Working as a contractor can be a really flexible way to earn your living but the nature of short-term work contracts or fluctuating freelance income can make securing a mortgage that bit more complicated.
What is a Contractor?
An independent contractor is essentially anyone who is self-employed but carries out work for a company. You might also be known as a freelancer or a consultant but the factors which make securing a mortgage as a contractor will affect you equally.
Companies often bring in a contractor to work on a project for a set period of time. For example, they might need an IT consultant to help with the launch of a new IT system for 6 months or a new company might hire a freelance PR consultant to oversee their first few months.
Contractors are usually hired to work for a set period of time on a specific project. This means that you might not receive a set annual salary but you might undertake a number of jobs for different employers in the space of a year.
Contractors are usually also responsible for paying their own tax and National Insurance contributions.
Contractors come in many different forms as the term can be applied to anyone who does not have a permanent job. This includes: if you work for umbrella companies, as a zero-hours worker, if you are freelance, on a short-term contract, or an agency professional.
Is it Hard to get a Mortgage as a Contractor?
Working as an independent contractor does mean that your income can fluctuate. One month you might get paid a large lump sum and then nothing for a few months. This can mean that it can be more difficult to provide evidence of a consistent income.
But don’t despair, many mortgage lenders will be willing to lend to you. Mainstream lending criteria might not favour contractors but if you get advice from a good whole of market mortgage advisor they can help you to navigate the system and identify a mortgage that works for you.
How Does a Contractor Qualify for a Mortgage?
Lenders will look at a number of factors before deciding if they can lend to you. This includes the usual mortgage parameters such as your age, income, property type and credit rating, plus they may also take into account:
- How long you have been a contractor for
- What type of contractor you are
- How long you have left on your current contract
- How long you have worked in the industry
- If you have had contracts renewed in the past
For a contractor it can be harder to prove earnings as they can go up or down month by month. Most lenders will want to see evidence of your earnings from at least the last six months but be prepared to show evidence of your earnings for the last two or three years.
The kind of evidence you need to show to prove your earnings might include: bank statements, invoices, tax returns, business accounts and contracts.
If you have been working as a contractor for a long time then this works to your advantage as lenders will look at a number of year’s annual earnings to come up with an average annual income. They will then use this to work out how much they think you can afford to borrow.
For example, if in your first year you earned £30,000 and in year two you earned £35,000 the lender will probably average it out to an annual income of £32,500 and base your mortgage offer on this.
How does being a Contractor Affect How Much You Can Borrow?
If your annual earnings have changed dramatically from year to year then a lender is unlikely to try and average out your earnings. Instead they will either take the most recent year as evidence of your income, or in some cases they might take your lowest annual earnings as an indication of your earning capacity.
Obviously, depending on the size of the difference between these two figures, this could have a significant impact on how much a lender will be prepared to loan you through a mortgage.
How Does Earning a Day Rate Affect Your Chances of Securing a Mortgage?
Some contractors work on a day rate. This means that they charge a set fee for every day they work.
Certain lenders may be happy to use your day rate to calculate how much your annual income would be. Other lenders might be more cautious and may only accept a day rate to calculate an annual income if you have a contract of at least 12 months.
To get a mortgage based on your day rate it usually helps if you have a history of working in this way. It also helps if you can prove you have signed a contract which will pay that day rate for at least six months.
How to Improve Your Mortgage Application as a Contractor
Lenders are looking for proof that you will be able to continue to meet your monthly mortgage payments. As a result it is important to show that you are consistently earning a decent amount.
You can also make yourself more attractive to lenders by offering a bigger deposit. This makes you a less risky prospect as you are borrowing less.
Another way of improving the strength of your mortgage application as a contractor is to show proof of repeat business or extension of contracts. Providing evidence of ongoing agreements with companies using your services can also be helpful. Lenders like to see long-term security.
Some contractors like to take breaks between each contract. While this might be your preferred way to work, any long gaps in earnings can look bad to lenders. In the year leading up to applying for a mortgage it can be a good idea to avoid taking too many breaks between contracts.
As a contractors it is also a good idea to provide lenders with plenty of evidence for your business expenses, incomings and outgoings to provide extra proof that you can afford to pay a monthly mortgage.
Finally, don’t neglect your credit score. Ensuring your credit score is good (or improving it if it is not so good), is another way you can improve your chances of being approved for a mortgage as a contractor.
Can I get a Mortgage if I have just Started out as a Contractor?
It is a lot more difficult to get a mortgage if you have just started out as a contractor but it is not impossible.
Most lenders like to see at least 12 months of accounts. Some lenders however who specialise in lending to contractors may consider you if you have just started out as long as you can provide evidence of contracts for future projects.
How Long does Your Current Contract Need to Be?
This varies from lender to lender and depends on your personal circumstances. However, applicants are usually required to have been working as a contractor for at least six months and have at least six months left to run on their current contract.
Can I get a Mortgage if I am an Umbrella Contractor?
If you are a contractor working through an umbrella contractor you should seek advice from a mortgage advisor who can help you to approach specialist lenders. This is because lenders might be concerned that your income is not sustainable as an umbrella contractor.
As with other types of contractor it helps if you have been working in this way for at least 12 months and if you can prove that your contract has been renewed in the past.
Do I Need to let my Mortgage Lender know if I switch from Employed to Contract Work?
No. As long as you can continue to meet your monthly mortgage payments then you do not need to inform your lender that you are no longer employed and are now working as a contractor.
If you think that going freelance will affect your ability to pay your mortgage then you should let your mortgage lender know. That way they can work with you to potentially change your repayments and prevent you from falling into arrears.
Can Contractors Use Help to Buy Schemes?
The Help to Buy scheme helps people to purchase a property by providing a low interest loan to increase the size of their deposit.
Contractors are eligible to apply for a Help to Buy scheme, however unless you can provide evidence for consistent earnings and for future earnings the lender might not be willing to take the risk to lend to you.
Can I Get a Joint Mortgage with a Contractor?
If you want to secure a mortgage as a contractor it can help to apply for a joint mortgage with someone in full-time permanent employment. This can reassure lenders that fluctuations in your income can be covered by the other party in your joint mortgage.
If two or more contractors want to apply for a joint mortgage; then, as with other contractor mortgages, you will need to demonstrate previous consistent earnings.
Key Things To Help You Secure a Contractor Mortgage
- Provide as much evidence as possible of recent earnings. This could include bank statements and invoices.
- Demonstrate evidence of previous and current contracts, especially if they have been renewed in the past.
- Make sure your credit score is good.
- Save up for a bigger deposit.
Securing a mortgage as a contractor can be more complicated than securing a mortgage when you are in full-time permanent employment. As a result it is a good idea to speak to a whole of market mortgage advisor to get tailored advice and find the right mortgage for you.
VA Mortgages are an independent whole of market mortgage advisor. Contact our advisors today for a no obligation discussion about your circumstances.