IT Contractor Mortgage
Today I’m here with Tessa to answer your questions on IT contractor mortgages. Of all the contractors I know, I definitely speak to IT contractors the most frequently. It’s a very popular area.
This will be a good episode for those of you who are IT contractors, or if you’re thinking of becoming one. As always, if you have questions, send them in to us – they will form part of our future episodes.
You’ll also notice I’m doing live mortgage Q&As on my Instagram page now, as well as regular videos and podcast episodes. So keep sending your queries in, and we’ll help as many of you as we can.
What’s the difference between a regular mortgage and a mortgage for an IT contractor?
A mortgage is a mortgage, but there is a difference in how lenders assess your income and see how able you are to pay the mortgage. The differences are really behind the scenes.
There isn’t an IT contractor mortgage on the market. You would take a normal mortgage, but IT contractors are just assessed differently in terms of calculating your borrowing .
What are the eligibility criteria for an IT contractor in the UK?
With any mortgage, for an IT contractor or otherwise, the key question is: can you afford the mortgage now and in the future?
A contractor’s income is a bit less stable in the eyes of a lender, compared with a regular employed applicant. Even though employment can change, lenders know that an employer has to treat someone fairly even if they lose your job or are made redundant. There is usually some time for them to potentially get another job.
From a lender’s point of view, contracting is a higher risk because contracts can end, and there could be big gaps before you land another one.
If you are contracting you’ll know that’s the case, and you might recognise that anxious feeling when you’re a few months away from a contract ending. You’re hoping to get another one, but it can be quite stressful. Lenders prefer borrowers with stability in long-term employment.
So you need to prove to a lender that you earn enough and that you will continue to earn at that level – plus, that you’re likely to get another long-term contract if you’re coming to the end of one.
How does being an IT contractor affect the mortgage application process?
There’s a little bit more paperwork involved for an IT contractor, in that we’re going to have to look at your contracts. For the last year, at least, we want to see what you’ve been doing and if there were any gaps. It’s good to have paperwork for longer than that if you’ve got it, because the more information you can give us, the better we are able to represent you to lenders.
Once the application’s in, there may perhaps be a little more underwriting than normal. But from there, it’s exactly like another mortgage – you’ll get a mortgage offer and we’ll be looking to get it all completed for you with the solicitors.
What documentation is typically required to apply for a mortgage as an IT contractor?
Some lenders want you to be contracting for at least two years, while others are happy if you’ve been contracting for a year.
They want to see a history of what you have been doing so far. They want to get a picture of you – are you a regular contractor? Are you popular in the IT contracting space? Are you likely to get another contract as soon as one ends? Have you got a good track record?
They don’t like more than six to eight weeks between contracts. So you’re going to need your contracting history – and that’s sometimes the most challenging thing, because perhaps you haven’t stored them all away together.
If you’re contracting, try to be really good with your paperwork and keep everything together so you know where to find them. That’s going to really help.
As with any mortgage, you need to prove your income. Bank statements will still be needed, the same as for someone who is employed. We look at the income coming into the bank account and make sure it matches your contract. We also take a look at how you’re spending your money and whether that’s in line with the mortgage that you’re trying to get.
Are there any specific mortgage lenders in the UK that specialise in mortgages for IT contractors?
It’s not really a specialist area of the market. A lot of the high street lenders are happy to work with contractors. We naturally gravitate to certain lenders because we know their underwriters are very comfortable with contractors.
If you go on Google perhaps you’ll find brokers that say they are specialist contractor mortgage brokers. But any mortgage broker can do a contractor mortgage. It’s just niche marketing.
It’s just about your broker’s knowledge and whether they understand how to calculate your income, how to represent you and how to get you the best mortgage.
What factors are considered when determining the mortgage amounts for IT contractors?
It’s all about your income, obviously, which will support the mortgage. Lenders will calculate that based on your day rate. As I’ve mentioned in previous episodes, every lender is different, whether you’re employed, contracting, or self-employed… They all have different ways of deciding what the affordability looks like.
