A day rate contractor is a hybrid between employed and self-employed. Most work off payroll for a client who is similar to an employer. Contractors work on one contract at a time and are, therefore, different from being self-employed, where people may work with many clients.
Day rate contractors have embraced “contracting” as it pays better than them being employed, and it gives them a flexible lifestyle. Due to the temporary nature of their work, buying their dream house can become difficult for contractors as banks and building societies perceive day rate contractors to be of higher risk. Therefore, not all banks on the high street will offer contractors a mortgage.
Don’t Contractors Earn More?
Yes, working as a contractor helps you earn more in comparison to a permanent employee in similar roles. Contractors are paid more because they have specialist skills, and they are not part of the headcount of the company. Most work on shorter-term contracts and do not get employee benefits.
High street banks and building societies have now started to realise that contractors have a higher earning potential, and their skills are in high demand with employers. They have also realised that normally there are very little gaps between contracts and therefore have started to become much flexible with their lending criteria. Getting a mortgage deal, therefore, is much easier than it used to be.
A mortgage is a big financial commitment. First-time buyers may need extra support, but even if for experienced landlords, the process can still be complicated. There are many questions that need to be answered when taking out a mortgage or even remortgaging. We at WIS Mortgages can help you with assessing your needs and help you with the entire mortgage process.
Can I get a mortgage as a contractor?
The short answer is yes. However, it could be complicated based on your circumstances.
Most contractors set up their own limited liability company. Given the circumstances, some add their spouse as a shareholder and an employee. However, when it’s time to apply for a mortgage, many lenders would look at salaries and dividends together with the past 3 years of company accounts when assessing the affordability of the mortgage.
It’s good news for contractors who tick this box and more so if the loan covers their borrowing requirement. However, withdrawing a minimum salary and dividend as part of your business plan, specialist underwriting may be needed. The good news is some banks, and building societies are starting to welcome this type of client and grant mortgage offers with the same interest rates available to other borrowers.
The second type of contractor is an umbrella company contractor. Due to off-payroll legislation changes, commonly known as IR35, contractors have had to switch to an umbrella company. Most lenders would consider umbrella company employees to be on a zero-hour contract rate for mortgage purposes. These agency workers will also require specialist under-writing as most banks will not consider umbrella company contractors given the temporary nature of work.
PAYE Contract Workers who will be operating on a fixed-term contract have similar obstacles and will require to demonstrate work history and continuity.
How Much Can I borrow?
This will be based on your experience in the same line of work, income, expenditure, commitments and credit status.
Experience in the same line of work
Contractors are an additional risk to the banks, given the short-term nature of work. Therefore, they will like to see some work history in the same line of work. Different lenders will have different rules around this.
Lenders also prefer to see no or very little gaps between contracts. They will also want to see some time left in the contract until the termination date. In general, the longer the contract, the more comfortable a lender will feel.
Your income can be assessed in 3 ways if you are a Limited Company contractor:
- Day or hourly rate
- Self-assessment Tax returns (SA302s and Tax overviews from your Accountant). This mainly looks at salary plus dividend.
- Salary plus profit earned as opposed to dividend
Subject to acceptability by the lender, contractors are privileged to have all three options compare to a self-employed who only has options 2 and 3. Though lenders will not consider an order book for the self-employed, some banks will consider future earnings for contractors on a day rate basis, which can be an equivalent to an order book. This will be looked at on a case by case basis.
Personal expenses and financial commitments
The more expenses you have, the lesser you can borrow. Some banks will look at National Statistics, and some also look at your bank statements. However, they consider lifestyle cost and expensive hobbies in assessing your mortgage application. Financial commitments include personal loans, credit cards, other mortgage products, hire purchase and childcare cost.
A contractor can be a high-risk given the temporary nature of work. Hence, it’s essential that they maintain a clean credit file by keeping debts to a minimum while maintaining timely payments with no defaults. While a good credit score can help you secure a mortgage, your credit status or credit score can also help you with getting a competitive mortgage rate.
Do I need specialist help?
A specialist mortgage broker can help you understand and guide you through the process end to end. Bespoke contractor-based underwriting may be needed for some contractors. A good contractor mortgage specialist will know which lenders will fit different unique circumstances.
A day rate or hourly rate based calculation may be needed for contractors in some instances. If you are a new contractor or do not take much salary/dividend and require a larger mortgage loan or using an umbrella company, contractor mortgages may be a route for you.
Some High Street banks also offer mortgages for brand new contractors from day one of the contracts.
What documents do I need to proceed?
A copy of your current contract is a must.
Some lenders will require a copy of the CV to decide if you are in the same line of work. Some banks and building societies may need at least one year of previous contracting history. If you are an umbrella company contractor or fixed-term contractor, they may require payslips to prove your income.
They will also require Banks statements, proof of address and proof of ID. The documents will vary from lender to lender, and a specialist contractor day rate mortgage may have different requirements.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the repayments on your mortgage.