Contractor mortgages

Proving your income: part one

All mortgage lenders require applicants to be able to prove their income. For contractors, this is more complex than your typical employee. Where contractors are concerned, most mortgage lenders will look for you to have been contracting, not necessarily with the same company, for at least a year. With such a short contracting history, it may be the case that the number of lenders willing to offer you a mortgage is limited, and the size of the deposit required higher. Conversely, the longer your history of contracting and the more stable your income has been, the greater the choice you’ll have in terms of lenders prepared to offer you a mortgage. It’s therefore important to find the right time to make a mortgage application, taking into account the length of time you’ve been contracting and your desire to buy a house.

Providing your income: part two

Every mortgage lender will take a slightly different view as to how they assess your income. Some, for example, will look at your net profit, while others will consider your salary and dividends taken or use another method of calculation entirely. To maximise your borrowing potential we are able to find lenders who will consider using your gross daily rate.

By following the calculation below, this will often enable you to borrow substantially more. You need to take your day rate, multiplying it by the number of days you work a week, and then again by the number of weeks you work per year. So, let’s say your typical day rate is £450, you work five days a week, and take six weeks holiday a year. You’d simply calculate £450 x 5 to give you £2,250, which you’ll then multiply by 46 to give you an annual income of £103,500 before expenses, tax, and other associated outgoings, which you’ll need to deduct.

Using this calculation will mean you are able to borrow substantially more than using salary/dividend or net profit figures. If you’re working for an umbrella company, the process differs slightly. The umbrella company will be responsible for deducting your tax on a PAYE basis as they technically act as your employer, as well as offsetting some of the income through expenses claims, such as travel and accommodation. If you use an umbrella company they should issue you with a P60 at the end of the tax year, which will clearly state your income and amount of tax and National Insurance paid, making it easier to prove your income. In addition, many umbrella companies provide further benefits, such as holiday pay, which can mean your income varies significantly depending on how you’re operating.

The key though is finding the right balance between declaring an income sufficient for you to obtain a large enough mortgage to buy the house you want and minimising tax bills. This theory applies whether you are trading as a limited company, partnership, or sole trader.

It’s important to look at your credit score; if it’s poor, you’re not going to get anyone to lend you any cash.

Whether you’re a contractor or not, your credit score will be critical when the time comes to apply for a mortgage. Lending decisions are based on risk, and your credit score gives lenders an indication of how likely you are to default on payments.

The first step is to create a plan to make sure your credit is as good as possible; minimise debt and where possible pay this off before you approach lenders.

Next, check your credit score and remedy any risk factors that are having a negative impact. Steps such as ensuring you’re registered on the electoral roll, meeting minimum payments for credit cards, and not utilising all the credit available to you are places to start when you’re trying to improve your score.

The decision of whether you’ll be accepted for a mortgage isn’t based on your credit score alone, but it is an influential factor.

We’ve already highlighted how important your accounts and records are, so it should go without saying that getting them in order before you approach a lender is critical.

Your lender is going to want to see up to date accounts, tax computations and other records that demonstrate your ability to pay your mortgage. Ensuring everything is up to date gives lenders a clearer indication of your current situation and what you can afford.

Taking this step now, and keeping on top of it, means the mortgage application process will be smoother. Rather than having to scramble around to find paperwork your mortgage lender has requested, you’ll know exactly where it is.