The Lowdown on Contractor Mortgages

In recent years it’s become more challenging to secure a mortgage. Mortgage rates have risen and everyone has been impacted by the cost of living crisis. High energy, fuel and food costs have been making a dent in people’s incomes which has made it harder to cover mortgage payments, and lenders have reacted accordingly.

Many high street lenders have introduced stricter eligibility criteria due to the increased chance of borrowers defaulting on their payments. The cost of living crisis is starting to ease, however, and mortgage rates have stabilised, but if you’re a contractor getting approved for a mortgage can still be a significant challenge.

The Challenges Contractors Face

From a mortgage lender’s perspective, a contractor is much higher risk than someone in traditional employment which makes it harder for contractors to get approval. The issue is not due to pay as contractors are generally well paid. Unlike an employee, contractors don’t receive a set salary every month. Project-based work means that contractor income can be variable and this increases the perceived risk to lenders which means there are more obstacles for contractors to overcome to secure a mortgage.

The nature of project work makes this unavoidable. Contracts can be sporadic, there will usually be gaps between them and the onus is on the contractor to win new work. Other factors can also have an impact such as seasonal variation. Even a contractor’s ability to work can be a red flag because if they can’t work, through illness or injury for example, then they don’t get paid.

Due to being perceived as higher risk, contractors can be faced with increased rates, a lack of choice and being turned down by high street lenders. Thankfully, specialist contractor mortgage brokers and lenders have emerged to cater to the growing niche of contractors that require specialist mortgage products that meet their needs and unconventional working arrangements.

In this post we’ll explain what contractor mortgages are, how they differ from conventional mortgages and tips for contractors on getting approved.

What is a Contractor Mortgage?

Contractor Mortgages are a type of specialist mortgage product that are tailored to meet the unique financial situation and needs of contractors. The eligibility criteria are more flexible than for a traditional mortgage and they take into account the fact that contractor income is variable and they don’t receive a fixed monthly salary.

Income is assessed over time based on contracts and payment history rather than assessing monthly income from a salary. Factors that will be considered in the application include contract frequency, whether there are any recurring contracts, and the likelihood of new contracts being secured will all be looked at as well as the rate you charge your clients.

Contractor mortgage lenders will require information such as tax returns, contract details and bank statements to support an application as proof of income rather than payslips. This gives them the necessary insight into the stability of the contractor’s work history as well as the consistency of income.

To support this it’s a good idea to maintain organised and detailed financial records of income and completed contracts over a period of years to ensure lenders have all the information they require to increase the chances of being approved.

Are Interest Rates Higher for Contractor Mortgages?

Contractor mortgage interest rates are dependent on various factors in the same way that traditional mortgages are. Although contractors are viewed as higher-risk borrowers by some lenders, if you approach a specialist contractor mortgage broker who has access to contractor-specific mortgage products and understands how best to place a case with a lender, you won’t necessarily have to pay a higher rate of interest. Interest rates can vary between lenders so it’s a good idea to shop around to find the best deal.

What are the Deposit Requirements for a Contractor Mortgage?

Deposit requirements for a contractor mortgage are similar to a traditional mortgage and the deposit amount is influenced by factors including the value of the property, lender policies and the strength of the applicant’s credit score and history. Lenders sometimes require a minimum deposit amount of 5% – 10% but deposits can be over 20% in some cases.

Tips to Help You Secure a Contractor Mortgage

Work Towards a Better Credit Score

Your credit score plays a crucial part in any mortgage application whether you’re a contractor or an employee and usually the better your credit score is, the more chance there is of you being approved. Ultimately the goal is to prove that you have a track record of being financially responsible and there are various ways to improve it.

Ensuring you don’t miss any payments and that you pay your bills on time is key to demonstrating that you’re a reliable payer. It may also be a good idea to reduce or clear any outstanding debts as low credit utilisation is usually looked upon favourably by lenders.

You can obtain a copy of your credit report and check it carefully for any errors or fraudulent activity which might negatively impact your score and dispute them and have them corrected. It may also be a good idea to keep old bank accounts and credit cards active instead of closing them and use a variety of credit types as that proves you can manage different forms of credit.

It’s important to note that it can take time to improve your credit score so patience and a commitment to positive financial habits are needed.

Contribute a Bigger Deposit

You will usually require a deposit between 5% and 20% of the value of the property being purchased, but the deposit amount needed will be dependent on the lender. You can usually get approved for a contractor mortgage with a deposit at the lower end of the scale but paying a larger deposit will likely improve your chances of approval and can possibly give you access to better rates and terms.

A larger deposit is always preferred by lenders as it reduces the risk to them, but it can also result in lower monthly repayments for you due to more of the mortgage being paid off upfront.

Speak to a Specialist Contractor Mortgage Broker

Whilst the above may help improve your chances of being approved, we would always advise speaking to a specialist contractor mortgage broker as this is the quickest and easiest way to secure a mortgage and find yourself the best deal. They understand the unique needs of contractors and can work with you to ensure you are in the best financial shape and work with specialist lenders whose eligibility criteria are usually tailored for contractors.

Our Contractor Mortgage partner, Professional Contractor Mortgages (PCM) are experienced contractor mortgage brokers who use their expertise to find you the best and most cost-effective contractor mortgage deal based on your specific circumstances. They’ve built strong relationships with the best underwriters and contractor-friendly lenders in the business and have full-market access. They can find the mortgage that’s right for you even if you’ve been declined previously.

The amount you can borrow can be based on your contract rate, such as your hourly or annualised daily rate, and PCM often have access to enhanced lending multiples and exclusive products with bespoke contractor underwriting arrangements agreed with leading mainstream lenders.

Whether you’re moving home, a first-time buyer, investing in buy-to-let or looking to remortgage, PCM are the go to contractor mortgage broker. Click here to get a quick contractor mortgage quote or click here to discuss your requirements with a Senior Mortgage Consultant at PCM.