Many myths are floating around that suggest a contractor’s mortgage application won’t be accepted. It is true that historically it was more complicated, with lenders asking for years of accounting records to help them feel secure. However, today, a self-employed person is just as likely as anyone to make a successful mortgage application.
Contractor Mortgage Glossary
Affordability assessment: A review that calculates how much you can borrow
Deposit: The amount of money you can put towards the purchase of property immediately.
Interest: Additional cost of borrowing money.
Mortgage: A loan specifically for the purchase of a property.
Term: A pre-agreed time-frame to repay the loan.Stress-test: A review of whether you can afford to make mortgage repayments if interest rates fluctuate.
Contract mortgages
The government has been making changes over the past few years so that mortgages are more affordable for those in vulnerable positions. This includes those looking for contractor mortgages.
Even if you have only been working in a contractor role for a year, you can still be approved for a mortgage so long as you pass the affordability assessment and stress-test that lenders carry out. And, of course, the more substantial the deposit, the more a lender will be willing to offer.
As with any mortgage, borrowers need to be prepared for a significant financial commitment. Not only does a mortgage require monthly repayments for an extended period, but you will also need to save up a considerable deposit.
Most contractor mortgages will require a minimum of a 10% deposit, although the right contractor specialist may know a lender who will accept a lower percentage. It is better to wait, however, and save a larger deposit as this will naturally bring down the interest rate as well as lower the agreed term to pay off the mortgage.
Contractor mortgage calculator
When ascertaining whether or not you can afford a contractor mortgage, you can make use of a mortgage calculator. This will give you an initial idea of how much you can afford to borrow and repay based on your contract rate and how much you have saved for a deposit. These calculators may also help you decide what type of mortgage you want to get (such as fixed rate, offset and so on) based on the repayment amounts and repayment term you are most likely to get. AMS Mortgages have their own helpful mortgage calculator that you are more than welcome to make use of.
How to save a deposit for a self-employed mortgage
1) Stick to a budget
No one likes the word ‘budget’, with its connotations of restriction and hardship, but reviewing your outgoings, creating a budget and sticking to it can help you save without feeling like you are going without.
Before assigning a budget, make a list of all of your outgoing expenses including bills and loan repayments. Once you have an all-inclusive list, calculate how much is left over to gage a budget that will allow you to live comfortably and save money simultaneously; reducing the likelihood of dipping into your savings.
Take this as an opportunity to review how much you are spending each month on unnecessary luxuries and find realistic places to cut back. If you buy a daily latte from Costa or Starbucks, for example, you could look to restrict this to a weekly treat and allocate the money that would have been spent this way to your contractor mortgage deposit.
The key here is to be realistic. Don’t tighten the purse-strings so much that you have to dip into your savings. On the other hand, don’t be too liberal with your budget, or it will take years to save.
2) Consider the types of jobs you are accepting
As a contractor, your income will be more flexible. Now is a fantastic time to review your clients and contracts. Are there clients that you have been working with for years, and are therefore not paying as much as more recent contracts?
Is there potential to end contracts that are taking considerable resources and are not paying well in favour of longer-term projects that will generate a living wage? If not, is this something you could consider for future projects without too much risk?
Changing the way you view future projects may help you maintain a regular income each month as well as allocate funds towards your mortgage deposit.
It may feel uncomfortable, but being a little more ruthless with your contracts may result in more money for less work; which, of course, increases the amount you can allocate towards your mortgage deposit. Of course, you should not take any steps that could be disadvantageous to your company or your income. All decisions should be heavily considered before any action is taken.
3) Discuss an offset mortgage
A contractor mortgage specialist, such as AMS Mortgages, can help you ascertain whether an offset mortgage is a viable option for your situation. With this route, you can put down a smaller deposit while still making savings on your mortgage amount.
An offset mortgage takes what you already have in savings and removes this from the interest on your loan, allowing you to build up your savings slowly and enjoy a lower repayment rate as well as a more secure mortgage.
To qualify for an offset mortgage, your savings and mortgage must be held by the same lender. You will reallocate your savings into an offset account that is linked to your mortgage.
Our team will be able to discuss this type of loan and help you decide whether this would be an advantageous route for you to take.
4) Use financial gifts
A lot of people, especially first time buyers, struggle to raise a 10% deposit. It is not unusual for family members to ‘gift’ money towards the deposit. If this is a route you can take, the person who is gifting the money will simply have to sign a letter that specifies:
- That the money is being gifted - with no expectation of repayment or right to the property
- The property address you are interested in
- Confirmation that finances are positive and there is no risk of bankruptcy
The lender may request additional evidence, such as proof of the money building over time.
5) Allocate inheritance money towards your mortgage deposit
Similar to using a gift to fund your contractor mortgage deposit, it is possible to invest funds gained from an inheritance. The lender may ask you to provide specific documentation, and your contractor mortgage broker can outline any additional information that is required.
Contractor and self-employed mortgage broker
Although having a contractor or self-employed mortgage application approved is not as challenging as it once was, it is not without its difficulties. Our mortgage brokers have substantial knowledge of the UK financial services industry and are here to offer advice specifically for contractors and those who are self-employed.
In many cases, our contract mortgage specialists will be able to find a product that matches the rates offered to those in full-time, permanent employment. You will also be the first to find out about attractive deals and interest rates. Get in touch today to find the best mortgage solution for you.