That changes all the time, as well. So it’s really important to speak to an advisor. That’s not just me plugging us on my own podcast – you do need to get advice around this.
I know your day rate can change when you’re a contractor, but hopefully we can get to a rough rate you generally charge. Lenders then multiply your day rate by the number of working days in a week, usually five, and then multiply that by 46 or 48 weeks generally to account for holidays. That will give you an annual income, equivalent to an employed salary.
Just to make it very clear, they’re also looking at gaps in your contracts, how long you have left on the current contract and how long you’ve been working as an IT contractor.
What are the typical interest rates and repayment options for IT contractors?
I can’t really talk about interest rates because they change every day. The repayment options are capital repayment and interest only. With capital repayment, every month you are chipping away at the balance of your mortgage, and by the end of your mortgage term, it will all be paid off.
You pay off less at the beginning, compared with the end, and your interest is part of that monthly payment. That’s the optimum way of paying off your mortgage. You don’t have to think about it and you don’t have to save on the side, you just let that mortgage work itself down to zero.
Otherwise, there’s interest only. You can also do part interest only and part capital repayment. There are different criteria around interest only compared with capital repayment, because it’s higher risk. Lenders want to know how you are going to repay the balance in the end. Because you’re just paying the interest every month, your balance will be exactly the same as at the beginning.
You need to know how you will pay that off in the end. Are you going to sell your property? Are you going to downsize? Have you got another strategy in place? The lender’s going to want to know that, too.
Can I get a Buy to Let mortgage as an IT contractor?
There aren’t really any differences when it comes to Buy to Let because it generally isn’t based on your income. With a Buy to Let, we’re looking at the rental calculation. How much are you going to rent out that property for every month; how does that compare to what you want to borrow, and how much deposit can you put down?
It’s a completely different calculation. It makes no difference whether you’re an IT contractor or not. The only time being a contractor can be important is if your rent isn’t enough for the affordability and you need to use your income to boost it.
In that case, lenders will want to know how you earn your money and whether that’s going to be enough to achieve your plans.
Are there any specific challenges or advantages for IT contractors in obtaining a mortgage?
The typical reason that IT contractors choose this line of work is because generally you earn more money. That makes you a higher risk, because you don’t know where your money’s coming from all the time – or certainly, not for a long period of time.
But generally, you can charge more per day than you would earn if you were employed in the same role. Lots of my clients have been in those employed jobs, but their eyes have been on other people that are contracted in, who earn a lot more money to do the same work.
Because you’re earning more money as a contractor, you can hopefully get the mortgage you really want. The challenge is that a lender wants stability, and for you to keep up with the mortgage payments. They want reassurance that you can afford this now and in future.
They don’t like the unknown, because they’re lending you a lot of money and want to know you’re going to keep up those repayments. So the challenge is therefore convincing the lender via your paperwork. The days are long gone when you would sit in front of them and explain your situation. We need to show them that you are a reliable mortgage applicant.
Contractors can often find this annoying. They argue that someone who’s employed could lose their job next month. Why is it any different? You can show you have a job for another six or nine months. But it’s all in the eyes of the lender. An advisor’s job is to represent you to that lender and make sure they’re comfortable.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
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IT Contractor Mortgage (Part 2)
A very warm welcome to today’s episode of the Mortgage Mum podcast – where we’re continuing to answer your questions around different areas of the mortgage market.
Our focus at the moment is on contractors, and we’ve been looking at First Time Buyer contractors and standard contractors, and now this is IT contractors Part Two.
We’re going to get very granular with you today. We can really cover a lot of ground between the two episodes.
How does the length and stability of a contractor’s work history impact their mortgage application?
Length and stability are the two key factors a contractor needs to demonstrate to a mortgage lender around their income. We have to see things from a mortgage lender’s point of view to understand why they ask for certain things.
They really want to know, can you keep up the repayments on the mortgage? Can you afford this mortgage now and in the future?
