A Guide to Mortgages for Self Employed Contractors

When you become a self-employed contractor, there are certain challenges you’d likely face, such as securing your first major contract or applying for a bank loan.

What you might not expect is that getting a mortgage can be an even bigger challenge.

Fortunately, getting a mortgage as a self-employed contractor doesn’t need to be difficult if you know what mortgage lenders are looking for.

What You Need to Know

A mortgage lender will see you as self-employed if you own over 20 – 25 per cent of a business paying you earnings. They’ll also see you as self-employed if you’re a contractor, a sole trader, a partner, or a director. Your status as a self-employed contractor affects how the lender assesses your income.

All mortgage lenders offer mortgages to borrowers who are self-employed. However, there are some more eager to do so than others. You also might find yourself excused from some lenders’ first-time buyer programmes that enable you to stretch your income or pay smaller deposits.

Some building societies and high street banks reserve mortgages requiring only a five per cent deposit to those applicants who are employed.

When the pandemic started, businesses were forced to shut, which spooked lenders, and they offered mortgages to the self-employed that required a 40 per cent deposit. Fortunately, things have relaxed since then. 

Even so, if you’re a self-employed contractor buying a house, the more you can put down as a deposit, the greater chance you have of being accepted. While you should seek self employed mortgage advice from a professional, here are a few things you should know.

Track Record

In order to secure a mortgage, you need to have been trading for two years with the likes of HSBC, Santander, or Barclays. Unless you’ve been trading for a year, you’ll need to talk to a smaller bank or building society with underwriters who will look at your application on its merits, as opposed to fixed criteria. This means that you’ll be charged more interest, however.

Just like with an employed borrower, a good credit score and a clean credit history is necessary for you to land a low interest rate.

Assessment of Your Income

Among the biggest differences between an employed and a self-employed borrower is how lenders assess their earnings.

If an employed borrower has just been given a big pay rise, a mortgage lender will allow them to use the new salary to support their application. For a self-employed borrower, however, the sudden increase in profits wouldn’t likely go in your favour.

Instead, your average profit would be worked out from the last two years of the most recent profit figure if it’s lower. Profits would need to be consistently high for two consecutive years to be accepted by the bank.

Lenders use different ways to calculate income, depending on the type of self-employment. A sole trader will be judged on their latest two years’ net profit before tax. A contractor will provide weekly earnings, with a lender then typically multiplying those earnings by 46 weeks.

Evidence Needed

A lender will ask a self-employed contractor to provide different income types as evidence depending on the status of self-employment.

Sole traders, for example, will need to provide a combination of documents from Self Assessment Tax Calculation (SA302) forms, their most recent three month’s personal, business bank statements, and a tax year overview. The particular combination is dependent upon the lender.

COVID-19 has increased how much paperwork lenders require, such as an applicant’s written statements detailing how their business has been affected by the pandemic and how they anticipate their businesses to do down the line.

They’ll also need to provide all standard evidence, such as three month’s personal bank statements, ID, and proof of address.

Income Bias

It can be a complicated task to calculate your earnings, so it’s wise to seek help from a mortgage broker. 

If your increase in profits is the beginning of a long-term trend, but there’s more to do to convince your lender, you might not get the loan amount required for your intended home.

A family member can provide a portion of their income to your mortgage application so that you’ll be in a position to be able to borrow more. They don’t need to make a large deposit or be registered as a property owner. They just need to be a guarantor for their loan, so that’s an option if you can’t afford the payment.