Mortgages for Contract Workers
Being a contract worker comes with great flexibility. It gives you independence, and financial freedom and allows you to pretty much be your own boss. However, has it ever crossed your mind how this lifestyle can affect your chances of getting a mortgage?
There’s often this stigma around being self-employed and the ability to borrow money, but it doesn’t have to be this hard.
The basis of it is, that as long as your financial records show a true picture of your income from the last 2-3 years, then you shouldn’t have an issue. Even if your income dips at points (I mean, that is to be expected in contract work) as long as your income is somewhat stable then it can be averaged out overall, which will allow a mortgage broker to determine what you can borrow. It really can be just this simple.
What is a contract worker?
To make sure you’re in the right place, you may be wondering if you fit under the category of a contract worker.
In a nutshell, a contract worker is basically someone who is self-employed but works under a contract of a larger/limited company. They work as a normal employee still but maybe employed via an agency, under an umbrella company or as a self-employed sole trader.
An example of this is say a boat builder who is self-employed for a larger company. This individual will in theory be an employee, but they will not be treated the same on paper. So, this individual will be responsible for paying their own tax and will not receive traditional company benefits such as holiday pay, sick pay, workers compensation and retirement or profit-sharing- depending on the company.
But in hindsight, you get the general idea. Being a contract worker comes with its perks as it can pay a substantial amount more than an employed person, and at times, pay less tax.
It also means you aren’t tied in somewhere and often headhunted by other organisations for work. On the other side of things, you be a freelancer instead of a contract worker. A freelancer can operate as a limited company or sole trader, completely as an individual.
What does a mortgage as a contract worker entail?
Your next thoughts may be what is a contract mortgage and how does it differ; Not that it necessarily differs, but there are lenders out there who provide services specifically for contract workers.
Some lenders will cater for contract workers or freelancers, some will do one or the other and unfortunately, some will do neither. This is why it is important to seek financial advice prior to an application, so you can find the best offer specific to your needs.
Contract workers can be assessed as a financial risk in the mortgage world, but with the right documentation and evidence, this doesn’t have to be the case.
The main aspects a lender will look for are:
- How long you have been a contract worker for
- If you’ve had any contracts renewed
- If you’ve left any contracts
- What type of contract worker you are e.g. IT contractor, boat builder, etc.
- How long you have worked in your chosen industry
As long as you are able to provide honest and evidence-based information, then you’re off to a good start.
It’s a huge myth that if you’ve only been a contract worker for under 3 years you aren’t able to apply for a mortgage. A financial advisor can get in touch to a variety of high street lenders to consider your application. As previously stated, there are lenders designed especially for contract workers in this exact position.
How your mortgage will be assessed
The next step is the application itself, and how you will be assessed. The general financial information applies such as credit score, any current loans, proof of income etc. But it’s only really the proof of income that differs from this to an employed person’s application.
If you’ve been in the game a long time and have years of proof of income, then that is ideal.
Say one year you earn £50,000 and the next it’s £45,000, then more than likely your income will be assessed on an average of £47,000.
You may have hesitations that this is lower than you’d like, but in the grand scheme of things, this is in your best interest. As you’ll know with self-employed work, your income can be flippant at times. Choosing an average income will ensure that you are able to pay your mortgage in the good months and the bad.
This also can occur if your earnings really differ from year to year. A broker may only lend you a lower amount based on this, which is both understandable and practical. This will help ensure you are always able to make a payment, giving both yourself and your lender peace of mind.
Another way of working out your income is through your day rate calculations. Say your day rate is £400. A 5-day working week means you earn £2000 per week.
Lenders will usually multiple this sum by either 46- 48 weeks of the year. This would give you a calculation of £500 x 5 days x 47 weeks. This would give you a sum of £94,000 to base your borrowing amount on.
The general rule of thumb for self-employed/ contract workers is that 2-3 years of proof of income is ideal, but not a necessity. It is your basis for proving your worth and how you will be able to apply for your mortgage application.
It’s always best to seek advice from a financial advisor, who can really give you the best outcome for your income and create the perfect criteria for what your next steps will be. They can help with finding a lender that will suit your needs best.
How will my mortgage be affected if I’m a contract worker applying with an employed person?
In this case, it goes without saying that a mortgage lender will be more willing to lend.
If the other person is employed with a stable income, then they aren’t necessarily of any financial risk to a lender. It would work in your favour to apply with someone who is employed if anything.
But for whatever reason this isn’t the case, you can always apply for a mortgage with a guarantor. This will mean that if you can’t make the payments, it will become the guarantor’s responsibility, which gives lenders the security that it will always be paid.
Can I get a mortgage on a fixed-term contract?
You aren’t excluded from the mortgage application just because you’re a fixed-term worker. You may have slightly more difficulty not being permanent but there are still lenders willing to help.
If you have your proof of income, and with no career breaks, this will work in your favour. If you can also prove your contract is at least 6 months, this can also work in your favour.
A financial advisor can steer you in the right direction here to find the best outcome for your current situation.