A contractor has to prove their income is stable and they will continue to earn what they earn now. Lenders like to see at least two years of consistent income history in the same line of work. As a minimum, a year is essential.
We need to look at your contract history. If you’ve got longer, brilliant, because we can paint a better picture for the lender. Stability is part of that consistency.
Have there been big gaps between your contracts? If so, why have those gaps occurred, and are they likely to occur in the future? Does your income fluctuate between those contracts or are you charging a similar day rate across them?
Are there any restrictions on the type of properties that can be purchased as an IT contractor?
There are always restrictions on properties, but it’s no different for an IT contractor compared to any other borrower. We will obviously touch on these in great detail in other episodes, but a good example is non-standard construction.
If you’ve got properties made with non-standard construction, such as a thatched roof or timber frame, they would be at higher risk. Flats in high-rise buildings, particularly those over a certain number of floors are harder to mortgage too – due to whether they’re going to sell – plus there are more safety restrictions on those.
Ex-local authority properties can have strict lending criteria as well, and so can properties that are considered uninhabitable at the moment. If you’ve got to put a kitchen and bathroom in, lending might be restricted.
There’s an endless list of restrictions on the type of properties. Some new builds, unusual or unique properties, commercial properties or properties above commercial units are other examples. It really is a whole other episode.
The key thing for an IT contractor is that this is just the mortgage market. It has nothing to do with the fact you’re a contractor.
Can I get a mortgage as an IT contractor if I have bad credit?
This is definitely a more common question, unfortunately. The cost of living is contributing to people’s worries – along with higher mortgage costs.
But the good news is, yes, you can still get a mortgage as an IT contractor, even with bad credit. It might just be a bit more challenging, and might cost you more. We’d be looking at the specialist lender market potentially, depending on how bad the credit is.
We’ll need to see your credit report. The most important thing is that you’re not ignoring it. If you’ve got bad credit, print your credit report off and get into the granular details.
Some high street lenders will look at bad credit, or we may have to go to the specialist market, which can have higher rates than the high street.
But we’ll be working with you. It’s really important to know how you can get out of the situation you’re in, avoid having it happen again and learn from your experiences, and really understand what all your options are – now, and in the future.
It can be easy to sit in a dark hole when you’re in bad credit. It can be very triggering and money issues can contribute to mental health problems. So the biggest thing you can do is talk to somebody about it and make a plan.
IT contractor or not, the message here is to get advice, make a long-term plan and you’ll be surprised how quickly the time goes. If you stick to that plan, you can really turn it around.
How does the remortgaging process work for an IT contractor?
No differences at all, other than the paperwork we need from you. For any remortgage we’re going to need proof of your income, your bank statements and proof of ID and residency. That’s exactly the same as for a normal remortgage.
But if you’re a contractor, how you prove that income is different. We’ll want to see your contracts. You need to get them all in one place to show us a history of your contracting experience.
Is it all in the same line of work? How long have you been doing it for? How many gaps have you had? That’s really what we’re looking for. We also need to know how long you have left on your current contract and the plan for when that ends.
So there’s a bit more documentation, but otherwise the mortgages are exactly the same. It’s just how we prove that you’re eligible.
What steps can IT contractors take to improve their chances of getting approved for a mortgage?
Be organised with your paperwork. If we know everything about your history and you’re very open with your advisor and happy to share everything, we can put together a mortgage that suits you, and get the paperwork together to make the lender feel really comfortable.
Our job is to make sure you can afford your mortgage and that it fits your daily life – in terms of your monthly repayments, but also your long-term goals. It’s our job to work with the lender to make sure they’re comfortable with you as an applicant. Find the right advisor, that’s going to manage all that for you and represent you well.
Are there any tax implications or considerations that IT contractors should be aware of when applying for a mortgage?
Anything that involves you declaring your own tax can be confusing. On one hand, you’re encouraged to reduce your tax bill by minimising your profits, but on the other hand you’re trying to borrow money based on what you earn.
