Getting a mortgage when you’re contracting – what’s different?

6 September 2023

As an employee, it’s relatively straight-forward to provide the income information a mortgage provider needs to lend you money.

As a contractor, when your income can be less stable, things can be a little more tricky.

It’s a question of understanding how mortgage providers assess whether you’re a good fit. Here our mortgage partner CMME answers your mortgage-related questions.

1. Is it harder to get a mortgage when you’re a contractor?

Securing a favourable mortgage as a contractor or freelancer is possible, and it isn’t necessarily harder, as UK banks and building societies have gradually begun to take a positive view of the sector after many years of lobbying from specialist brokers such as CMME.

You will find that many lenders are comfortable assessing affordability based on your annualised daily or hourly rate, rather than focusing on several years of company trading accounts. For applicants who are utilising an umbrella payroll company, a similar approach is applied, with the lender focusing on the contract, rather than the payslips, to assess affordability. We find that lenders will deduct some specific income streams when focusing on the payslips, so this preferred approach helps to maximise the level of mortgage funding.

Around 10 years ago there were circa 4-5 mortgage lenders that would consider assessing an application based on contract terms. In 2023, that list has grown to more than 25 lenders, spanning the residential and buy-to-let markets. That is a great improvement and helps to provide a wide array of interest rate options, expansive lending limits and diverse mortgage types for contractors to access.

2. What’s different about the application process contractor vs employed?

Due to the improvements in contractor underwriting, there are very few differences. An employed applicant will be asked to provide 3 months of consecutive payslips, a P60 to support the use of bonus or regular commission payments, and 3 months of personal bank statements.

A contractor working via a limited company (PSC) would also be asked to supply 3 months of consecutive business bank statements. There are instances where a contractor may be asked to provide further contracts but that is often when extensive gaps in their work history are apparent.

Normally, this would be for instances where an applicant has taken more than 8 consecutive weeks off in a row, so a lender may require additional income evidence to support the application.

3. Does being a contractor affect how much I can borrow or the term of the mortgage?

No, and as we can utilise the annualised income process for contractors, the amount of borrowing available can often be higher than if an application is made using company trading accounts. Most mortgage lenders currently offer anywhere between 4.5-5.5x a sole or joint income to determine the maximum lending limit available, subject to credit scoring and the level of deposit that can be provided.

The term of the mortgage is determined by the specific lender’s maximum age at the end of the term, with most allowing up to age 70-75. The maximum term is also determined by the age of the oldest applicant. So, if the application is for a joint mortgage the term will be based on the difference between the oldest applicant’s current age and the lender’s published maximum age at the end of the term.

For guidance, most mortgage lenders are willing to lend over a term of 35-40 years, depending on the age of the oldest applicant at the outset of the mortgage.

4. Do I have the same choice of lenders?

The great news is that most high street banks and building societies offer a contractor-focused policy, allowing you to access the most competitive mortgage rates and lending options available in the market.

If the policy isn’t available, all UK lenders will be willing to assess your mortgage application by referring to your trading accounts as an alternative approach, or potentially the payslips if you are working via an umbrella payroll process. In both instances it is important to be aware that mortgage lenders will only allow certain elements of the income to support mortgage affordability, so check this before applying.

5. Is it riskier to take out a mortgage if you’re a contractor?

As with any self-employed role, there are added risks in taking mortgage finance that cannot be avoided for a contractor. The reality is that you cannot fall back on sick pay if you are unable to work, nor is there any form of death in service benefit automatically in place as you aren’t employed and therefore protected.

The key here is to factor in an element of personal cover into your budget for the mortgage repayments, to ensure that you can continue to cover the cost every month, and you can potentially clear the mortgage in the event of a serious illness.

6. Is there anything I can do to protect my mortgage payments if my income changes?

A mortgage lender will consider a series of support measures if your income increases, so it’s always important to contact your lender if an issue arises. The Government and 32 mortgage lenders recently signed up to the Mortgage Charter (June 2023) to commit to supporting mortgage borrowers in the event they have difficulty in paying for their mortgage.

