Contractor mortgages require real thought, and this article will explain why.
For years, as a self-employed contractor, I’d been earning more than many of my friends who were in permanent employment, so I suppose I just assumed that getting a mortgage would be simple. Except it was anything but. In the end, I managed to get a good deal through a specialist contractor mortgage broker, and after going through all that, it seemed only sensible to put my lessons down on paper so that others who don’t work the standard 9 to 5 way could learn from what I had to go through.
The sad truth of it is that unless you have exceptional circumstances, you’re not going to have much luck by just walking into a high street bank. For one thing, it’s unlikely that anyone in the bank will have dealt with this before, and for another, even if that isn’t the case, the rates will be sky-high.
If you’re still mystified, allow me to explain. Most high street banks calculate the money they can lend based on percentages, times the salary in question, with dividends added. Not great for the freelancer who has an income that goes constantly up and down! It’s all down to the salary contractors generally earn, of course. Whereas employees tend to earn a good salary, which they pay tax on, most contractors invest their earnings back into their limited company, and don’t pay as much tax. It all makes it quite hard to get the mortgage you need and I was no exception.
Now I knew this, it was time to get a new strategy. So after doing some research, I decided that I needed a lender who would calculate me a mortgage based on gross revenue or daily rates. In other words, numbers they could actually understand.
Why the contractor mortgage broker matters
My next step was to call up someone who was a recommend specialist in contractor mortgages, and this was where things started to move faster. I immediately saw the benefits of going through a broker, as it was clear that they’d be much more able to source me a better deal.
This wasn’t the end of the story, though. Next, I needed to meet some strict requirements.
My initial problem was that I’d only been freelancing for 8 months. This presented an issue, as the high street banks enforced a rule where you had to have been contracting for at least 1 year. Particularly annoying when properties keep appearing and constantly miss the boat.
While I was waiting for the year to elapse, I stayed in the game and considered what I could do, such as allowing them to look at my gross value and consider this as evidence of my income. But I wasn’t out of the woods yet. I also had to demonstrate that contracts were consistently coming in or being renewed, so that it formed a steady stream of money. I was also very aware that my credit score was being scrutinised, as this is something which came up early in my research.
Looking back, it was actually a good thing that I had to wait, as this gave me time to sort my books. They’d never been that unorganised, but one thing is certain. If you cannot show that you’re organised enough to keep money in check, the bank will worry about lending to you.
Finally, after a while, things worked out. Just as my first year as a contractor came into being, I had my accounts and contracts ready. I’d also shown that the gross value of my annual income was acceptable, and put in writing what I was paying myself, along with what was going back into my own limited company. Now all finished, I was able to put an offer in on a flat. Finally, things were falling into place.
Now I know more, I suppose I realise that I could have got a better deal had I been employed by a firm, but from what I understand this is always the way. But things can change, and so can life, so one good thing is that if in the future I want to buy with a partner then doing so could be a better option. That way, we could use the permanent-job salary in the deal, but we’ll see how it goes.
Things I should have done better
Had my accounts been better organised, things would have been much smoother. I could also have spoken to many a contractor mortgages broker, and looked into better ways to land a mortgage instead of being in a rush. One thing I would advise is to use gross income as a measure of your earnings, as this seemed preferable to mortgages based solely on daily rates.