I’m not insinuating any of you do anything untoward on your tax return, but of course there are business expenses. And as a contractor, you’ll be considered self-employed by lenders, so they may well look at your tax documents to make sure that what you’re declaring to HMRC matches what your contract’s saying.
If there’s a huge difference or inconsistency, that could be an issue. They’re always going to probably use the lowest figure. So it’s really important that everything lines up, that what’s on your contracts is what you’re declaring with your accountant and HMRC, and is what you’re using towards the mortgage.
People can come unstuck when those things vary. They know they can afford the mortgage, but unfortunately the paperwork doesn’t actually marry up with that.
So there is a really big consideration there – if you are claiming business-related expenses, you really need to balance that out with what you’re looking to borrow on your mortgage.
How does the affordability assessment work for IT contractors given the nature of their income?
It works based on your day rate. You need to prove that you’re continuously charging that and it isn’t a one-off, and then that’s used to calculate an annual income.
When you’re employed, it’s easy. You get your pay slip, you have your salary, you may have bonuses or commission, but generally it’s clear what to tell a mortgage lender you earn.
When you’re a contractor, we look at your day rate, multiplied by five for days per week.
If you work less than five days, that will show in your contract and we’ll do it based on that. We assume that you’ll want a holiday, so lenders take that weekly rate over 46 or 48 weeks a year.
That’s generally what your annual income is assumed to be in the world of contracting. It varies between lenders though, so just bear that in mind. It’s our job to figure out the lender that’s going to tick as many boxes as possible, including lending you the most.
Are there any specific mortgage products or schemes available to support IT contractors?
No, there are no specific products or schemes. Some lenders are better for contractors in terms of their calculation and how they underwrite you. So there are not better products, but better lenders with more appetite to work with contractors.
It’s just about working with us to find a lender that’s going to tick all the boxes. It’s not just about the fact that you’re a contractor – there could be other things to take into account, such as your Loan to Value, or perhaps income from the other applicant on the mortgage, or perhaps bonus and commission.
There will be mortgage brokers that advertise that they are contractor specialists, but you are an applicant just like anyone else. It’s just about how we prove your income.
Can you explain the concept of contract-based underwriting and how it applies to IT contractor mortgages?
Contract-based underwriting is everything we’re speaking about now – it’s just a label you might hear. It’s how lenders examine your active contracts, checking the duration and the income you receive. They then turn that into income for the mortgage application, which is annualised.
We talked about how that works with your day rate, the length of your contracts, what they’re looking at and the gaps in contracts. That’s really what contract-based underwriting is. An underwriter looks at your contract and creates an income structure using that information.
They may project income for you, assuming that your contract is going to last a year or two and you’ll be on a higher daily rate in future. They check whether it’s ongoing, if it seems credible with the market; whether you’re being paid fairly for the work that you’re doing, and whether you’re being paid more than you used to be.
A contract-based underwriter will drill down into those things. It’s not just a number, it’s how comfortable they are with the whole picture. Because contract work is really unique, the underwriting is going to be unique too.
This is mortgage jargon, essentially. We even find this challenging as brokers, sometimes. Lenders might talk about contact-based underwriting and we have to double check what that means – and then when we actually look into it, it’s exactly what we’ve just been speaking about. It’s just the label put on it. There’s jargon everywhere, but hopefully we can translate and simplify it for you.
What else do we need to know about IT contractor mortgages?
Please make sure that you’re looking at this in plenty of time. When you’re self-employed, the earlier you look at your finances, the better – because you’ve got more time to plan ahead.
It’s really good to know what you’re aiming for in the future. If you want to move home, speak to us as soon as you start considering it. Don’t wait until you need the mortgage to get advice. You can ask questions along the way, and when you’re self-employed that pays dividends – pardon the pun.
Speak to us in advance so you’re well prepared and don’t end up disappointed – otherwise you’ve got to wait a whole year, then do another tax return to get to the income you need. So always speak to someone well in advance.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
YOU MAY HAVE TO PAY AN EARLY REPAYMENT CHARGE TO YOUR EXISTING LENDER IF YOU REMORTGAGE.
