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As a contractor, applying for a mortgage often follows a different process and it can be hard to know where to turn. Many traditional lenders often shy away from offering loans and imparting advice, but help is still available. We have compiled our tips to help you give your mortgage application the best chance of success:
There is sometimes a lack of understanding of the way contracting works from lenders who are used to offering mortgages to those in traditional employment. Many of those in call centres or in branches are not trained in how to deal with mortgage applications from those who do not fit their standard script. Because they usually ask for information about your employer and how long you have been with them, you might find that you cannot get any further than this step in the standard mortgage application process.
This is why we recommend that you use a mortgage broker who specialises in finding products which suit contractors. Lenders who process hundreds of applications a day might not be able to ensure that they are able to take every possible situation into account, but there are providers who are more familiar with the way contracting works. These lenders will not be put off when they learn that your employment situation doesn’t fit with traditional employment, and they will usually be able to begin the process of applying for a mortgage with just the details of your contract rate, bank statements and appropriate ID. This means that you won’t have to have three years of accounts available or endless references, as they will understand what it means to be a contractor and provide an appropriate mortgage to suit your situation.
There was a time when 100% mortgages were offered to a range of people, but it is incredibly rare to be offered a deal such as this now. To get the best rates, it is important to have a decent sized deposit saved up – usually between 10% and 25%. If you do not have this level of deposit or if you have no equity in your current property, there will still be mortgages available to you, but you will have to be prepared to potentially pay higher rates. The higher the level of your deposit, the lower the risk the lender is taking on, so the less you pay for your loan which makes your repayments smaller.
One thing which will definitely affect your ability to secure a mortgage is your credit rating. Even with a good deposit and a profitable contract, if you have a history of being unreliable at repaying debts, then you could struggle to secure a mortgage. Since the credit crunch, lenders have been encouraged to tighten up their checks and be stricter about who they lend to, so the onus on you is to ensure that you don’t give them any reason to consider you a risk. Make sure you are on the electoral role whenever you move, keep on top of loan or credit card repayments and always keep lines of communication open when it comes to your finances to ensure that you aren’t overlooking anything.
In order to secure a mortgage based on your contract, you will need to have an up-to-date version of it to hand during the application process. Ensure that this contains all the important details you will need, such as the rate and length of your current contract. This is important if you want to avoid the time consuming and stressful process of compiling three years’ worth of accounts and providing references to the mortgage company to support your application.
One of the most important things to consider when you take out a mortgage is how much you can afford to repay each month. Lenders usually offer mortgages which are multiples of your current contract rate, but this doesn’t mean that you have to take out the maximum loan that they offer you. You will be given details of how much your repayments will be and should consider carefully the implications of taking on monthly payments which may stretch your finances too much. You will need to look at all your financial commitments and be realistic about how much you can afford, as well as considering what you could be paying out if you take out a variable mortgage and interest rates happen to rise.
Whilst a specialist mortgage adviser can help you to find a loan which will suit your circumstances, they cannot predict the future. If you are worried about taking on a large commitment, then it is worth considering your options, such as waiting to save a larger deposit or taking out a smaller and more manageable loan in order to relieve some of the pressure on your finances. If you are looking to re-mortgage your existing property then you will need to ensure that you have an action plan for if your circumstances change.
Our FAQs should help to provide information you need regarding your mortgage and dispel some of the most common rumours about applying as a contractor:
This may have been the case in the past, but currently, it is possible to arrange a mortgage based on your contract rate. This means that you do not have to be able to prove how long you have been contracting or provide accounts going back years. Whilst some high street mortgage lenders have relatively rigid rules about lending, there are specialist underwriters who are able to base their offers on the contract that you have rather than accounts from previous years. This means that you could secure a mortgage with just your contract, bank statements and ID as proof of your position.
Many call centre agents who are following a script will tell you that you need to have proof that you have spent a ‘substantial’ time in your current role in order to minimise the risk of lending to you. This can cause problems for contractors who only spend a short time in each role, but there are underwriters who are able to skip this aspect of the assessment process altogether on the understanding that contractors do not conform to the expectations one might have from someone in traditional employment. Even if you are new to contracting, there should be lenders who will understand your situation and make you an offer based on their understanding of the nature of the work.
Whilst some lenders will expect every applicant to fit their expectations of those in regular employment, there are those who understand what it means to be a contractor and how it works. Like anyone trying to secure a mortgage, if you have a deposit and a good credit rating, you should be able to borrow about four times your contract rate and be classed as low risk. However, if you have CCJs or defaulted mortgage payments on your credit file, you may have more trouble, but it will not be harder for you than it would for someone in permanent employment. Even if you think your financial history will stand in the way of securing a mortgage, it is worth speaking to specialist underwriters to see what kind of mortgages they can offer you.
There is no need for such a large deposit and most homeowners purchase with a deposit of around 10%-20%. Although almost 100% of mortgages used to be available, lenders are unlikely to offer them in the wake of the credit crunch, but you can shop around to find the option that is right for your situation.
In most cases, interest rates for contractors and permanent employees are the same, although some find that they actually get better rates than those in traditional jobs. This is particularly true of those who have been able to take advantage of their higher earnings to save for a deposit, which can make interest rates and monthly payments smaller. Contractors often have better credit ratings, which can make it easier to find the right rate.
Many mortgage brokers do not really understand the way that contracting works and have used a system called ‘self-certification’ to arrange mortgages for contractors. These have been less and less common since the credit crunch, but they were also preventing contractors from accessing some of the best interest rates and beneficial ‘loan-to-value’ rates. Using a specialist underwriter could help you access mortgages based on just your contract rate.
You may have heard stories about contractors waiting for weeks to have their mortgages approved, or having a long list of referees required to complete the process. However, specialist underwriters who appreciate the nature of contracting work can secure you an offer based on your contract with no need for collecting references, which can make the process significantly faster and easier.
Lenders change different rates for a variety of reasons, including fluctuations in base rates for those on variable mortgages or because the fixed term of your current arrangement has come to an end. However, the fact that you are a contractor should make absolutely no difference to the rates you are offered. Unless you are seeking to change the terms of your agreement or release equity from your property, your employment status is unlikely to make any difference.
If you are thinking of buying a property or remortgaging an existing property, CMME can help. Call us on 01489 555 080 or email them on email@example.com.
Nixon Williams are not authorised to offer regulated mortgage advice. Nixon Williams is an Introducer Appointed Representative of CMME.
Your home may be repossessed if you do not keep up repayments on your mortgage.
CMME is a trading name of CMME Mortgages and Protection Limited. Authorised and regulated by the Financial Conduct Authority (FCA reg. 414798). Registered in England No. 04886692. Registered Office: 2 Glass Wharf, Bristol, Somerset, BS2 0FR. Please be aware that Commercial Mortgages, Overseas Mortgages and some Buy To Let Mortgages are not regulated by the Financial Conduct Authority. Calls may be recorded for training and security purposes and to improve the quality of our services.