What makes contractors smart is how they deal with their finances. Their accountant streamlines their income for tax efficiency. Their day rate often eclipses that of the mere mortal permies alongside whom they work.
Yet for all this strategy, they still fall foul of the High Street mortgage lender. And hard.
In a professional sense, contractors are independent. They have to be tough, so High Street rejection is hard. Advisers telling them they can’t afford the mortgage they need is a bitter pill.
But it needn’t be like this.
One of a professional’s greatest strengths is knowing when to ask for help. It’s not a weakness.
So today, we’re going to show you how contractors can get a mortgage using their day rate. First, a direct way; then one that navigates unnecessary obstacles.
Before we show you how, let’s paint a picture. See if you can see any of the characters therein.
High Street Mortgages for Contractors: Why They Often Suck
A contractor will approach two or three mainstream mortgage providers. Sometimes more. All those lenders offer a ballpark figure based on the contractor’s accounts.
That offer is nothing short of derisory compared to what they earn. But it is what it is.
As the offers are similar, they’re tempted by the lender who offers the biggest loan. Yes, even if that means paying a higher arrangement fees for the privilege.
That’s not how it should work. In fact, it’s not how it does work if you approach lenders from the correct direction.
Contractors earn good money. They keep way more of that income than permies on PAYE. They can, in real terms, afford much more than their employed peers. So why do lenders’ offers fall short of that potential?
It all begs the question, “How do contractors get a mortgage that reflects their true status?”
As promised, here’s the a short, direct answer. Afterwards, there’s a longer route for the butterfly collectors. As the saying goes, “Pick your potato…”
How do contractors get a mortgage? A competitive one, at that?
There are two ways a contractor can secure a mortgage that uses their gross income. The first and fastest route to a contractor mortgage is simple:
- Gather all the info you’ve put together about the home you want to buy;
- Grab these documents of your own:
- Copy of your contract
- Utility bill/driving license/passport (any one of those will suffice);
- 3-months bank statements;
- Up to date CV;
- Pick up the phone to a specialist contractor mortgage broker;
- Relay all the above to said broker and send copies of what they need;
- Sit back, relax and be in your new home within the next 3-5 weeks.
That’s it. You need not read any more of this article. Instead, pick up the phone or request a call back when it’s most convenient for you.
But I know there are contractors who like to know how the cogs work in tandem.
They like to take things apart and put them back together again. They also have a collection of leftover bits in a tin that ‘might come in useful’.
They never do. Instead, they replace the model that stopped working not long after they put it back together.
So, for those of you with things that may or may not work with a piece missing, let’s break it down.
Getting a mortgage using your contract rate: the long route
My guess is you’ve been to a couple of High Street mortgage lenders already. You’ve presented your contract to them, which goes down well. So well that each adviser becomes your new best friend in an instant.
You’ve brightened up their Saturday morning, justifying them getting out of bed on a weekend. The commission they’re in line for on the mortgage you’re asking? It has them almost salivating…
…until you present your accounts.
Now, remember: at branch (and call centre) level, advisers have a strict formula they must follow. This formula is an equation and it’s called ‘lending criteria’.
Since the credit crunch, each lender has its own. The reasons for those differences are many.
To relate them here would detract from the point of the article. For now, know this. Each lender has interpreted post-credit crunch guidelines to reflect their brand’s ethos.
To curb your curiosity, we’ve created guides for all contractor-amenable lenders’ criteria.
But with all that said, a contractor’s financial situation on paper doesn’t matter one jot. At least not at branch level.
A huff and a puff and I’ll blow your house ownership dreams down
Mainstream banks and building societies have profiles that mortgage applicants must match.
For sure, credit history plays a part. But an adviser’s priority is to make sure that applicants can afford to repay the mortgage loan.
To work out affordability, advisers extract certain information from applicants’ documents. The affordability criteria include, but aren’t limited to:
- net pay;
- dividend drawings
- time served in current industry;
- term of employment contract.
These are all elements designed to help a lender decide risk. Even as a novice contractor, you can see the pitfalls already.
In most cases what you draw as salary and dividends in no way reflects what you can afford. You may only have been contracting for a short time. And that current contract may only run for a 3-, 6- or (at best) 12-month period.
When an in-branch advisor tries to put your contractor finances into their equation? Even the program laughs, or spits out a laughable affordability result.
The advisor makes their apologies and concludes the meeting.
They promise to start the mortgage application process for you, of course. By that, they mean that they’ll ship your details off to their underwriters.
But when they say that they’ll “be in touch” as you leave? Why do you get the impression that you needn’t hold your breath.
What they’ll omit to tell you is that they’ll stamp your application ‘High Risk’. Nor that, based on their initial search, the bank won’t avail you of the funds you so desire to buy your home.
They’ll also not mention the impact of a failed credit search, the probable result. Even one fail could prevent you getting a mortgage with a more amenable lender later on.
The long route to contractor mortgage success turns full circle
Now, most contractors are also limited company directors. They’re not daft. They wouldn’t have set out on this independent road without a bit of nous.
So, when the rejection comes back from the bank, they turn to the Internet. What did we ever do without it?
With any luck, they find a genuine specialist mortgage broker. Or at least, a contractor mortgage calculator.
They input their day rate into said calculator, or move the slider. The further they slide, the more it tells them they can afford. Based on their day rate, our contractor can borrow much more than on the High Street.
Why such a big difference? One of those figures isn’t right; how can it be?
How specialist brokers explain your contract income to underwriters
As a contractor, you need an interpreter. Someone who first understands your day rate and income. Then, they must be able to translate it into mortgage underwriters’ language .
But what you’ve done by going the long route is to make their job harder.
There’s a real chance that one of the lenders who’ve rejected you do do contractor mortgages. The problem is, you’re in a category all to yourself.
In-branch staff can’t access the underwriting process that can assess you with accuracy. They rely on a host of your historical financial data.
Between you and me? All those accounts they ask for are useless.
You and I know that your wealth hides within the retained profits of your limited company. And even if, by some miracle, your adviser sees it too, they can’t use it in their calculation.
To get the best mortgage deal and best interest rates, you have to bypass branch staff. You need a direct line to underwriters who can use your total gross income.
But how do you access contractor underwriting when it’s so elusive?
You’re not the first contractor to fail with mainstream mortgage lenders. You sure won’t be the last.
Over time, specialist brokers have emerged to act as go betweens. They’ve already negotiated bespoke terms with lenders who work with contract income.
You don’t have to start explaining your income from scratch or present reams of accounts. You can see where I’m going with this now, right?
To start the process, you must approach such a broker and give them your details. Their experience and instinct will tell them which lender is best for you.
But they can’t do that without first you contacting them.
Now, do you remember that check list at the top of the article? The one that said, the fastest way to get a contractor mortgage?
Grab all the documentation listed under point 2., then call this number: 0208 421 7545
The rest will flow from there.
It took a while to get here, didn’t it? But whether you go the long or short route, remember one thing:
when securing a mortgage as a contractor, a specialist broker is your new best friend.
Author: John Yerou
John Yerou is the owner and founder of Contractor Mortgages®; a trading style & trade mark of the award winning Mortgage Quest Ltd. One of the most recognised names in providing mortgages for contractors and freelancers across the UK.
In 2004 John began his career in Financial Services as an independent mortgage adviser and broker. John has been instrumental in negotiating bespoke underwriting for contractors with high street lenders.
His presence in the industry as a go-to expert is growing by the day and he is regularly cited and writes in publications both locally and nationally.