Working as a contractor can be hugely satisfying but also make getting the right mortgage, more challenging. Here are some tips to help improve the result – it’s largely about proving earnings.
The mortgage problem for contractors
Working as a contractor can be wonderful: far more freedom and flexibility than being a salaried worker. And if you have the right skills, then it can be enormously financially rewarding. But there’s a flip-side: rules and laws are mostly written by, and for, the salaried employee. Government can be suspicious and banks can assume you’re an insecure borrower.
You may have a healthy income and so be financially secure but proving this to banks and building societies can be an uphill job. And lenders will always calculate the size of mortgage you can afford as a multiple of what they see as your earnings. They prefer borrowers to fit into tidy categories like full-time employment, which they see as less risky, ignoring the fact that your contracting means you have far greater skills, and so will often find it easy to move roles and clients.
The past causes
To be fair to the banks, it’s not entirely their fault. Assessing variable and varied sources of income is more complex. The solution used to be that they relied on your honesty and some deeper background and credit checks, and then made use of what were called “self-certified mortgages”. These used to be used heavily by contractors and many other non-standard borrowers. They allowed the applicant to self-certify their income without supporting documents and lengthy approvals. It was a far quicker and easier process than now, but inevitably, self-certification was abused. Applicants told fibs about their income and defaults were high.
Regulators [rewrote the rules] after the 2008 banking crisis and effectively banned self-certified mortgages. Sadly you’re now required to submit far more documents and jump through far more stringent hoops to prove that you have enough income to support the mortgage you want – “affordability” in the jargon. And mortgage brokers can be wary of the form-filling and time involved, So you can be left feeling abandoned and unsupported if you only speak to mainstream brokers.
The challenge of proving earnings and affordability.
So in the post-2008 world, you’ll need to do more work to prove your earnings and areas to think about are:
- New to contracting – you’ll usually need to show proof of earnings for the last six months, although some lenders want to see two to three years of documents. As a result, if you’ve only recently switched to contracting, then proof is harder. Talk to us and we can recommend some lenders that will look at your past full-time employment and so get you what you want.
- Variable earnings– Even if you’ve worked longer as a contractor, there are still affordability wrinkles that you should keep in mind. For example some lenders may calculate your income by averaging out the last few years and calculate affordability – what loan payments you can afford each month – based on this average. For example if you earned £50,000 last year and £65,000 this, then some lender may estimate your yearly income to be around £57,500. Other lenders may use the most recent year, or the lowest, as an estimate of your earnings in these circumstances which can mean you only being able to borrow a smaller amount than you deserve. With the right advice and broker, most such problems are soluble.
- Low multiplesLenders will always apply a multiple to your income to work out how much you can afford to borrow. For permanent employees that is typically 4 1/2 x income. Many contractors find that they are offered a smaller loan than they want because the lender has ignored or “haircut” part of their income or applied a lower multiple, for example 2 1/2 x income. Again the answer is the right broker and lender.
Improving your chances
One strategy to boost your chances of succeeding is:
- Larger deposit – By putting more of your own cash into the house purchase and so borrowing a lower amount. The lower the risk a bank takes in lending to you, the more likely they are to approve it. The terms and interest rates they offer start to improve with a 10% deposit, drastically so with a 25% deposit.
- Relatively continuous earnings– Lenders like long-term stability so if you can, show evidence that you have an long-term agreement with an employer or major client. Equally show how past agreements, even if time-limited have been renewed. Taking time off between contracts is one of the benefits of contracting, but lenders may be concerned if you’re workless for more than two months in a three month period. Try to avoid such gaps.
- Check your credit score Before applying, consider how good your credit score is now. It’s easy to check and often some small changes can improve it fast.
The mortgage climate is improving
The short-term gloomy news you read about the economy stalling and house prices softening is true, but the long-term trend is moving your way. More lenders are beginning to welcome contractors as mortgage applicants and regulators have slowly begun to [loosen the worst rules]. The good news is that it’s far easier for you to get the right mortgage than it was, even a few years ago. But, even so, it requires the right preparation and advice.
Preparation and a good result
The good news though is that with a little preparation, advice and the right broker, you can get the mortgage you deserve. That means not just being approved for a loan but finding one with the size, interest rate and terms that suit you best. Here’s what to do to reduce such problems to the minimum.
The three things you can do, and one you should think about
- Gather and improve your information
- Get advice and a specialist broker
- Pencil a property, the right lender
- Make sure you’re saving enough – we’ll cover this elsewhere soon.
Gather and improve your information
Those in full time salaried employment need only produce three payslips to satisfy most lenders but as a contractor you’ll need to do more. The list below gives you some examples of documents that can help, depending on your exact situation. Don’t be put off by the length or complexity of the list. Most lenders require much less and we can advise you on exactly which combination is best. In some cases you’ll need documents to be verified or certified. Again speak to us to check how.
- Recent invoices sent to your clients – verified
- 1 – 3 years of your company accounts – certified
- Profit and cashflow projections, if you have less than 3 years of accounts
- Client contracts, past, present and upcoming – verified
- 1 – 3 years of your year-end tax return – [SA302]
- Details of any dividend payments you’ve received
- Evidence of your expenses and operating costs
The more up-to-date information and documents you can gather, the better. If you earn money from a number of sources then consider how you can best prove each one. We have built most (not yet all) of this information gathering process into our platform so sign up to make your life much easier.
Once you’ve done as much as you can, come and talk to us.
We’ll onboard you, and suggest the best broker and lender for you, based on the data you’ve gathered.
Get advice and a specialist broker
If you’re struggling to meet the proof of income requirements set out by some lenders, using an expert broker can be your best route to securing a competitive mortgage. An experienced broker will be able to look at your complete finances and income history, then take a holistic approach to your mortgage needs.
This means they’ll find the best mortgage for your individual circumstances, without the need for any self-certification. Along with exploring all the potential possibilities, a specialist broker will also be able to help manage your application from start to finish, even assisting with evaluating your credit reports.
If you’d like to be introduced to a skilled broker, just make an enquiry. The brokers we work with are experts when it comes to securing mortgages for clients with complex income situations.
Pencil a property, the right lender
Once you’ve talked to a broker then you should be able to get an indication of how much you can borrow or perhaps even a “Decision in principle” from a lender – essentially a firm estimate of the mortgage and terms a lender will offer you before you’ve put an offer in on the property you want. Having this in hand will put you in a far stronger position with Estate Agents and sellers. Now comes the hard work of finding the property you love. Keep your broker informed as you do so and take it seriously. The quickest way to lose a good broker’s interest is to make them feel you’re not serious or committed to buying.
And if all else fails
(To be continued…)