Contractor Mortgages

When you apply for a mortgage, the lender will conduct an affordability assessment to determine how much money you may borrow. They will consider how much money you make on a regular basis, your costs, and how secure your income is.

As a contractor, you’ll typically need to present proof of earnings for the last six months, however many lenders would want to see two to three years of records. As a result, getting a mortgage early in your contractor career can be challenging, however you may still have options.

If you’ve been working as a contractor for a long time, lenders may average out your recent years earnings to determine your average income. They will then calculate how much you can afford to repay each month based on this average. If you make £50,000 one year and £55,000 the next, the lender may estimate your yearly income to be around £52,500. However, if your earnings have fluctuated significantly from year to year, a mortgage lender is unlikely to use this method. They may use the most recent year, or the lowest, as an estimate of your earning capacity in these circumstances. As a result, you may be able to borrow a smaller amount than you would otherwise.

One strategy to boost your chances of succeeding is to put down a larger deposit – and thus borrow a lower amount. The lower the risk a bank takes in lending to you, the more favourable your application will be viewed. Lenders will seek for indicators of long-term stability as well. If you can show lenders that you have an ongoing agreement with an employer or evidence of past agreements that are likely to be renewed, your application may be more tempting. While taking time off between stints is one of the benefits of contracting, lenders may be suspicious if you are out of work for more than eight weeks in a 12-month period. Also, before applying for a mortgage, think about how good your credit score is now and whether you need to work on increasing it.

Evidence of your expenses and operating costs will also be required, with more information the lender can better understand your financial situation and will be more confident in lending to you.

Offset mortgages are ideal for contractors who choose to save for tax by placing funds in an offset savings account. This account is linked to your mortgage and the value of your savings is deducted from the balance of your mortgage with you only paying interest on your net balance.

For example:
If you have a £500k mortgage and £100k savings the lender will only charge interest on the net balance of £400k. Furthermore, unlike the interest received on general savings accounts the saving is tax free.