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Some contractors find it hard when it comes to purchasing a house and finding a mortgage that suits their business model. Many contractors are turned down when they go to high street lenders due to the simple evaluation criteria of employed vs self-employed finances which simply do not add up to what the contractor needs.
This can be overcome by using a financial advisor that specialises in contracting and contractor circumstances. This will mean that they will get their application in front of lenders and underwriters that understand the contracting business and who can see through to the earnings that a contractor takes home.
Often it’s down to the individual lender who have particular lending models that they base all their applications on, and if a contractor doesn’t fit that model, they will not be granted a mortgage. This can have nothing to do with the contractor themselves, rather than the lending criteria of an organisation.
It is worth shopping around and speaking with your accountant to find a financial advisor who specialises in contractors, to ensure the best possible outcome when it comes to one of the biggest purchases a person can ever make. If you are using an accountant who already specialises in contractor or freelancers, they will be able to point you in the right direction.
Why are contractors turned down?If a contractor goes to their own bank and applies for a mortgage, the bank will look at their earnings and determine that they do not fulfil the affordability test. If you are a limited company contractor, you may opt to receive a low income but high dividend payments as your way of receiving wages, however this is why the bank will think that your income is low as they will not consider the dividend payments.
Another reason a contractor may get turned down can be to do with bad credit history or career gaps. Again, this can usually be fixed if using a specialist contractor financial advisor.
There are ways contractors can help themselves when it comes to applying for a mortgage, many of this comes with common sense and applying thought to the process of what a lender will be looking for. Plus, it’s also a good idea to start thinking about what you will need at least six months before you want to apply for a mortgage to ensure all information is accessible and correct.
Find a lender who will use annualised contractor ratesFinancial advisors who understand contractor will use annualised contractor rates to establish how much can be borrowed. This is worked out by taking a contractor’s daily rate and multiplies it by 48 weeks per year, which will provide an annualised rate. Depending on the lender, the amount will then typically be multiplied by four to give the contractor’s borrowing limit. Day rate exampleIf your day rate is £300 and you generally work four days per week, your estimated annual income would be around £57,600.• £400 x 4 days = £1,200 per week• £1,600 x 48 weeks = £57,600
If a contractor has been going for over three years, some lenders will look at all income and dividends paid over the three-year period and see what is affordable from those figures.
Do not use company money as your ownDon’t forget that when you’re doing your calculations as a limited company contractor, the company money is not your own and cannot be used in your mortgage calculations. Taking a loan from the company can be an option in order to gain more finance for a deposit.
Avoid breaks in contractingWhen a lender looks at your contracting history, seeing longer-than-normal breaks in your work history may cause concern for a lender. Obviously as a contractor, the flexibility of working when you want and take the holidays that you want to is part of the lifestyle however be aware that if you take breaks that exceed eight weeks over an average of a twelve-month period, some lenders may have concerns.
Even if you are new to contracting, you can be eligible to get a mortgage, this where the day rate example comes into play. Although you do not have the track record to verify which helps when applying for a mortgage, a good financial advisor will be able to help establish what you need to obtain a mortgage.
2020 Accountancy are partnered with CMME - Mortgages for independent professionals, therefore you can be assured that your mortgage and application are in good, knowledgeable hands.
If you’re wanting to get your foot on the property ladder, always speak to a specialised financial advisor as well as your accountant. Here at 2020 Accountancy, we are happy to steer you in the right direction and provide you with any guidance that you may need. Feel free to get in touch!