It can be difficult for people that are not in permanent employment, i.e. someone that is a temp, freelancer, contractor or self-employed to get a mortgage, particularly if your income fluctuates or if lenders perceive that your ability to earn sufficient money might be unstable. This might seem unfair, particularly for people that have a good track record of achieving required income levels, but ultimately responsible lenders need to ensure that borrowers will be able to manage their repayments.
A lot of mainstream mortgage providers do have misconceptions about the ever-increasing numbers of people not in permanent employment, and it is common for lenders to perceive this significant workforce as higher risk than employees. However, there has been considerable progress in recent years with more lenders being receptive to offering mortgages to freelancers, contractors and self-employed people. There are also a number of firms that specialise in lending to this important part of their market.
What lenders will need
The specifics of what is required will vary according to your chosen lender, but in general they will need to see a history of your income so that they can be assured that you are likely to be able to afford the mortgage repayments. It used to be the case that lenders would need at least 3 years’ worth of proven income but that isn’t necessarily always the case now. Mortgage providers will want to see evidence and a track record of you consistently earning your income, whether that is being paid by on a per project/contract basis, or whether it is paid on a time basis, i.e. hourly, daily, weekly or monthly. They are also likely to require some evidence of likely future income.
Usually a self-employed person will need to provide 1 year’s of accounts, and some lenders will want the peace of mind to know that you have engaged an accountant to assist with overseeing your financial position. They may also require evidence of your financial position via HMRC statements and calculations, so it is always a good idea to keep your financial paperwork up to date.
Temps and agency workers are usually either paid via their recruitment agency, or they might be employed by an umbrella company. In either case, their earnings should be subject to PAYE, meaning that HMRC should have a record of your income and tax paid. This means that the lender may treat such workers as employees and request three months’ payslips as well as a P60 as evidence of income. There are likely to be further requirements such as some evidence of likelihood of future work. In addition, having a contract of employment with the umbrella can be useful as a further indication of stability, and therefore potentially less risky for the lender.
How to apply
You can apply directly to mortgage lenders or via a broker, and in either case we suggest checking that they have experience of lending to self employed people, freelancers and contractors. If they have a track record of similar lending, they are more likely to understand how your income might fluctuate, but also be comfortable that it is not actually as high risk as other lenders might perceive.
In general you should be able to access all the same types of mortgage as anyone else, i.e. fixed rate loans, tracker mortgages and discounted mortgages, all of which are of course dependent on your own particular circumstances. The level of deposit required and applicable interest rate should be broadly the same as per any other applicant.
The amount that you will be able to borrow is subject to the lenders criteria and for contractors (who are paid according to time worked) we would normally expect this to be calculated according to an average weekly rate which is multiplied up to give an annual income figure. Lenders will usually assume that a certain number of weeks will not be worked annually due to holiday or gaps between contracts, so don’t expect your weekly rate to be multiplied by 52!
It should be noted that at the time of writing it is too early to know the full impact of coronavirus on mortgage lending, however we expect them to be more risk averse compared to pre-pandemic. Therefore, this article is intended as a general guide, and you will need to seek advice that is specific for your particular circumstances.