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A common query among Limited Company contractors is whether they can secure mortgages like full-time employees. While contractors face many challenges when it comes to getting mortgages, the answer is yes, contractors have many options to secure mortgages. In this article of "Path of Education for New Contractors" we look at Limited Company mortgages in detail and cover the following points.
Limited Company contracting is a growing market. Many lenders have realized the potential of this segment of the workforce and are now more willing to provide mortgages to contractors. Let's look at some of them.
Halifax provides mortgages to contractors simply on the basis of their signed contracts, without any other income proof. In fact, contractors can get mortgages worth 4-5 times of their annual contract value. The annual contract value is calculated using the present contracts, even if the contracts are for 3 or 6 months. Earlier, Halifax offered such mortgages only to IT contractors, but in 2013, it extended the product to non-IT contractors. In order to qualify, the annual contract value should not be less than £75,000 a year. Also, you need to have at least one year of contracting experience in your field.
Example 1: Suppose you are a contractor with 2 years of experience, and you have signed a contract worth £20,000 for 3 months work. Based on this, your annualized contract value will be considered to be £80,000. So, you can get a mortgage of up to £400,000 (or five times your annual contract value).
Calculation: £20,000 is earned in one quarter of the year (3 months), so you need to times the £20,000 by 4 quarters to find the annualised salary. You then times that by 5 to give the maximum mortgage capacity that you may be allowed to borrow.
|Annualised salary||£20,000 x 4 = £80,000|
|Mortgage capacity||£80,000 x 5 = £400,000|
Kensington Mortgages offers mortgages of up to £1 million to self-employed people. They require at least one years SA302 form and bank statements. The SA302 form is a summary of the income declared to the HM Revenues and Customs (HMRC). As of October 2014, Kensington offers a rate of 3.44% for a 2-year fixed mortgage and a rate of 3.64% for a 3-year fixed mortgage. There are no administration fees for applications.
Clydesdale Bank provides mortgages to self-employed contractors as long as their calculated income is £75,000 per annum. Income is calculated as the average weekly rate charged by the contractor multiplied by 46. So, if the average weekly rate is £1,800, your annual income will be considered as £82,800 (£1,800 x 46). Clydesdale Bank also accepts applications from contractors with less than 2 years experience. As income proof, the bank requires 3 months bank statements from both the contractor and of the Limited Company.
Virgin Money offers mortgages to Limited Company Directors and self-employed contractors. For Directors, they take into account the salary and share of net profits (dividends) as proof of income. Self-employed contractors are classified as per their current contract term, say 6 months or 12 months and the eligibility criteria varies by the contract term. To show evidence of income, you need to provide two years of account statements or two years of SA302s.
Apart from the above, some other lenders who offer mortgages to contractors and Directors of Limited Companies are listed below.
From April 2014, new Mortgage Market Review (MMR) rules are in place. Under the new rules, the mortgage lending process has become more stringent, when compared to the past. Banks will have to analyse all applications in more detail before awarding any mortgages. For example, mortgage advisers will conduct longer interviews of nearly two to three hours to understand the applicant's income and spending patterns. Let's look at how these rules affect mortgages for contractors.
Proof of Income: The new MMR rules have stopped self-certified loans if the income cannot be verified. Earlier, self-employed people and Limited Company contractors could get mortgages on the basis of self-declared or self-certified income without having to show detailed income proofs. However, now they need to show detailed income records of up to three years.
Proof of Expenses: Earlier if your income was higher, lenders would offer higher mortgages without looking at your expenses. As per the new MMR rules, lenders will now also take into account your regular expenditures like gym subscription, eating out expenses, and other outgoings to assess your disposable income. The mortgage amount will be determined on the basis of the income left after deducting expenses.
Technically, the new rules have made things more challenging for contractors if they want to secure mortgages.
Deal with lenders who accept annualised contract values: As seen above, there are some lenders who accept annualised contract value and are not entirely focussed on past years salaries and dividends. You should go for such lenders if you want to get a higher amount mortgage. Securing mortgages on the basis of annualised contract values is especially useful if you have signed any new contracts which are paying higher than your older contracts.
Don't use company money for offset mortgages: Offset mortgages are a popular type of mortgage, which charges interest after deducting the balance in a linked savings account. Let's say, you have a mortgage balance of £100,000 and you have savings of £50,000 in a linked personal savings account. If this is the case, you will have to pay interest only on £50,000 (mortgage of £100,000 less savings of £50,000). However, the money held in a company account is owned by the Company and not you, the individual. Therefore, you cannot use your company account for offset mortgages.
Maintain a good credit rating: Irrespective of whether you are a full-time employee or a Limited Company Director, a good credit rating is a must for getting a mortgage. To maintain a good credit rating, you need to settle all utility bills, credit card dues, and other such payments, on time.
Higher deposits improve your prospects: If you have the funds, it is always a good idea to make a large deposit, as this improves the chances of securing a mortgage. With a higher deposit, your loan-to-value (LTV) ratio comes down which reduces the risk to lenders.
Avoid long breaks: Any long breaks from contracting can go against you when you apply for a mortgage. Contractors are considered a risky class by the lenders. But if lenders see a consistent track record of work and earnings, they are more willing to take the risk of awarding a mortgage. On the other hand, long breaks in income can make it difficult for contractors to secure mortgages.
Check pre-payment clauses: It is possible that your business may leave you with surplus cash, so you should aim to clear off your mortgage as soon as possible. Check with your lender about the prepayment clauses and prepayment penalty, if any. For example, most lenders don't allow more than 10% of mortgage repayments in a year.
As seen above, many banks and building societies offers mortgages to contractors and Limited Company Directors. However, you should note that if your mortgage applications are rejected for any reason, your credit score will get negatively affected. Things have become even more difficult with the new MMR rules. So, before applying you need to understand the lenders selection criteria properly and apply only if you are confident of meeting their criteria. Things can be more difficult for first-time contractors, as most mortgage products require detailed income and expenses proof.
If you are looking for a contractor mortgage broker, it is worth considering the services of Contractor Financials who can provide a mortgage of up to 5 times your annualised contract value.
Currently Contractor Financials have a special promotion and are offering the Halifax Limited edition, 2-year fixed mortgage for contractors at the very competitive rate of 2.99%. Contact Contractor Financials for more details.
You may also find the following contractor calculators useful for your salary and tax calculations.