Mortgages can be complex.
Not everyone ticks the boxes for a traditional mortgage, especially if you’re self-employed and are unable to provide proof of a regular income.
Don’t worry, there are alternatives available.
What is a self-certified mortgage?
A self certified mortgage was designed for people who couldn’t prove their regular income. This type of mortgage was popular with self-employed freelancers and contractors.
With self certified mortgages, no proof of income was required.
Borrowers could declare their own earnings without providing evidence.
Are self certified mortgages still available?
Self certified mortgages were banned by the Financial Conduct Authority in 2014 over concerns that lenders were accepting over-inflated incomes from the applicant, which meant that they were not affordable for the customer.
All mortgages are now regulated by the federal government through several acts passed by Congress.
It is extremely unlikely that self certified mortgages will return to the market. Some overseas lenders may still offer you this type of mortgage, however, they come with the following risks:
- If you’re unable to make your mortgage repayments, for whatever reason, your home will be repossessed. There are rules that protect you from having your home taken away from you with other types of mortgages, for example, if it was due to an illness or temporary financial difficulty, which don’t apply to banned self certified mortgages.
- A self certified mortgage will be regulated by the laws and policies of the country in which it was issued. Check what protection and laws apply to your mortgage before taking it out.
Consider a contractor mortgage instead
You may have heard that getting a mortgage as a contractor is really difficult.
Getting a mortgage as a contractor is more than possible, and this is how.
Self-employed and contracted people have access to the same mortgage products as employees, however, they may have to jump through more hoops to get their application approved.
Although self certified mortgages are no longer available, there are mortgages that are designed to make it easier for self-employed people and freelancers to borrow with their day rate, salary and dividends.
A contractor mortgage looks at your day rate and works out how much you can borrow based on that.
How to choose a lender for a contractor mortgage
Lots of lenders will offer contractor mortgages, however, it’s important to use a company that has a good track record of getting contractors a good mortgage deal and specialize in this area.
Use a lender who has been recommended by family or friends, or do some research online to find a suitable one for you.
How much could you borrow as a contractor?
Historically lenders would work out how much you could borrow by multiplying your income by a fixed number.
If you have been a contractor for several years, lenders will use an average from the most recent years when deciding how much you can borrow. If your income varies significantly from year to year, a lender will either take the income from the most recent year or the lowest earnings in recent years.
Now, most lenders will look at your full financial situation, including:
- Your monthly pay.
- Income from pensions, investments and any grants or child maintenance.
- Your available credit.
- How much disposable income you have.
- The amount of outgoings you have.
Lenders will assess you based on which self-employed category that you fall into.
Sole trader: lenders will use your self-assessment which states your total income and tax paid.
Partnership: if you’re in partnership with somebody else, the lender will look at your share of the profits.
Limited company: if you own a business, you will be assessed on the salary you pay yourself and any dividend payments.
Get the best mortgage deal
Lenders will take into account how secure your job as a contractor is when processing your application.
If you can show an ongoing contract agreement or past agreements that state it is likely to be renewed, this will strengthen your application significantly.
Certainty and consistency in your earnings will go in your favour when applying for a self certified mortgage. A strong CV that demonstrates evidence of a range of contacts will help too.
Top tips for securing a contractor mortgage deal
As a contractor, lenders will look at different criteria than if it was for somebody who is employed.
Here are 10 things that will increase your chances of being approved.
Boost your earnings before applying for a mortgage: if you have the opportunity to take on extra work on the lead up to starting the house buying process, now is the time to do it.
Extra regular income means you will be able to borrow more money.
Minimize the amount of extended time off in the 12 months before applying for a mortgage.
Lenders may be wary about how regular your income is and use it as a reason to decline your application.
Keep an eye on your credit score: it’s important to correct any errors on your credit score as this is what lenders will use to determine if your application will be successful.
Sign up to MSE Credit Club to keep an eye on your score.
Save as much as possible for your deposit: most lenders will require at least a 10% deposit.
The higher the deposit you have, the more mortgage deals will be available to you.
Use lenders who specialise in contractor mortgages: specialists who work with contractor mortgages are more likely to be able to get you the best deal possible through negotiated rates.
Specialists have a thorough understanding of contractors and what they need to do for their mortgage to be approved.
They will also know which contractor-friendly lenders to apply to, saving you time going through the process only to be rejected.
Use an accountant: up-to-date accounts are a vital part of getting your mortgage application approved.
Having accounts that have been signed by an accountant also adds credibility to your earnings.
Providing as much information as possible on your expenses and operating costs will also go in your favour.
Know what you can comfortably afford: lenders can raise their variable rates, which will be passed on to their clients.
It is important that you can afford the repayments and account for any potential increases.
Keep your contract paperwork up-to-date: gather all of your previous contracts and ensure the client name, rate and your name are clearly labelled on it.
Lenders will use these for your mortgage application.
Update your CV: lenders will want to see a copy of your latest CV to confirm your contract day rate and prove how long you have been contracting for.
Have your ID documents to hand: you will need to provide proof of your previous earnings in the form of signed bank statements.
You will also need proof of your name and address by providing your passport, driving licence and utility bills.
Make sure your voter registration is up-to-date. Lenders often check this to verify your identity and current address.
Buy with your partner: if your partner is employed, lenders may be more willing to lend you a higher amount than if you applied on your own.
If you are a single applicant you could also look at joint borrower sole proprietor mortgages.
Contractor mortgage myths
Myth 1: contractors need at least three years of accounts to get a mortgage approved.
Wrong. you can actually get a mortgage based on your day rate.
Many lenders now take into account your current and recent contracts rather than the number of years you’ve been working.
Myth 2: contractors need to have been contracting for at least six months before applying for a contractor mortgage.
Wrong again. contractors are assessed in the same way as an employee would be, therefore it doesn’t matter how long you have been contracting for before you apply for a mortgage.
Myth 3: lenders view contractors as high risk.
Not true. being a contractor does not mean you’re riskier as a borrower than any other person. You will not be held back because of your job type.
Myth 4: contractors need a larger deposit than employed people.
A large deposit will give you a more competitive mortgage deal regardless of whether you’re a contractor or an employed applicant.
Myth 5: lenders charge contractors a higher mortgage rate than employees with a full-time contract.
The mortgage rate you receive is determined by many factors including your credit score, loan-to-value rate, inflation and more.
It is not determined by whether you are self-employed, a contractor or an employee.
Start preparing for your contractor mortgage application
Even though a self certified mortgage is a thing of the past, getting a mortgage as a contractor isn’t the impossible task that many people are led to believe.
Using the tips and advice above, it’s never too early to start preparing yourself financially for a contractor mortgage. Want to know more about mortgages and homeownership? Visit our blog for the latest information and advice.