Securing a mortgage for a Contractor can be a lengthy and cumbersome process. However, with the right financial advice it is one of the best investments a Contractor can make. This guide will provide you with all the advice that you will need as a Contractor to take the first steps to applying for and securing a mortgage.
Advantages of Mortgages
As a Contractor, you should be earning greater amounts of income which could be invested into a property. This puts you in a good position to buy a substantial property or even invest in a second property that could be rented out.
Note that your high income puts you in a favorable position as you can repay your mortgage back in a quicker time than normal i.e. in a shorter time than the 25 year mortgage repayment plan.
Disadvantages of Mortgages
The most difficult part of buying a property is securing a large mortgage. The high street banks and even some building societies will only give you a limited mortgage based on your salary. With the new IR35 rules and the nature of contracting, you may often find yourself in a difficult position when trying to convince a bank manager that they are worthy of a larger mortgage.
It is advisable to shop around for the best mortgage before applying. Each time that a credit check is carried out, this shows on your record and puts you credit score and credit worthiness in jeopardy.
Ensure that you also aware of all the insurance policies that you may need to take out before securing a mortgage.
Mortgages from Other Lenders
There are other lenders that could help you secure a larger mortgage and they normally specialize in mortgages for contractors. In most cases you will be able to lend up to 4.5 times your annual contract rate. It is also advisable to secure a 10% deposit to get the best mortgage deals.
As mentioned, do not apply for a mortgage with many lenders, it is better to shop around and choose the most favorable deal to avoid unnecessary credit check activity which could affect your credit score.
There are expert Mortgage brokers that specialize in securing mortgages for contractors. It is important to secure a mortgage broker you know has a good reputation and has dealt with contractors before. This is an important consideration as you may have many short-term contracts and the mortgage broker should be able to help you secure a mortgage based on your type of income. It is also important that the mortgage broker follows all mortgage protocols and financial codes of conduct.
Choosing the Right Type of Mortgage
There are 2 main types of mortgages which shall be examined below. They all have different structures and should be considered carefully before deciding which one best suits your individual financial needs.
A Repayment mortgage allows you to repay the capital and interest hence reducing the amount owed over the duration of the loan. This type of mortgage can be inflexible but it gives you the guarantee that your mortgage will be repaid at the end of the duration of the loan.
Interest Only Mortgage
The Interest Only Mortgage allows you to pay only the interest back and repay the loan amount separately. This can take the form of an ISA (Individual Savings Account) mortgage which gives you great flexibility.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.