Mortgages for IT Contractors Get a mortgage based on what your IT Contract's actually worth!
At Freelancer Financials, we’ve championed the cause of IT Contractor mortgages for a decade. Most underwriters also recognise the income availed of contractors working in the digital arena. At least they see the potential of those earnings, in principle.
Getting those same underwriters to adopt lending policies tailored to the IT sector? That’s where our job becomes more difficult.
We want to reassure IT contractors here and now that you can get a mortgage based on your contract. You don’t need Limited Company accounts or umbrella payslips. In truth, if you’re new to contracting, neither of those proof of income methods work in your favour.
But before we go into how much contractors can borrow, it’s worth explaining why we do what we do. After reading this, you’ll never go to the High Street for a mortgage again.
Why don’t banks recognise a contractor’s affordability status?
Many lenders are reluctant to base an IT contractor’s mortgage affordability on their contract. It’s this outlook that makes High Street lenders appear inflexible and outdated. And dangerous!
They push lending criteria designed for permies on all potential borrowers. And even self-employed mortgages they base on accounts.
Yes, you are self-employed. But if you have accounts, it’s likely they’re streamlined for tax-planning. That means the low salary and dividends you draw don’t reflect your earnings.
You know this. Your accountant knows this. An in-branch mortgage advisor? They wouldn’t understand retained profit if you gave them the link to Investopedia.
A simple (but overlooked) truth: IT Contractors are more creditworthy than their permie peers
Most IT Contractors work shoulder-to-shoulder with their client’s employees. Both parties know that the independent professional earns much more than their employed counterparts. So why don’t mortgage lenders acknowledge this gulf in earnings?
The whole scenario would be laughable if it wasn’t so grave. The worse thing is, there are more contractor-friendly lenders today than ever. Yet we get countless calls from IT contractors whose bank has rejected their application.
The problem lies, in the main, with the High Street. Not you, the contractor; the stumbling block is with in-branch advisers.
But you can’t blame them if the bank hasn’t trained them to process specialist mortgages. And make no mistake: all contractor mortgages are a specialist field. And until there’s a huge shift in the UK economic mindset, they’ll remain so.
So, how do you get a mortgage as an IT Contractor?
First, you need to go through a specialist broker who understands the way you work and trade. Limited Company payment structures are not for the faint-hearted.
That broker must also have strong ties to lenders’ underwriting teams. It’s they who sanction non-standard mortgages, not branch staff.
Finally, they need to know how to package your application to highlight your strengths. In the case of IT Contractors, those strengths are your income and retention thereof.
An in-branch IFA will not recognise the potential mortgage affordability in your contract. The day rate may look phenomenal on paper. But your accounts (with applied tax efficiency) won’t support those top line figures.
If you’ve only been contracting a while, you won’t even have trading history on your side. No trading history = scant accounts = no-go on the High Street.
But those elements present no barrier if you approach a lender through the correct route.
How much you can borrow and what you need to back it up
I perhaps know what you’re thinking. What’s the point of going through the motions just to get rejected again?
For a start, there are so few factors involved you’ll hardly flinch. Also, we specialise in IT Contractor mortgages. We can take one look at your status and tell you whether it’s worth pursuing a mortgage.
We can even get you a same-day agreement in principle based on what we know! Here’s why we’re so confident.
We’ve spent considerable time around the negotiating tables with many lenders’ decision makers. These high-brow, intense meetings have given us clear insight into what they need. In many instances, we’ve helped them understand what makes an IT Contractor so mortgage-worthy!
Underwriters who understand contracting don’t need accounts or pay slips. They know that these reflect your effectual ‘take-home’ pay, not your limited company profits.
Instead, they assess your borrowing potential on your current contract rate. Yep, that’s right. Your day rate, annualised over a year, will be the basis of your mortgage affordability. How cool is that?
They know that your accountant applies a tax-planning strategy to your income. So they project your day rate over an annualised gross salary (for affordability purposes).
The result is a hassle-free way of applying for your mortgage; all you need is:
- a copy of your contract, confirming your contract rate and its longevity;
- a copy of your latest CV confirming your IT employment history;
- three months’ bank statements;
- proof of ID and Address (passport and/or recognised utility bills).
Then, you want to know how much you can borrow. Based on a lender’s generic IT contractor affordability calculation, you:
- take your day rate: [£xxx.xx];
- multiply [day rate] by days worked per week to get a weekly rate: [x 5];
- multiply [weekly rate] x weeks worked per annum to get an annualised contract value: [x 48]*;
- multiply [annualised contract value] by the lender’s affordability factor: [x 4.5]**;
to give you the size of the mortgage you could borrow based on your gross contract value.
Let’s do a theoretical example, based on an IT Contractor earning £500/day:
- their weekly rate would be [5 days x £500] = £2,500 ;
- their annualised contract value would be [£2,500 x 48 weeks] = £120,000;
- their potential mortgage affordability is [£120.000 x 4.5] = £540,000!
Use this info (and your IT contract) to get the mortgage your status deserves!
You may have had a frustrating time of securing a mortgage using your contract up until now. Why the High Street insist on making it so complicated we don’t know. The reams of accounts in-branch advisors may have asked you to submit are just not necessary.
If you do anything after reading this, do yourself this one favour. Don’t risk going to your ‘local branch’ or where you’ve got your current account for a mortgage. Most specialist brokers offer at least as competitive mortgage rates, often better. Moreover, they know what they’re doing!
It makes sense for high-earning contractors to enlist accountants in order that they’re tax-efficient. But brokers shouldn’t lose sight of what makes IT Contractors such a safe bet for a mortgage: what they earn!
*Most contractor-friendly lenders use 48 weeks to work out your gross annualised salary. Yes, you can use this as a guide. But be aware that there are one or two who use 46 weeks in their calculation. If you want an exact figure, always take the time to get an official quote!
**The usual ‘affordability factor’ a lender applies to your annualised IT contract is 4.5. Again, we must point out that some lenders only use 4 as their multiplier. But some lenders go the other way. They’ll lend 5 times your annualised earnings as an IT Contractor for your mortgage. Now that’s what you call an x-factor!
Contractor Mortgage Calculator
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