When it comes to calculating affordability for a self-employed individual, there are a range of approaches based on the structure you’ve chosen for contracting. However, contractors are unique to the self-employed world as we can use any one – or a combination of – criteria to calculate affordability (dependent on the lender). This may seem like good news, providing all the perks of being self-employed without being constrained by the need to tick certain boxes, yet it can be a curse for those looking for a mortgage. Complex income streams have the habit of creating hurdles, especially where managing finances are concerned…
Despite this, contractors shouldn’t be unfairly restricted from receiving the same treatment as any other high net worth client. After all, there’s nothing more frustrating than raising substantial profits on an annual basis, yet losing out simply because you don’t have the security a permanent employment contract can offer. Because of this, we’ve put together our top 5 tips to ensure you’re prepared to tackle affordability checks and any other obstacles lenders throw your way.
This may seem like an obvious statement, but the importance of doing so is vital. First of all, you will need to have a signed current contract to hand. Almost every lender will also take your track record, expenses and any renewed contracts into account. Essentially they want to determine a stable income with no large losses, so most will want to inspect 2 to 3 years’ worth of accounts. However, private lenders are often willing to accept less than that, especially if you have a history of fixed term contracts in the same industry. Assets and business can alternatively be taken into account, looking at an average figure if the business shows a steady increase and the latest figure if there is a downward trend.
Any missed payments have the potential to affect whether you can secure a mortgage, as does being turned down by just one lender. Missed or late loan, credit card or utility bill payments, can all remain on a contractor’s credit profile for up to 6 years. Credit cards or overdrafts up to their limits can also harm your rating, as lenders will presume you’re reliant on them. Not only this, if you own an ‘emergency’ credit card with a £10,000 limit, even if it remains unused, the limit amount can contribute to your total liability so it’s sometimes best to close these. Equally, some contractors have clever accountants, who don’t necessarily incur tax on everything due to judicious use of expenses or write offs. One common example is expensing travel, subsistence and mobile phone costs as they reduce corporation tax liability, but also lower your ‘profit’ on paper. This means your bottom line figure can end up misleadingly low, so it’s important to check this before applying to avoid unnecessary restrictions.
One advantage of being a contractor is the ability to take breaks whenever you need to, but this can cause concern to lenders. Because of this, the majority of lenders will look at a 12 to 24 month employment or contracting track record, with preferably no more than 8 weeks between each contract. However, a good track record will encourage lenders to take calculated risk, leaving you in a much better position. So if you already have a healthy record, contractors can actually often benefit from better deals and more choices. If you’re a first-time contractor? Don’t panic. There are still options available to you when using a specialist broker. If you’re currently on a short term contract or have been in the business for less than a year, you are likely to be turned away by high street banks. A broker, on the other hand, will be able to find a lender willing to consider alternatives when calculating affordability.
With the days of the 100% mortgage long behind us, a lot of the best deals available to contractors are now based on how much of a deposit you can save – ideally between 10% and 25%. If you haven’t managed to do so, or if your existing property is not yet worth more than you paid for it, there are still mortgages out there for you – although you may have to expect a higher rate. Because of this, lenders usually want to look at your credit rating and loan to value ratio, meaning that those with smaller deposits and a higher loan to value, may face more of an uphill journey ahead of them. If you’ve been stashing away the pennies, the more equity you can put into a new property (in the form of a deposit), the less of a risk you are in the eyes of a lender, increasing your chances of lower rates and repayments.
It’s important to understand what lenders will deem as ‘too risky’ and prepare accordingly, but it can be tricky to do so by yourself when your situation is more complex. A lot of high street lenders are unfamiliar with the contracting world as the specialist criteria tends to fall outside of standardised tick-boxes. That’s why we recommend using a specialist broker, who will be experienced in working with contractors and able to outline your total potential and present your case in the best light to a lender. A broker will be able to source the best combination of financial details, find the right lender for your circumstance and work to your priorities.
We believe strongly in keeping our clients as informed as possible and we hope you have found this useful. For more details, please do have a flick through our guide library, where you will find in-depth, market-leading whitepapers on the mortgage process and specific product-related information – including on the best contractor mortgages.