Whereas it was once difficult to be accepted for a mortgage as a contractor, lenders now assess you using different criteria to standard applications. Instead of insisting on years of accounts and penalising you for having an irregular income, lenders have acknowledged the growing number of contractors in the workforce and have altered their lending criteria accordingly.
There are numerous ways to strengthen your application, not only ensuring it’s successful but also increasing the mortgage options available to you and providing you with more competitive rates. We’ve given you 10 tips on how to do this below.
1. Pay a larger deposit
Lenders typically require a deposit of 15 to 20% of the property value, particularly since most low-deposit mortgages were withdrawn from the market at the start of the coronavirus pandemic. There are lenders, though, who will accept a deposit as low as 5%. If you’re struggling to save a deposit, you may be able to take advantage of the new 95% mortgage guarantee scheme or one of the government’s Help to Buy schemes.
Paying a larger deposit, however, makes you less of a risk to lenders and is a good way to improve your chances of a successful application. It lowers the loan-to-value (LTV) ratio and this, in turn, can lower the interest rate you pay.
For example, if you want to buy a property in Bexleyheath for £300,000 and have a deposit of £30,000, the remaining £270,000 is 90% of the property’s value, meaning you need a 90% LTV mortgage. Whilst paying a 10% deposit opens up more mortgage options than a 5% deposit, you won’t benefit from particularly competitive interest rates. If you can increase your deposit to between 20 and 25%, however, much better rates will become available to you. The best rates are given for 60% LTV mortgages when you are able to pay a 40% deposit.
2. Make sure your contract is up to date
You need to provide the lender with a copy of your current contract. This shows your pay rate as well as how much longer your contract is valid for. If you can also provide evidence of previous contracts that you expect to be renewed in the future, this will go in your favour.
Lenders tend to prefer a contract with at least 4 weeks duration left on it. For a shorter time frame, you will need to provide proof that it will be renewed or evidence of a new contract.
3. Minimise the breaks between your contracts
Having the flexibility to enjoy breaks between your contracts is one of the benefits of being a contractor. However, taking lengthy breaks can be detrimental to your mortgage application. Lenders won’t have any issues with you taking a few weeks off but avoid taking breaks of between 6 and 8 weeks in a year. Lenders need to see that you have consistent contracts for at least 12 months before your application and a lack of work for a long period within that time frame may make them wary.
4. Prepare adequate paperwork
Help lenders feel more confident about offering you a mortgage by providing as much information about your financial situation as possible. As well as a copy of your current contract, lenders usually require proof of your ID, a copy of your CV, proof of your deposit and between 3 and 6 months of bank statements. Prepare evidence of your operating costs and expenses as well as details for your predicted income from future contracts. It’s helpful if you can provide details of previous contracts too as confirmation of having consistent work.
5. Improve your credit score
Before you apply for a mortgage, increase your chances of a successful application by improving your credit score. Obtain a copy of your credit report from one of the main credit reference agencies: TransUnion, Equifax or Experian. Make sure your information is correct and notify the credit reference agencies if this isn’t the case so that they can rectify the details. Register on the electoral roll if you’re not already on there. Make sure any bills are paid on time and reduce any unnecessary spending. For example, if you have a gym membership in Bexley that you rarely use, just cancel it.
6. Protect your credit rating
When you apply for a mortgage, a lender will carry out a credit check on you. A soft check doesn’t have any effect on your credit rating but a hard check will impact your score. This in itself shouldn’t be an issue but if you apply to several lenders, this will be reflected on your credit report and other lenders will be wary of lending to you.
Instead of going it alone and randomly applying to multiple lenders who may reject you due to your circumstances, ask a specialist mortgage broker to handle your application on your behalf. This ensures your application is submitted to the right lender for your contractor status and protects your credit score.
7. Commit to realistic repayments
Don’t overestimate the repayments you will be able to make when applying for your mortgage. Remember that your contracts and income can fluctuate so make allowances for that. It’s essential that you can afford the monthly repayments otherwise you risk your property being repossessed if you fail to make the required payments.
8. Opt for a flexible mortgage
Just as you may have times when you receive a lower income, there may be occasions when your contracts provide you with a higher income. Some mortgages have the flexibility for you to pay off additional amounts to your normal repayments, allowing you to repay your mortgage loan faster.
9. Consider a joint mortgage
There’s nothing to stop you from applying for a joint mortgage if you want to buy a property with someone else. You still need to provide the same information as if you were applying on your own but applying with another applicant may increase the loan amount the lender agrees to. Between you, you should be able to save a larger deposit and this will provide you with more mortgage deals and better rates.
10. Liaise with a specialist mortgage broker
Speaking to a specialist broker in Kent, London or Edinburgh who has expertise in arranging mortgages for contractors can help you in many ways. Specialist brokers appreciate the unique ways that contractors work, understanding your income and needs. They have extensive knowledge of the market and know which lenders offer specialist underwriting services.
They have access to an unrestricted range of products, including those only offered by lenders through brokers, so can impartially search for the best deals to suit your circumstances. When applying for Welling or Pimlico mortgages, a specialist broker can tailor-make your application and present it in the best way to ensure it’s accepted by a lender the first time without affecting your credit score.