Other brokers will push the angle that they have access to bespoke underwriting and special access to contractor mortgages.
This is not accurate.
Certain lenders have the criteria to lend against a contractor’s daily rate, others do not.
Mortgages for contractors are not difficult to obtain as long as you approach the correct lenders.
Today, I will discuss 5 areas to look out for with contractors obtaining a residential mortgage.
1. Minimum Daily Rate / Industry
- Make sure you tell the lender the industry you work in.
- Some lenders require a minimum daily rate and other require a minimum daily rate depending on the industry the contractor works in.
- To illustrate this, Clydesdale Bank require a minimum calculated income of £75,000 in any industry.[1]
- As they work off a 46 week year, Clydesdale Bank require a minimum daily rate of £326.50 per day.[2]
- £326.50 x 5 days x 46 weeks = £75,095
- If you are contracting in the IT industry then Halifax do not require a minimum daily rate.
- In any other industry, Halifax would also require a minimum calculated income of £75,000[3].
2. Retirement Age / Maximum Term
Since the mortgage market review in April 2014, lenders have had to tighten up their criteria on lending into retirement.
Some lenders are more lenient than others.
For example, some lenders will lend to:
- Client’s 65th birthday
- State retirement age
- Client’s 70th birthday.
The knock on effect of this to contractors is that your choice of lenders is already reduced due to the requirement of working off your daily rate.
It might be that the only lender who will lend against your contracting history, will lend to state retirement age resulting in the term being shorter and higher monthly payments.
3. Loan Size & Income Multiples
- By working off a client’s daily rate, it often means they can borrow more money than they anticipated.
- All lenders have their quirks.
- For example, Halifax will restrict income multiples to 4 x income if the borrowing is over £500,000[4]
- This was Halifax’s response to slow down borrowing in central London.
- The other way lenders protect themselves is loan-to-value.
- Virgin Money require a 20% deposit if the purchase price is over £500,000.[5]
- Kensington will only lend against a contractor’s daily rate with a minimum deposit of 20%, regardless of the purchase price.[6]
4. Gaps
This is an issue that will catch out most contractors.
All underwriters want to see consistency with a client’s contracting history.
Each lender takes a different view to gaps between contracts.
- To give a quick example:
- Virgin Money will accept gaps no longer than 2 months between contracts.[7]
- Clydesdale Bank will accept gaps no longer than 6 weeks between contracts[8]
- Halifax will accept gaps no longer than 4 weeks between contracts.[9]
- If the gap is because you couldn’t find new work then lenders will stick rigidly to the above criteria.
- If a contractor has a gap for a credible reason (medical reasons, extended honeymoon, switching from long-term permanent position to contracting doing same job) then lenders will often understand the circumstances behind it and still lend.
5. Offshore Umbrella Companies / Employee Benefit Trusts
I have yet to find a lender comfortable with a contractor that is paid via an offshore umbrella company or employee benefit trust.
Those are the 5 most common areas to be aware of when obtaining a mortgage as a contractor.
There are many others.
Call us today on 02921 159 466 for contractor mortgage advice for your circumstances.
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Neil Soundy Financial Services Ltd is an appointed representative of HL Partnership Ltd which is authorised and regulated by the Financial Conduct Authority.
The Financial Conduct Authority does not regulate some forms of buy-to-lets.
We do not give or imply legal or taxation advice. We recommend you contact a solicitor or accountant for advice in these areas.
Think carefully before securing other debts against your home/property. Your home/property may be repossessed if you do not keep up repayments on your mortgage.
[1] Clydesdale Bank will have other criteria to meet as well.
