Contractors can source a broad range of mortgages, but these are usually not available when you apply to a bank directly.
Often bank staffs at local branches don’t understand the contracting market,
which is why contractors should seek the support of a contractor mortgage specialist.
The advantage of going through a specialist to apply for a contractor mortgage is that contractors can often get a substantially larger loan than permanent employees.
Many contractors are unaware that they can apply for the same competitive mortgage deals as a permanent employee. The first decision you need to make is whether you want to apply for a fixed rate or tracker rate, obviously this will be based on your personal preferences and situation. If you’re not sure a mortgage specialist that arranges contractor mortgages can guide you through this important decision.
Contractor Mortgage Rates
Tracker rates are dictated by the Bank of England base rate (BoE), it will follow the BoE base rate by a margin set by the lender. So if you select a product that is BoE plus 1.99%, this means that it track the BoE rate by a margin of 1.99% giving a pay rate of 2.49%. Whereas if you select a lenders discount variable deal, you will receive a discount of the lenders standard variable rate. It is important to not in this case that the lender has the discretion to change their SVR whenever they like. Should the markets fluctuate and lenders cost increase due to the cost of borrowing, they can potentially increase their SVR are will. Therefore, it is always less risky to choose a tracker deal over a SVR.
The main mortgage products available for contractors and freelancers include:
Fixed rate mortgage: The interest rate remains fixed for a specific length of time after which it reverts to the lenders SVR. Depending on the lender the SVR could be set higher or lower than the fixed rate. In most cases it depends on the loan to value, the larger the deposit the contractor puts down the more likely the fixed rate will be lower than the SVR.
Variable mortgage rates: Variable rate mortgages usually fluctuate depending on whether you are following the BoE base rate or the lenders SVR. It is extremely important that you distinguish the difference between these two options. Many contractors get caught out by applying for a discounted variable deal believing it is tied to the BoE base rate when it is not.
• Tracker rates: will be set at a margin above the BoE base rate (0.5% currently), e.g. base rate plus 1.99%, giving a pay rate of 2.49% for period of time, usually 2 years and then reverts to the SVR or in some cases to a new margin above the BoE for the remaining term of the mortgage.
• Discounted rates: this is where the lender discounts their SVR by a certain amount of percentage points over a certain period and then reverts to SVR after that period expires. The lender can raise the SVR at their discretion irrespective of whether the Bank of England leaves the base rate the same.
‘Loan-To-Value’ the size of the loan in relation to the value of the property
In today’s current climate lenders require contractors to provide a minimum deposit of at least 10% of the value of the property. This means that the lender provides the remaining 90%, this is referred to as a ‘Loan-To-Value’ (LTV) of 90%.
Normally, the lower the LTV is, the lower the interest rates offered. Those contractors who can offer a deposit of 25% can benefit from a very attractive interest rate. Lenders are typically offering rates as low as 2.59% for 25% deposits. This is because lenders view these contractors as less of a risk.
Credit History – Is this important?
Naturally, this is important irrespective of whether you are a contractor or a permanent employee. Lenders place a great emphasis on credit history and will be a major determining factor whether you qualify for a mortgage. Even a few late payments on your credit card might blow your chances of getting a mortgage. We advise anyone considering a mortgage to obtain a credit report from Experian or Equifax before, in order to check your credit score. There are lenders that will turn a blind eye to a few late payments but lenders are continually tightening their criteria towards adverse credit.
Mortgage rates for contractors
To summarize contractors are able to secure the same range of mortgage products as permanent employees. They will need to provide copies of their contract, bank statements and CV in place of financial accounts. Contractors should always seek mortgage advice from contractor specialist to ensure that their mortgage application has the greatest chance of success. Contractor based underwriting is also available to IT contractors as long as they apply for an IT Contractor Mortgage.
