People have adopted strategies to survive in the booming economy. There are different types of employment types and tax implications relevant to each category. Daily rate contractors could be defined as employees who work based on a contract basis.
The employment contract would define the nature of the agreement. The high-street lenders and building societies who handle the daily rate contractors would require full contracts signed by both parties to evidence their income.
The contract should include few important elements. For example, the daily rate, contract start date, contract end date, terms and conditions, the additional clause on bonus/overtime, information of the service provider, the related parties of the transaction.
The Daily Rate
The daily rate is one of the important factors that the lender would need to know. Some lenders have a minimum daily rate to consider a mortgage for contractors. Most lenders have defined the number of weeks they are considering for the year as work weeks. Firstly, the weekly income would be calculated by multiplying the day rate into five working days. Secondly, the weekly income would be multiplied by the relevant number of weeks specified by each lender to calculate the annual income.
It is important to note that, some lenders would consider any deductions mentioned on the contract document. Contractors often set up a limited company to provide their services via the company. They usually add the spouse as a joint shareholder and pay salaries and dividends. Some lenders would consider this as a commitment in the maximum loan amount affordability calculation.
Therefore, it is important to find a suitable lender who would provide you the required loan amount. It has been a bit of a grey area on how lenders consider commitments and deductions from the annual income. No contractor would want to submit a mortgage application and end up receiving a lower loan amount than the required amount.
The contract start date and end date
The contractor-friendly lenders would like to review the level of experience the applicant has as a contractor. If someone has less than 12 months of experience as a contractor, it would be difficult to apply for a mortgage. There might be few lenders who would still consider previous employment track records in the same line of work if someone has worked as a contractor for less than 12 months.
On the other hand, if a contractor has more than 12 months of experience, there would be many lenders to consider his mortgage application. Still, it is important to find a suitable lender who would provide the required loan amount. A mortgage adviser would help you to find a lender who would lend you the required loan amount.
The end date of the contract is also something the lender would like to check. Usually, the lender would want to see a minimum of six months remaining on the current contract. Further, the lender would evaluate the likeliness of renewal or extension with the same provider. Alternatively, if the contractor has been in the same line of work for more than two years, the lender would be happy with even four weeks remaining on the current contract. It means that a lot is depending on the work experience.
Information of the service provider
The lender would want to see the parties involved in the contract. Applicants often add the limited company as the party for the contract agreement rather than their name. Most lenders are comfortable with this arrangement. However, some lenders would only consider the agreements in the personal name. Therefore, applicants need to find a suitable lender and it would be better to have a Mortgage Adviser on their side.
Terms and Conditions of the Agreement
Mortgage providers would always request the full contract from the applicants. It should include fully detailed terms and conditions of the employment. The underwriter would go through each and every line of the contract and come back with queries and clarifications. It is important that the applicants review all the terms and conditions with a mortgage adviser before submitting a full mortgage application.
Overall, the daily rate of contractor mortgages is a rising demand in the UK. More lenders are entering the space and applicants have more flexibility than ever before. It would still be important to find a suitable lender and a mortgage adviser on your side would make it possible!
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