Contractor Mortgage FAQs
When did you last hear a contractor or freelancer express how easy it was to find a decent mortgage provider? Not recently.
There are exceptions; but, for the majority, securing any finance when you’re a contractor is no gimme.
Through a combination of personal experience and engaging on countless forum threads, we realise exactly how scarce mortgages for contractors have become since the self-cert was shelved.
Not that we ever believed self-cert was the right way for contractors to fund their home purchase in the first instance. It was perhaps the right mortgage for Sole Traders and Self-Employed entities who didn’t declare all of their earnings.
In those instances, it was very much a case of the banks saying:
“Well, tell us how much you earn. How much of that you declare to the Revenue is your concern.”
Because the self-employed and many freelancers were securing mortgages this way, self-cert also became the accepted product Independent Financial Advisors would offer to contractors.
Traditional brokers subsequently tarred all self-employed people with the same brush and it stuck. Sad to say, many still do.
The good news is that contractors are in a much stronger position than that. The reason: they can be assessed on the strength of their contract alone.
However, putting your trust in a specialist mortgage broker is essential if you want to reap the benefits of your contractor status.
You may argue that we would say that. But so many of our clients have struggled with these issues before coming to us in the past, we’ve collated answers to our most frequently asked questions into one resource, here.
The following answers address those past concerns and will help you to define what’s missing from your approach. And it is your approach, not your circumstances, that is tripping you up.
In this 3-part F.A.Q., we’ll:
- clarify the contractor status itself, first;
- then address mortgage-specific queries;
- and finally explain why Freelancer Financials is different from other service providers.
When you’re done absorbing this extensive resource, you’ll feel confident that it’s with the lenders and not you where the real problem lies.
We challenge you to surprise yourself yet further by realising how much you can borrow through a specialist broker using our mortgage calculator.
Contractors essentially do the same job as permies. However, they possess an inner confidence and self-belief in their skill-set, thus employability.
So rather than saddle themselves with a permanent contract and its restrictions, they see an opportunity to earn more under their own steam.
The big question is: are running a business and the subsequent mortgage complications worth this extra effort?
At Freelancer Financials we can arrange a mortgage for you with a reputable High Street lender on the day you commence your first contract.
As long as you have prevalent work history in the niche you’re now operating as your limited company, there shouldn’t be a problem.
If you’re expressly new to contracting, some lenders will insist on evidence documenting your last two years of continued employment.
Most lenders usually require a minimum of 4 to 6 weeks remaining on your contract to approve your mortgage. Of course, longer is better to satisfy their risk assessment.
If you have less than that, we can often negotiate the remaining duration in specific circumstances. Agencies and clients are often amenable if you ask them for a renewal or extension of your contract for mortgage application purposes.
Being asked for reams of unnecessary accounts is often the case when you approach your bank directly for a mortgage.
Most branch advisors don’t understand your contractor status. As such, lenders are likely to highlight your mortgage application as higher risk before forwarding it to head office for assessment.
Furthermore, if you state that you're self-employed through your own limited company, they’ll ask for an accountant’s certificate or 3 years accounts. This is requested to try to prove your disposable income, hence affordability.
The problem with using this traditional approach for you is that it rarely reflects your true earnings. You need your mortgage application to be based on a multiple of your contract rate alone.
We can also arrange mortgages for contractors employed through Umbrella Companies. As with limited company contractors, this would be based on your contract rate.
Again, you won't have to rely on the traditional method of using pay slips or tax returns. They're unlikely to reflect your true disposable income so, quite frankly, are not necessary for your mortgage application.
Despite what non-specialist advisers or your High Street bank may have told you, there are very few documents that actually matter.
In order to package your mortgage application the way underwriters both need and like to receive it, you'll need:
- Proof of ID (a copy of a passport or driving license will do fine);
- Proof of address (utility bill, credit card or bank statement);
- A copy of your latest contract, confirming your contract rate;
- A copy of your latest CV may be requested;
- Bank statements confirming contract earnings.
Unlike standard mortgages for self-employed company directors, where affordability's based on salary and dividend drawings, a contractor mortgage is based on annualised current contract earnings.
Calculating how much contractors can borrow in this manner gives the majority of applicants access to substantially more finance than they'd otherwise be availed of.
Granted, self-cert mortgages were the most common way that those on a non-permanent contract secured finance to pay for their homes. However, they were NEVER the best way.
In our opinion, getting rid of self-cert has done contractors a favour. For anyone used to funding their home purchase this way, it probably doesn't seem like it at the minute.
High Street lenders have an out of date bias towards permies. Their advisers can work out neat little sums and pigeonhole full-time employees into specific categories.
