If you ever applied for a mortgage as an employee, you know the drill. You take your P60 to a mortgage lender, often to the same institute with whom you bank. An advisor there will check your income against that document, often by way of a bank statement. They’ll also check your employment status and your credit history.
Based on those results, they’ll offer you a mortgage using their standard ‘affordability calculator’. Or not, if your credit score is too adverse.
It used to be that those lenders’ offers would be similar wherever you banked.
If you were a sole applicant, the lender’s mortgage offer was in the region of 4 x your salary. For shared ownership (joint) applications, they’d offer 2½ – 4 times your combined salary.
But since the credit crunch, those multipliers are less set in stone.
Lenders now interpret ‘responsible lending guidelines’ in their own unique fashion. Some follow recommendations to the letter. Others are beginning to relax their policies.
One thing is for sure. The uniformity you could once almost guarantee has all but evaporated.
Today, advisors judge a mortgage application on its merit, albeit using a simplified calculation. And therein lies the problem.
Whilst much has changed, the template lenders use to work out mortgage affordability hasn’t.
Many contractors struggle to calculate how much they can afford to borrow for a mortgage. That’s because they can’t rely on employee-oriented traditional mortgage calculations.
So how does a contractor work out what a lender will offer them for a mortgage?
Limited company contractors don’t get P60s. A client dictates the duration of a contract, depending upon their immediate requirement. Contract earnings can also fluctuate from one client to the next.
To overcome these anomalies, we’ve brokered special mortgage loan underwriting criteria with lenders. We don’t ask contractors for documents they can’t provide. Instead, we use a contractor’s current contract rate as the basis of their affordability.
This is how mortgages for contractors differ from standard underwriting ideology, reflecting the ‘now’.
Yes, the historical employment is important. Continuity of work within your chosen industry is desirable.
The cleaner your credit profile the better. And a bigger deposit will get you a lower interest rate. These factors are the same no matter how you process your income, be it via a limited company or as an employee.
But a different underwriting process calls for a new way to work out what contractors can afford. As such, we’ve produced three tools to help you secure and manage a contractor mortgage:
- contractor mortgages calculator:
- to help you gauge the value of the home you can afford;
- repayments calculator:
- to help you visualise how much you need to maintain your monthly payments;
- stamp duty calculator:
- the one everyone forgets, but if your home is above a certain value, you need to factor in Stamp Duty, too.