Are you a contractor looking to buy a home? If so, you may find conflicting information on your mortgage options. Contractors often work on day rates, through limited companies and umbrella companies. When looking to achieve your homeownership dreams, it’s important to understand how different lenders will use your income. At Willow Brook Mortgages we have experts in contractor mortgages to ensure that your income is used fully. Some lenders will class contractors as self employed and there are different requirements for lenders. With access to over 100 lenders we can ensure that the lender who we are applying to for a mortgage is happy with how your income is received. So, whether you’re self-employed, a freelancer, or a contractor, we can help you navigate the path to homeownership with confidence.
When it comes to securing a mortgage as a contractor, you may come across the term “contractor mortgage.” But what exactly does it mean? In simple terms, a contractor mortgage is a type of mortgage specifically designed for self-employed individuals, freelancers, and contractors who may not have a regular income stream. Unlike traditional mortgages, which rely heavily on a stable employment history and predictable income, contractor mortgages take into account the unique financial circumstances of contractors.
Contractor mortgages typically consider a contractor’s day rate or annual contract income rather than relying on a fixed salary. This allows contractors to qualify for a mortgage based on their earning potential rather than their employment status. Lenders will look at your current contract and require a history in contracting or a significant amount of time left on your current contract.
Essentially for a contractor mortgage they are looking to understand your income and to utilise it to maximise your income compared to just looking at your self employed figures which are often lower once you look at your net profit or salary and dividends.
One of the biggest advantages of contractor mortgages is the flexibility they offer in terms of the income verification to utilise your income fully. As a contractor, your income may fluctuate from month to month or year to year. Lenders offering competitive mortgages for contractors will look at the day rate you are receiving for the work you are carrying out.
Another benefit of contractor mortgages is that they often allow for a higher borrowing amount. Traditional mortgages typically calculate the maximum loan amount based on a multiple of the borrower’s salary. For contractors with higher earning potential, this can limit their borrowing capacity. Contractor mortgages, on the other hand, consider a contractor’s day rate or annual contract income, allowing for a higher borrowing amount based on their projected earnings.
In addition to flexibility and higher borrowing amounts, contractor mortgages also offer competitive interest rates. A lot of mainstream lenders now offer mortgages that consider the day rate for contractors meaning competitive interest rates are also available. This can result in significant savings over the life of the mortgage.
While contractor mortgages offer unique benefits, it’s important to understand the limitations of traditional mortgages to make an informed decision. Traditional mortgages are typically designed for individuals with a stable employment history, consistent income, and a predictable salary. This can make it challenging for contractors to meet the eligibility requirements of traditional mortgages.
Traditional mortgages refers more to traditional lending criteria rather than the actual mortgage product. Some lenders still look to class contractors as self employed which usually has a negative impact on the amount they can offer on a mortgage.
One of the main limitations of traditional mortgages for contractors is the reliance on employment history and salary. Lenders often require a minimum of two years self employed income to be able to use the income. Additionally, traditional mortgages criteria often requires payslips to be provided.
Another limitation of traditional mortgages is the borrowing capacity. Traditional mortgages typically calculate the maximum loan amount based on a multiple of the borrower’s salary. For contractors with a variable income, this can limit their borrowing capacity and make it challenging to purchase a home that aligns with their financial goals.
Before diving into the application process for contractor mortgages, it’s essential to understand the eligibility requirements. While these requirements may vary slightly between lenders, they generally include the following:
1. Minimum contract length: Lenders may require a minimum contract length, usually ranging from 6 to 12 months, to demonstrate a stable income source.
2. Proof of income: Contractors will need to provide evidence of their income, such as bank statements or invoices, to support their mortgage application.
3. Contract extensions or future contracts: Lenders may require proof of future contracts or contract extensions if you are close to the end of your current contract. This is to ensure that there will be an income going forwards and the ability to repay the mortgage.
4. Credit history: As with all mortgages, lenders will look at your financial commitments and your history of paying your credit commitments when assessing you for a mortgage.
Now that we have explored the benefits and limitations of contractor mortgages and traditional mortgages, let’s delve into the key differences between the two options. Understanding these differences will help you determine which type of mortgage aligns with your financial goals and lifestyle.
– Employment Status and Income Verification
One of the fundamental differences between contractor mortgages and traditional mortgages lies in the verification of employment status and income. Traditional mortgages typically require a stable employment history and predictable salary, often verified through payslips or tax returns. In contrast, contractor mortgages consider a contractor’s day rate or annual contract income as proof of earning potential, allowing for more flexibility in income verification.
– Eligibility Criteria
The eligibility criteria for contractor mortgages and traditional mortgages also differ. Traditional mortgages may require a minimum of two years of employment history or within the same industry. Contractor mortgages, on the other hand, focus more on the stability of income and future contracts, making it more suitable for contractors.
– Borrowing Capacity
Borrowing capacity is another area where contractor mortgages and traditional mortgages diverge. Traditional mortgages often calculate the maximum loan amount based on a multiple of the borrower’s salary. For contractors this can limit their borrowing capacity. In contrast, contractor mortgages consider a contractor’s day rate or annual contract income when determining the borrowing amount, allowing for a higher loan limit.
Pros and Cons of Contractor Mortgages
To summarize the key advantages and disadvantages of contractor mortgages, let’s take a closer look at the pros and cons:
1. Flexibility: Contractor mortgages offer greater flexibility in income verification and eligibility criteria, making it easier for contractors to secure financing.
2. Higher borrowing capacity: Contractor mortgages consider a contractor’s day rate or annual contract income, allowing for a higher borrowing amount based on their projected earnings.
3. Competitive interest rates: Many lenders recognize the value and stability of contractor work and offer competitive interest rates, resulting in potential long-term savings.
1. Limited choice of lenders: Contractor mortgages may have a narrower range of lenders compared to traditional mortgages, making it important for the correct lender to be used. This is where it is essential to use a mortgage broker who understands the lending criteria for lenders.
2. Lenders will usually require more documents to verify your income – your contract will be required, if you are close to the end of your contract they will need confirmation of the renewal or the new contract, bank statements will also be required to show the contract income coming in.
Case Studies: Real-Life Examples of Contractors Mortgage Options
To provide a real-world perspective, let’s explore two case studies of contractors who chose different mortgage options:
* Case Study 1: IT contractor looking at a lender using traditional mortgage criteria
The lender looks at their income based on normal lending criteria and so as they contract through a limited company, the lender is looking at their accounts to verify their income. For a lender who is treating a contractor as self employed they would only consider the salary and dividends received. Often for limited company income the minimum salary is taken for tax efficiency which is £12,750 and then the client had taken out £40,000 in dividends so the lender would use the total income of £52,750
* Case Study 2: IT contractor looking at a lender who will use the contracting income
The lender specialises in contracting income so they can consider the day rate for the clients income. The client has a day rate of £600 per day, 5 days a week. The lender will consider the day rate and use 46 weeks for their calculation which would be £600 x 5 days x 46 weeks = £138,000 being used for the income
These examples show how differently the income can be looked at for contractors and demonstrate how using the right lender for your income type can have a large impact on the mortgage you are being offered.
At Willow Brook Mortgages we specialise in contractor mortgages to ensure that your income and hard work is relfected in the mortgage you can obtain.
Click here to speak to one of our advisors about your mortgage options today.
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