Thinking of applying for a contractor mortgage? Improve your chances of getting approved with these tips from our in-house experts and panel lenders.
Contractors and freelancers have always had to struggle in order to find a lender who would agree to the terms. This took a turn for the worse in the aftermath of the 2008 global recession.
If you’re a contractor, you would know that banks and high street lenders don’t really have a positive track record of accepting contractor mortgage applications. That, however, does not mean that contractors, freelancers and other self-employed professionals cannot get a mortgage to finance the purchase of their dream home. Here are some important tips from our in-house contractor mortgage experts and specialist lenders on our panel to help you understand contractor mortgages better and in turn be well prepared before applying for one.
Do You Qualify For A Contractor Mortgage?
As far as contractor mortgages go, the first sign of confusion arises from the very question of eligibility.
The problem here is that many contractors learn about contractor mortgages after their applications are turned down for regular mortgage products. At this point, it should be enough to say that all contractors, freelancers and self-employed professionals who have ongoing, active contracts are eligible to apply for contractor mortgages.
Examples
Most lenders are happy to bracket all contractors in a single group for the sake of simplicity, with sub-groups corresponding to various industries and sectors. For example, we have on our panel lenders who specialise in IT contractor mortgages, home services contractor mortgages and so forth.
Directors of limited companies who act as independent contractors (or employed contractors with longer contract tenures) and self-employed professionals/freelancers (registered as sole traders) are, for instance, eligible for contractor mortgages.
How Contractor Mortgages Differ From Other Mortgages
Contractor mortgages are fundamentally no different. They allow the borrower to borrow the money from the lender over a long period of time, while the property in question acts as the security.
The difference stems only from the fact that contractor mortgages are customised to meet the peculiar financial position contractors find themselves in. You may have noticed that it’s difficult to get your application through if you can’t demonstrate a reliable stream of income – a huge problem.
As a way of solving this problem, lenders are willing to undertake additional risk by disbursing contractor mortgages. This risk often manifests itself in two forms – relatively higher deposit amounts and interest rates. This is, however, not to say that contractor mortgages are always more expensive than other mortgage products and contractors, essentially speaking, are forced to accept a rough deal. Read on to understand what we mean by this.
Contractor Mortgages And High Street Lenders – A Bad Combination
At Commercial Finance Network, we broker a range of contractor mortgages for our customers on a regular basis. Over the years, we’ve observed a common thread that runs across many applications we receive – applicants choose to approach us (the broker) only upon getting turned down by high street lenders.
Our experience of operating in this industry for over a decade tells us that approaching high street lenders for any specialty finance product – contractor mortgages, HMO finance or even invoice finance – is a bad move. Most high street lenders lack the resources or experience to handle any case that doesn’t conform to the norm, and hence, you are very likely to receive an expensive offer (if at all you’re to receive one, that is).
In essence, if you’re looking for a contractor mortgage, high street lenders will have little to offer.
What do you do then?
Approach Specialist Lenders
Specialist lenders are the ones who bring on board adequate experience and expertise to handle your exact requirements. In this case, a specialist contractor mortgage lender will know how to assess your credit history, your history of contracts, your ongoing contracts and your affordability, putting them in a better position to construct a mortgage offer that takes into account all the angles.
Of course, it’s extremely difficult to approach specialist lenders on your own if you don’t have the right contacts. This is where a leading whole of market broker like Commercial Finance Network comes in. We forward your application to our panel of UK-wide specialist lenders, thereby improving your chances of securing a fair, affordable and swift contractor mortgage offer. Applying is easy – call us on 03303 112 646 or fill in this quick application form.
Yes, New Contractors Can Indeed Get Contractor Mortgages!
It’s one of the long-floating contractor mortgage myths – if you are a new contractor, the doors are already closed on you.
This is, we’re happy to report, far from the reality.
One of the benefits of working with an industry-leading broker like Commercial Finance Network is that your application reaches contractor-friendly lenders who are willing to assess your case even when you are a new contractor. Of course, it’s always a good thing if you have been operating as a contractor for 2-3 years.
However, it’s advisable to have an ongoing contract that the lenders can use to annualise your day rate (the longer the contract, the better deal you’re likely to get).
What Are Annualised Contractor Day Rates?
