordability.

How much can you borrow based on your contract rate?

Those lenders who offer mortgages for contractors will work just from a generous multiple of your annualized contract rate (up to 4.5 times income). By making use of your contract, this circumvents the need for providing company accounts, pay slips or tax returns.

Therefore an IT Contractor earning £500 per day on a 6 month rolling contract can potentially borrow £540,000. To calculate how much you can borrow, multiply your daily contract rate by the number of days you are contracted to work in a week and then by 48 weeks in a year, this can vary depending on the lender (non IT contractors is 46 weeks). You can normally secure a mortgage loan of approximately 4.5 times this total figure.

What about IT Contractors?

Lenders are more familiar with IT contractors as they employ many of them to write specialist code for the back office systems. Many banks employ thousands of IT consultants and coders on a contract basis as projects typically last 6 - 12 months at a time. For this reason many lenders have a more flexible approach to IT contractors. A number of banks have arranged bespoke underwriting providing IT Contractor mortgages.

Are the interest rates higher for contractors?

Not at all! The same rates available to permanent employees are also available to contractors. There is often a misconception that a contractor mortgage is more expensive. A contractor mortgage specialist will be able to source you a rate that is competitive and no more expensive than a standard mortgage available to a permanent employee.

Will it take far no longer to arrange a contractor mortgage?

Absolutely not! In actual fact it is quicker in most cases as many contractor specialist mortgage advisers will have direct relationships with senior underwriters. As long as you can provide a copy of your contract, CV and bank statements, it should not take longer than 4 weeks, from start to completion.