It's a common misunderstanding that contractors need to find bigger deposits than permanent employees. It's just not so.
You will need a minimum of 5% of the home's purchase price to put down. But the larger the deposit you can find, the lower the interest rate on the balance.
That interest rates are higher for contractors than for permanently employed people is pure fallacy.
The myth probably springs from a time when it was easier for inexperienced IFAs to secure mortgages for contractors using the self-cert. In that instance, rates probably were higher than those offered on other mortgage products.
It's our aim to change that view. Over time, we've patiently developed relationships with leading High Street lenders and financial institutions. One reason for doing so is to simplify what qualifies as relevant earnings for lending purposes for contractors.
We can give you a fairly accurate estimate of how much you'll be able to borrow. Using terms negotiated with various lenders, we'll use your annualised contract income as the basis of our calculation..
Depending upon your unique circumstances, the amount offered will be anything between 4.50-5.00 times your gross annual earnings.
The quickest and simplest way to get an estimate is to use our Contractor Mortgage Calculator.
We can obtain an "agreement in principle" based on your contract rate or net profits alone. However, it's important not to confuse this with a "mortgage offer".
An "agreement in principle" is a certificate of credit check that states you've passed the lender's credit assessment. It's an endorsement that can improve your negotiating position with a seller or estate agent, but not a green light to go full steam ahead.
As soon as you have a copy of your signed contract, the first step is to contact us for a mortgage proposal. We can then secure you an agreement in principle (AIP) the same day we receive your application.
First, the lender will value the property you're considering purchasing. Next, your solicitor will carry out the necessary legal searches.
Most banks with whom we work will complete this entire process in 4-6 weeks. However, we have known backlogs when lenders are running special offers.
Even then, contractor mortgages still often complete quicker than standard mortgages. You'll not have too long a wait to pick up the keys to your new home.
For remortgages, most of our lenders will cover the cost of the valuation and legal fees. In some cases, they even waive arrangement fees.
For home movers and first time buyers, the majority of lenders charge a valuation and arrangement fee to book a particular mortgage deal.
If you remain with your lender, unless you're on a life time tracker rate, your initial mortgage rate will revert to the lender's standard variable rate.
All too often, people become complacent and simply put up with the new reversionary rate once the initial rate expires. They end up paying a lot more than they ought to be, simply because they don't test the waters when they revert to the lender's SVR.
Whether you'll have to pay stamp duty or not depends upon the value of the home you buy. The latest rates for UK Stamp Duty are:
|What Stamp Duty is Due on My Mortgage?|
|Purchase Price||% Duty|
|Up to £125,000||Zero|
|£125,000+ - £250,000||1%|
|£250,000+ - £500,000||3%|
|£500,000+ - £1M||4%|
Our mortgage advisers will always try to ensure that there are no hidden surprises or charges when making their recommendations. Any mortgage schemes that insist upon you taking out the lender’s uncompetitive home insurance, etc., will be excluded from our searches.
This includes banks that stipulate you must take out their life insurance and protection cover as part of the deal. Our exclusion of such lenders doesn’t mean you should forego protection, though.
If you're not going straight to our Mortgage Calculators or guides, all that's left for you to do is complete the call-back form in the side bar.
One of our mortgage advisors will then contact you by email with recommendations and mortgage options tailored to the requirements you provide.
Unlike other mortgage brokers who are predominantly Jacks of all trades but masters of none, we specialise in providing mortgages for freelancers and contractors. They are core principles of our business.
Our clients come to us because they've been let down by general mortgage advisers who've had neither training nor experience in presenting mortgage applications for contractors.
We're proud to say that many new clients in this predicament are introduced to us by others who've already enjoyed the benefit of our experience.
We've helped many thousands of contractors in your situation. Having established strong relationships with the senior underwriters at High Street lenders, your application will be approved quickly and without fuss.
You won't get the same reaction if you approach the same lenders directly and deal with branch staff yourself. Why? They simply don't understand how you work.
If they deign to speak to you, they'll begin by insisting on three years accounts. This request is totally unnecessary and misguided.
Author: John Yerou
John Yerou is the owner and founder of Freelancer Financials; a trading style & trade mark of the award winning Mortgage Quest Ltd. One of the most recognised names in providing mortgages for contractors and freelancers across the UK.
In 2004 John began his career in Financial Services as an independent mortgage adviser and broker. John has been instrumental in negotiating bespoke underwriting for contractors with high street lenders.
His presence in the industry as a go-to expert is growing by the day and he is regularly cited and writes in publications both locally and nationally.