If you currently have an active contract and are paid a fixed day rate, lenders may be willing to annualise this rate to arrive at an estimate that fairly reflects your yearly income.
However, we would like to inform our readers that not all lenders follow this practice, and the ones who do may require you to have a long term contract in place. If you have an active contract for the next 12 months, your chances of getting a good contractor mortgage offer automatically receive a boost.
How Do Lenders Calculate Annualised Day Rates?
It’s a straightforward process that involves a couple of assumptions. It may, however, vary from one lender to another.
If you are a contractor whose contract stipulates a flat day rate of £300 and you offer your services 5 days a week, your weekly income comes to be £1,500. Discounting the holidays, it’s safe to say that most workers get paid for 43-48 weeks a year.
Assuming that you work for 48 weeks over a 12-month contract term, your annualised day rate will be £72,000. The lender will then be able to calculate your affordability based on this number.
Making The Most Of Your Company Account
This is a question we get asked often – Can I utilise the cash surplus in my company account towards my contractor mortgage?
There’s no objective answer to this question, and we strongly recommend consulting with qualified finance experts. However, as a rule of thumb, we can safely say that you can produce company accounts (for a limited company, that is) to bolster your mortgage case. Lenders will always be better placed to offer you a good deal if you can convince them that you’re running a profitable company and you aren’t drawing high salaries for reasons such as tax concessions.
On the other hand, if you’re merely working as a sole trader or in a partnership, you may be able to use company accounts to offset the deposit/repayments on your contractor mortgage.
This Goes Without Saying: Keep Your Credit History Clean!
The most common reason for lenders to turn down contractor mortgage applications are unconvincing credit reports.
We understand that personal situations and other financial difficulties can damage your credit score (it’s a very common scenario, and you shouldn’t feel disheartened about it). However, you should take positive steps to repairing your credit score and sorting out your credit history as soon as you can. Working consistently towards this goal – paying bills, clearing the past dues, settling outstanding debts, getting rid of unwanted credit cards are a few steps you can take in this regard – usually does the trick.
To know about the common scenarios that hurt your credit score, do read through our bad credit mortgage guide.
Contracting Breaks May Hurt Your Application
One of the very first points we made here was that you should avoid high street lenders for specialty products like contractor and freelancer mortgages. Here’s another reason that supports this point: high street lenders are almost always ill-prepared to understand your contracting situation.
Most people choose to start working as a contractor or a freelancer to embrace a certain lifestyle – one that lets them have a better control over their lives. After all, who wouldn’t want such professional and personal freedom?
This, however, comes with its own risks. Every contractor knows that it’s not always easy to bag contracts that run into years. Applying for a new contract, going through the whole process and essentially setting up a new shop every few months naturally leads to contracting breaks.
These breaks, even when they are intentional, don’t do you much good when you’re applying for a contractor mortgage. Therefore, we advise you to avoid letting such breaks creep in. Your focus should be on establishing an unbroken, continuous history of contracting (which, in all probability, will also help your finances). For reference, many lenders on our specialist panel prefer that you don’t have contracting breaks that are longer than 8 weeks over a 12-month period.
Contractor Mortgage Deposits
As a rule of thumb, lenders can offer better quotes when you are ready to put down a bigger deposit. As the deposit amount goes up, the lender’s risk goes down, and you may get interest rates that are much lower than ongoing market rates.
Generally speaking, contractor or freelancer mortgages do require you to put up a 10% (or higher) deposit. If you can produce a good track record of contracting, healthy affordability and good credit score, this number may go down (subject to the lender’s discretion and policies).
Know And Understand The Charges Involved
As a responsible, industry-leading mortgage broker, we will always keep you in the loop regarding our fees and charges. But that isn’t it – the lender will charge you an additional set of charges. These include:
- Arrangement fees
- Admin charges
- Stamp duty
- Property valuation charges
- And others
The Best Contractor Mortgage Is The One That Fits Your Needs
Applying for a mortgage without having the luxury of predictable income under your belt can be stressful. Being turned down by multiple lenders doesn’t help at all in such a scenario.
Thankfully, you can now bypass all the hassle by reaching out to specialist lenders across the UK using our affordable, flexible and fast contractor mortgage broking services. Remember – a good mortgage deal can save you thousands of pounds in the long run.