Many believe that mortgage lenders prefer permanent employees, and it is quite challenging to get a mortgage or go for a good deal if you are an IT contractor. There are so many applicants working as a contractor who believe that it is impossible to find a deal appropriate for them with a high street lender. Mortgage Adviser could make a huge difference in this thought process by helping the applicants to secure a mortgage with a high-street lender
How Do The Lenders Categorize Contractors?
All high street lenders and building societies cater to the growing requirement for contractor mortgages. However, each one has its conditions, which sometimes makes it tricky. Bespoke underwriting has helped contractors obtain the funds required to purchase their dream house or remortgage with a better deal. Mortgage lenders have evolved to be more flexible in underwriting mortgage applications for contractors.
- Contractors on a fixed-term contract on a client’s PAYE
- Contractor operating via a limited company through a recruitment agency or directly with a client
- Contractors operating under an umbrella company on an umbrella payroll
An experienced mortgage adviser would assess your circumstances and decide on the suitable lenders. Also, the adviser would know the exact type of documents you need for the mortgage application along with the best route to calculate annual income.
There are certain misconceptions in the mortgage industry about contractor mortgages and they way lenders calculate their income.
Contractor Mortgage Misconceptions
- Contractors need to have at least two years of accounts to secure a mortgage.
Applicants could get a mortgage based on their day contract rate. A contractor specialist mortgage broker will work with several contractor-friendly lenders and will be able to give mortgage advice based on their current contract. Applicants do not need two years of limited liability company accounts filed with Companies house.
- The IT contractors need a big deposit.
Some IT professionals believe lenders expect a big deposit if they need a mortgage. Fortunately, a bigger deposit is not required. Of course, if you put more towards a deposit, this will reduce the risk to the lender.
Therefore, to secure a lower mortgage interest rate, a large deposit will help as it reduces the Loan to Value (LTV) ratio. Banks and building societies will also consider mortgages with a 5% deposit. However, there are strict lending criteria for 95% LTV products.
- IT contractors fall into the high-risk category.
IT contractors will be treated similar to a permanent employee by some contractor-friendly lenders for income assessment. However, the contractor should have been in the same line of work for two years and have a few weeks left in the contract.
- Contractors need to have at least six months remaining in the contract.
Contrary to popular belief, it is not necessary to have six months remaining on the contract.
An IT contractor can secure a mortgage with current continuous employment of twelve months or more with six months of the contract remaining, or the customer has two years of uninterrupted service in the same type of jobs. The lender may require proof of the employment track record.
- Fees and initial interest rates are much higher for IT contractors.
Mortgage lenders don’t discriminate on cost or initial rates. IT contractors can select from the standard product range. Fees include valuation, booking, arrangement, and product fees.
Specialist Mortgage Advice For Contractor Mortgages
- Offer a free initial consultation.
It is a good idea to consult an independent whole of a market mortgage broker. Many mortgage brokers offer a free initial consultation and have no restrictions by a particular bank. This meeting will help the broker to get to know your circumstances.
- In-depth analysis of the circumstances to find the correct lender.
High street banks will look at your current contract and offer mortgage deals based on your daily rate. Contractor-friendly lenders will include and are not limited to Halifax, NatWest, and Nationwide. Income assessment differs from lender to lender.
A handful of banks offer mortgages for new contractors. Only a few prefer new contractors within IR35. Some of them like longer-term contracts, some don’t mind. An experienced mortgage broker is likely to know the best-fit mortgage provider and mortgage products.
- Finding deals which match your daily rate.
A mortgage broker can help daily rate / hourly rate contractors source deals. Lenders have deals packaged in different ways. Examples include lower interest rates but higher product fees or vice versa. Mortgage brokers will have tools to work out the cheapest workable deal over the initial term.
- Find a lender who would consider self-employed income instead of day rates.
Some lenders would consider your taxable income or net profit. They will investigate your company history, and most will require at least two-year limited company accounts or self-assessment tax returns. Therefore, this option may be more for an experienced contractor.
If you invest in a Buy to let mortgage, most lenders will require the taxable income figures. However, some lenders would consider a new contractor for a buy to let mortgage too.
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