If you are on a short-term contract, your income fluctuates or you have a relatively new business without much of a track record, it can be trickier to prove not just what you have earned in the past but what you will earn in the future to the satisfaction of a mortgage lender.
A lender will regard you as being self-employed if you’re a contractors or freelancer, a director of a limited company or partner in a partnership, or own shares in a company which forms your main income. Whether you are a sole trader, in a partnership or have a limited company, lenders will consider your application based on your business type and you will need to provide different evidence of your income, whether this is from dividends, vested stock, large bonuses etc.
Day-rate contractors on fixed or short-term contracts who are paid a daily rate, often working in IT, finance and construction, can find it even more difficult to get a mortgage as not all lenders will take all of their contract income into account. Many high-street lenders don’t really understand contractor mortgages, with many assessing contractors as self-employed applicants, basing income on salary and dividends rather than the day-rate model. This means many borrowers end up with a smaller mortgage than they would otherwise.
However, some lenders have more preferential terms for contractors, taking your day rate into account, rather than an average figure. These lenders will look at the type of contractor you are, how long you have been contracting for, and how long left on your contract. The longer you have been contracting and the stronger your track record, the better. Some lenders offer professional contractor mortgage so if you work in IT, accountancy or a solicitor, there may be increased choice available to you at more competitive rates.
Self-employed applicants need to supply a fair amount of evidence of earnings, both in the past, current and in the future. Lenders will want to see your self-assessment return (SA302) showing your earnings and tax paid, as well as salary and dividend payments. If you are a contractor, they will want to see a copy of your contract, details of your track record of contracting, bank statements and proof of ID.
Lenders will also want to see how your income has fluctuated from year-to-year so that they can ascertain how steady your income is and whether you will be able to meet your monthly mortgage payments. Most lenders will want to see at least two years of accounts, although some may want more or will settle for less. If you are relatively new to self-employment it can be harder to get a mortgage although if you have evidence of strong future earnings potential this may help convince a lender that you are a good risk.
How much can I borrow?
As with employed applicants, lenders will take into account your income as well as your outgoings when deciding how much you can borrow. You will also need a good credit rating and at least a 5 to 10 per cent deposit. As with all mortgage applicants, the bigger the deposit you put down, the cheaper your mortgage rate will be.
If your income fluctuates significantly from year-to-year, the lender may take an average when deciding what to lend you. For example, if you earned £60,000 last year and £40,000 the year before, the lender may use £50,000 as your average income for the purposes of working out what you can afford to borrow. Some lenders will use your recent year’s income as the basis for lending, while others will take the lower amount. If the lender goes down the latter route, you will potentially be able to borrow significantly less than you might otherwise have done, particularly if your business has been impacted by Covid.
Consult a whole-of-market broker
Lenders vary in how they treat self-employed applicants and day-rate contractors, with some being more flexible than others, particularly since the pandemic. It is therefore worth seeking advice as to which lenders are most likely to be sympathetic to your situation.
Your first port of call should be a whole-of-market mortgage broker, such as AWS Private Finance. We specialize in Contractor mortgage so know which lenders will be most sympathetic to your circumstances, while our bespoke advice will ensure you get the right mortgage for your needs. If you are self-employed, a day-rate contractor, in receipt of large bonuses or vested stock, get in touch for more information.