Let me first caveat this blog post for legal reasons, I am no way a financial or mortgage advisor. This is not advice and nor do I advise you personally follow anything mentioned in this article without consulting a professional financial advisor.
If you’re like me, you’ve probably heard a good few times “You’ll struggle to get a mortgage” or “You need at least 2-3 years accounts to even be considered for a mortgage” or worse “You have no chance in getting a mortgage”.
I actually naively believed these myths and passed off the possibility of getting a mortgage in my position a pipe dream.
The key lesson here? Don't listen to others!
Fortunately, there are options for freelancers and if you’re a contractor even more options and benefits for us!
Just don’t listen to the hearsay or worse let that stop you from speaking to an advisor.
I actually put off speaking to an advisor for a couple of years, as I believed this bullshit and thought I would be laughed out of the door.
Let me assure you, you will NOT be laughed out the door or phone.
It can be a daunting thought to speak to advisor, personally I had no idea how to approach it.
I’m not the biggest fan of speaking to people in person, especially the thought of walking in a Mortgage Advisors office unannounced and asking to speak with someone.
Simply, finding a Local Broker and give them a call and explain your situation.
What options are there?
To give you a bit of background before you do speak with a broker, let’s put you into a better position so you’re not influenced by the first advisor you speak to.
You have two options as a freelancer or contractor:
- Approach a lender as Self Employed with your Limited Company
- As an employee based on a day rate stipulated in a contract
I’m going to break down both approaches as they both have their pros and cons.
Self Employed Route
A broker who either isn’t aware of the other route or doesn’t have the lenders available, will usually propose this route.
I personally took a break the previous year and as a result my earnings would have been sporadic and therefore my mortgage affordability would have been lower as well as not clean accounts.
Depending on who you speak to, they may say a lender requires 2 years of accounts but generally they base it on your previous years turnover.
Also your payment structure may affect your mortgage application. My broker spoke of a client who turned over £2 Million and took a dividend the previous year of £500k and was still denied because she paid herself the base salary.
Taking this kind of mortgage does have benefits of receiving a lower interest rate, which could be why lenders are more stricter towards these borrowers.
The final disadvantage is you require at least a 25%deposit by some lenders, which means more money down and more time saving.
Of course, if you’re accounts stack up and you’ve got the cash, there are some more favourable mortgage products available.
Got a contract and a specified day rate in writing? Good news, you’ll be able to get a mortgage pretty easily.
The common misconception among contractors I’ve spoken to is a mortgage is not possible.
There’s actually a few lenders who consider you as permanently employees if you meet a certain criteria…
Your day rate needs to be over £250 a day and have a signed contract…that’s it.
From this, they multiply your day rate by 240 days to determine your salary, then will determine an affordability figure by again multiplying your salary by 6.
Let assume you’re ballpark day rate is £250, this is obviously the lower end of the spectrum and conservative but that will net you a salary of £60k with an affordability of around £360,000 to be borrowed.
These kind of lenders also only require a minimum deposit of 10%...not the 25-50% myths you hear.
Contrary to the alternative option, the available mortgage products will generally offer higher rates.
Don’t this detract you, there are techniques to lowering your monthly payments...
I was personally advised to take on a 2 years fixed term mortgage with an initial higher payback period (32-38 years) then after the fixed term remortgage to a lower repayment period. Taking this approach gives you time to ‘find your feet’ and determine your monthly spends and lower your cost of living compared to standard rental costs.
How to apply for a mortgage
First and foremost - You are going to need to speak to a Mortgage Advisor!
If you were employed, going straight to the lender would be a viable option....But if you’re reading this, I'm guessing you may be self-employed?
If I'm right and you are self-employed, a broker has access to a wide range of mortgage lenders and knows how to specifically craft your case to look desirable to lenders.
Doing this alone, you’re likely not going to succeed as you may slip up on some crucial positioning.
When I first decided to purchase a house, I had no idea of how to approach a Mortgage Advisor....this stuff isn't taught in school!
I wondered whether you just walk into a local mortgage brokers shop front you see and was clueless what to even ask if I you did walk in or call up.
Luckily a broker was recommended to me so I could approach them from the position of being referred and was able to have a good chat and understand the process…unfortunately that broker ended up being a dead end.
This actually ended up being a good omen!
The point I’m making is, don’t be afraid to explain your situation. If the broker is worth their sauce, they will be able to confidently advise you on an approach regardless of your situation, not scare you away.
Personally, I spoke with 3 mortgage advisors before settling with one. The first was put off by the fact I was self-employed, the second was an online mortgage broker that lacked good communication and the last one was fantastic and just got the job done!
My final broker told me every possible paperwork I may need then literally applied for the mortgage in front of me. There was no waiting around or uncertainty from the lender and requiring extra paperwork, everything ran smoothly and I was officially offered a mortgage within 3 weeks.
Alarm bells should ring if they say you’re case is too complicated and do not even propose the contract day rate route.
You need to think of a broker as an essential part of your power team. They make money through a referral fee from the lender so it’s in their interest to secure you a mortgage and fight your case!
Build a good relationship with your broker and you may be able to use them in the future for some property investment deals ;).