We always recommend that it is essential for a contractor to have Income Protection in place when taking a mortgage. If you become sick or suffer a sudden disability, which will naturally impact your ability to repay the debt, you can make a claim that will cover your income until you can return to work, or retire. This is an invaluable form of protection for contractors and there are even options available that can be set up via your limited company to help pay the monthly cost of the cover.

7. If I’m going from employed to self-employed, do I need to tell my mortgage provider?

No, this is only relevant if you apply for additional mortgage funds with your current lender if you want to move the debt to a new lender or if you are looking to move home. In all instances, your income will be reassessed to confirm you can afford the mortgage, so being ready to provide the required documents and information is key at that stage.

It would be highly recommended to investigate what your current or new mortgage lender will require in advance of making an application for this reason.

8. What advice would you give to people who are getting a mortgage for the first time?

There are several key points worth noting before applying for your first mortgage.

  • Firstly, review your credit file to understand how you are rated and to address any discrepancies with your report. I would suggest covering this off at least 3-6 months before applying, as corrective actions can take that amount of time to appear on your record. Register to vote, as this can provide a significant boost to your rating, whether you choose to vote or not! And make sure your payments for committed expenditures are up to date, i.e., utility bills, mobile phone bills and any that you pay for unsecured debts, such as credit cards and personal loans.
  • In line with this plan, address spending habits, particularly paying off debts where possible, stopping using your overdraft and limiting large payments leading up to applying for the mortgage. Lenders assess affordability by reviewing the latest three months of personal and 3 months of business bank statements (if applicable.)
  • Next would be to firm up your deposit available to put towards the purchase. The bigger the better, as this will improve the interest rates offered and present your application as low risk for the lender to consider.
  • Moving on, I would aim to apply when your income has been at its most consistent when you are preferably at the start or middle of a contract and you aren’t expecting any imminent changes in your finances. Try to avoid applying if you have recently taken a long period of leave, say over 8 weeks, as this will potentially hinder your chances of approval.
  • Lastly, be prepared to provide many documents to support your application! Lenders are consistently improving their processes to confirm the identity of applicants and to establish their affordability but most still require seeing documents submitted during the process. You will be asked as a minimum for ID, proof of current address, income evidence and proof of your deposit. Depending on your personal circumstances there may be additional proof required, so be prepared to help avoid delays in securing a mortgage offer.

9. What advice would you give to people who are remortgaging?

Whenever interest rates are in a state of regularly increasing, I would suggest that reviewing the options available to you sooner rather than later is essential. Under the Mortgage Charter 32 UK mortgage lenders have committed to allowing an existing borrower to book a new interest rate 6 months before their existing product expires. This locks the rate in, and the lenders have also committed to allowing a borrower to switch to a lower rate if one becomes available before their current deal expires.

Switching to a new lender is also possible and I would recommend comparing your current lender’s interest rates against those available elsewhere before committing. Your existing lender may charge a fee if you decide to move to a new lender after accepting their offer of a new interest rate, so check the terms and conditions before proceeding. In addition, the process to transfer your mortgage to a new lender requires the assistance of a legal conveyancer, so the timescales and costs can increase.

Lastly, bear in mind that your current lender is likely to utilise an electronic valuation system that estimates the value of your home an average of similar property values within a 1-mile radius. While they will compare your home to properties of the same or similar size, this will not include any cosmetic or structural changes you have made to the home.

When moving to a new lender you will receive a free physical survey of your home, so the surveyor is likely to factor these changes into their estimate of the property value. This can help with improving the interest rate band offered (so lower rates become available) or allow you to increase any additional borrowing limit available.

Get in touch with CMME to find out more.

NOTE: Your home may be repossessed if you do not keep up repayments on your mortgage.

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