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For the UK’s 4.8 million self-employed*, mortgage options depend greatly on the sector and nature of their work. It’s often assumed that all lenders will want at least three year’s accounts and will base their maximum loan on taxable income. For contract workers, especially in historically dependable sectors such as IT, the reality can be very different – and much better.
Contract workers frequently have high commuting costs, spend significant sums on equipment, and have other expenses such as training, accountancy fees and attending trade conferences. All of these can be offset for tax purposes, creating a difference between gross and taxable income which can amount to tens of thousands. This is good news for saving tax, but a problem when faced with traditional lenders who insist on using taxable income to calculate maximum loans.
Fortunately, some lenders take a more enlightened view, offering terms that incorporate the entirety of a contractor’s gross income. This has happened because lenders have seen that contract workers can often be in one post, on a good day rate, not for just three or six months at a time, but for years. Furthermore, even those who do move quite frequently from one contract to another can often demonstrate strong continuity of earnings. Finally, because their earnings tend to be high, contract workers usually have sizeable deposits, adding to their appeal in the eyes of specialist lenders.
A mortgage we have just secured for one client provides a good example. With a day rate of £500, our lenders were prepared to advance as much as 4.75 times annual income, assuming 48 working weeks, i.e. £570,000. In the event, to buy his £920,000 home he needed a little less – £535,000 – which we secured for him, fixed for two years at just 1.39%.
An important point in favour of the client referred to above was that he had no gap in earnings longer than six weeks, over the last two years. Gaps beyond six weeks are not a ‘deal breaker’ – a significant minority of IT contract workers take a three-month break, year after year – but do limit the number of potential lenders. Similarly, if you have been a contractor for less than a year, there are lenders who will consider granting a mortgage, though they will look closely at the length and nature of your current contract, skill set and sector within which you work.