The result has been employers taking on more contractors. Whilst this clearly has many benefits for employer and employee not much consideration has been given to the impact it may have on mortgage borrowing prospects for hundreds of thousands of people contracting in the UK.
As a contractor you will be deemed as being self-employed and the vast majority of lenders will require at least two years’ accounts, basing affordability on net profit for a sole trader or remuneration and dividends for a director of a limited company – all of which can be restrictive.
In the past the bulk of people contracting have been in IT but this has now opened up greatly and many people now work on a contract basis including accountants, solicitors and banking professionals.
What are the options?
The biggest high street lender that is most flexible with contractors is Halifax who will lend to IT contractors and other contractors whose income is more than £500 per day or £75,000 per annum.
Halifax does not have a specific list of contractors so are certainly one of the more flexible lenders in the market.
Clydesdale Bank is a further lender happy to lend but is generally looking for professionals. They will consider engineers and banking professionals so long as their income is a minimum of £75,000 per annum.
Of the smaller lenders Saffron Building Society will lend and has no specific criteria in terms of type of role.
How is income calculated?
It varies by lender and each has a differing affordability model on what they deem to be acceptable but typically the lender will be happy to calculate borrowing on the daily rate detailed in the contract.
If the contract states a daily rate of £375 then this is multiplied by the five working days in a week and generally by 46 allowable weeks in the year assuming six weeks unpaid holiday is taken.
In this example the lender would be using an annual income of £86,250 which could result in borrowing of up to £431,250.
As you can see this is a great deal easier than having to provide two or even three years accounts although it is still possible that the lender may need to see evidence that the applicant has been contracting for two years.
It is equally possible that the lender may be happy with evidence of a minimum of 12 months or even six months dependent on the loan to value. This evidence will generally be your current and potentially previous contracts showing the daily or annual rate.
A final point to consider is that lenders will probably be happy with up to a month between contracts to allow for a holiday for example but should you decide to take an extended break for a few months then you will struggle to get any lender to approve a mortgage if you’re contracting.