Updated 27 May 2022
Struggling to obtain a mortgage can be one of the downsides of self-employment. Being your own boss has many perks, but when it comes to owning your own home, you might find that your career choice holds you back. However, with the help of a specialist contractor mortgage broker, it’s very achievable when you approach it in the right way. Here are the obstacles you may face, and how to overcome them.
Self-employed people such as contractors can certainly get mortgages of course, and often secure good deals. However, the application process is more challenging, and the failure rate does tend to be higher. It’s harder for freelancers to find a lender, as your income tends to be less predictable than someone in employment, with more peaks and troughs. Even though you may take home more net income than a comparable employee, lenders are therefore more cautious if your income fluctuates or if you work on fixed-term contracts.
Many feel this is unfair, and they have a point. The argument goes that in times of economic downturn or uncertainty, the contracts might dry up and your income with it. However, the same might apply to employees, who face the risk of redundancy. And a contractor may well be in a better position to earn piecemeal income even in the hard times, whereas a full-timer might well struggle to find another permanent position. Still, whatever the rights and wrongs of it, many mortgage lenders have convinced themselves that contractors are a higher risk when it comes to lending.
Your task, therefore, is to convince them otherwise through the sheer strength of your mortgage application. One big help in achieving this is to use a mortgage broker with a good track record of working with the self-employed.
Lenders use various criteria to determine how much they’re willing to lend contractors. They may look at your average income based on a number of years, or use your lowest yearly income from a certain period.
Your day rate can also prove useful to help lenders determine the amount you’re likely to earn. They will use this figure and multiply it by the number of weeks you earn, assuming you would take holiday. Be prepared to show how many weeks you’ve worked in a recent year and be aware that they will take gaps between contracts into consideration. Generally, lenders will want to see a consistent working pattern.
If you’re a contactor but you’re buying jointly with someone who works in employment, lenders may look more favourably on their more predictable income, which may help you to access the loan. Both your earnings will be taken into account for joint mortgages, so you will still need to show a consistent income pattern, but if the employed person is first-named on the mortgage this may help the application succeed.
To get an idea of how much you could borrow, you could do a calculation based on your day rate. Multiply your day rate by the number of days you work a week, and the number of weeks you work a year (no more than 48 to include holiday, even if you work longer than this in reality). This will give you your average annual income, which you can use to look at mortgage deals.
Bear in mind, however, that lenders will take into account the potential for your earnings to slump. So the amount you can borrow will likely to be lower than the online calculators say. However, the Unbiased Mortgage Calculator is a good place to start.
You won’t necessarily need a larger mortgage deposit as a contractor. In theory, you can get a contractor mortgage with a 10% deposit at the present time, like most other borrowers. But the more money you can put down upfront, the more likely you are to be offered deals with lower interest rates.
If you can, this is a good opportunity to play to the strengths of being a contractor. Make an effort to save up as big a deposit as you can, using the higher wages that contract work can often command. Building up a large cash cushion will offset the perceived drawbacks of being a contractor, and will firstly mean the bank doesn’t have to lend so much, and secondly help to persuade them of your high earning power.
For traditional mortgages, you need to show bank statements to prove your monthly earnings, but it’s more complicated for contractor mortgages. Your broker or lender will tell you exactly what you need, but they usually ask for the following:
The situation is much the same if you work as a contractor for a limited company operate under the off-payroll working rules (IR35). You are still not classed as an employee, so will face the same more stringent application process as any other freelancer.
Lenders will assess your affordability based on your earnings from your salary and dividends, not other income. If you take a low salary and supplement your earnings with other income, you may need to adjust your earning structure or go through a specialist lender that will consider your full book of accounts as well.
If you don’t have accounts to show, you may be able to use copies of your SA302 tax calculations as proof of your earnings.
Note that if you’re buying an investment property through your company (i.e. to be a company asset), you would need to look for commercial mortgages instead.
A specialist contractor mortgage broker can help you find more niche lenders that are willing to lend to contractors. You’ll be less likely to get turned down if you choose this route. Your mortgage broker will guide you through the whole process and vet your application, for the maximum chance of success first time. And given that declined mortgage applications will impact your score, using a broker can help protect your credit score too.
There are buy-to-let mortgages out there that accept applications from contractors, but the deals are few and far between. Your best bet would be to go through a broker to access them.
If your credit score is low, you’ll find it even more difficult to get a mortgage. Try to improve your score before you apply and bear in mind that declined applications will affect it.
The Help to Buy scheme closed to new applicants in 2019, but you could take out a Lifetime ISA to help you save the deposit for your mortgage. You’ll need to be over 18 years of age, but under 40, to open one of these accounts.
To put yourself in the best position for getting a mortgage, it helps to show consistency of earnings and a good track record of managing your money. The following steps can put you in a better position when you apply:
Finally, remember that if necessary you can start small and work your way up. Once you own a property, no matter how cheap, your chances of securing your next mortgage are considerably improved.