IT Contractor Mortgage
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IT Contractor Mortgage
Hemat Natha talks all about getting a mortgage if you are an IT contractor.
What is an IT contractor?
An IT contractor is someone that doesn’t have a permanent employment contract and works on limited term contracts. It doesn’t mean that they don’t work all year round – it’s just that they don’t have the same benefits that employees receive, such as pensions and employment law securities.
An employer of these contractors has the option to renew the contract – the contractor might work for a 12 month period, at the end of which the contract is either renewed or not. Meanwhile, as an employee you’re employed until you resign or you’re made redundant. The employer doesn’t need to renew your employment: you’re continuously employed.
Many IT contractors take project based work to deliver change projects or IT infrastructure for example.
What’s the difference between a regular mortgage and an IT contractor mortgage?
There isn’t a specific mortgage for IT contractors. All mortgages are the same, but lenders do have different criteria around occupation or employment type. IT contractors can be treated in various ways. The lenders have different approaches in looking at your income to assess the affordability for your mortgage.
What are the eligibility criteria for an IT contractor mortgage?
Whenever an IT contractor comes to us, we ask them how long they’ve been contracting for and how long they’ve got left on their existing contract.
Depending on that, we then ask if they’ve had their contract renewed. If it’s been renewed with the same employer three or four times, that’s great. We also ask about the industry they work in. It helps to see a copy of the contract and evidence of 12 months’ employment history in the same field. We’ll then ask for relevant documentation to support that.
What documentation is typically required to apply for a mortgage as an IT contractor?
The standard documentation is your passport and proof of address. We also request your credit report – we use CheckmyFile which looks at the four major credit reference agencies in the UK.
We then ask specific questions about how you are employed. Some IT contractors work through an umbrella company. In that case, we ask specific questions about the company and we’ll want the payslips from it.
If you’re trading through a limited company, we’d ask for your company accounts, tax calculations and tax overviews.
But the main thing we ask for is a CV – to show us where you’ve worked and past contracts. We also ask to see your copy of your current contract. If the contract is coming up for renewal in less than three months, we might ask for confirmation that it will be renewed. We’re then able to go to lenders and explore what they have to offer you.
How does being an IT contractor affect the mortgage application process?
There isn’t much difference. It’s only really about the answers to the questions we ask. So if you’re on your first contract and it hasn’t been renewed, there are limited lenders. You would need to prove that you’ve got previous experience in your specific line of work.
By asking a lot of questions and being nosy about your income we can make sure we get the right lenders with the right affordability for our clients.
Do any mortgage lenders in the UK specialise in IT contractor mortgages?
Lenders all have different criteria. If anyone comes to me for a mortgage and wants the maximum amount of borrowing, we’d try to go to lenders that will give the highest loan.
The best way to maximise your borrowing is to use an IT contractor’s day rate, which we’ll come on to in a moment.
What factors are considered in determining the mortgage amount for IT contractors?
The biggest factor is looking at the contract and the day rate. Those day rates vary typically from £250 a day to £1,000 a day. Lenders will use that and calculate the number of days they work per week, then annualise that out. They might multiply it by 52 or 48 depending on the lender.
That’s the fun of my job. It’s like a puzzle to find the lender that has the best calculation for that IT contractor.
We did have an IT contractor around a year ago who had multiple contracts. He did three days in one job and two days in another. We were able to use both incomes because he’d been doing it for quite a while.
We can take multiple different contracts – but some lenders may view that person as self-employed. Each has their different policies and criteria. In that particular scenario, we needed to borrow the maximum amount, which we did by using both contract values. The mortgage was easily affordable because he was earning the money.
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What interest rates and repayment options are there for IT contractors looking to get a mortgage?
Rates change on a daily basis. So anything I say may change tomorrow. The best thing to do is to speak to us – we’ll do a quick rate search and give you specific details.
It’s August 2023 as we’re recording this and rates are pretty high, although we’re seeing them going down slightly. Everyone that’s obtained a mortgage with us in the last six months is getting reviewed to make sure they have the most suitable rate. We will do that up until completion on their mortgage.
Each client then knows that they are actually on the best rate available to them. That’s just part of the service. We want to do the best for everyone – I imagine my mum going to a mortgage broker. I would want her to be treated in the same way, with good service and care.
Are there any specific challenges or advantages for IT contractors in obtaining a mortgage?
The challenge is often in providing signed contracts. A big advantage is the opportunity for additional borrowing capacity if you’re on a day rate. You might get paid into a limited company but lenders will still take you as if you’re employed. The way lenders multiply your income as a contractor is a big advantage.
How does the length and stability of a contractor’s work history impact their mortgage application?
It’s really important. We’d always ask you whether this is your first contract and if it has been renewed. We’d ask how long is left on the contract and how long you have previously been contracting.
It’s important because mortgage lenders may perceive IT contractors to be a bit more risky. The company could potentially let you go and you’d need to find another contract. How easy is it to find a contract to walk into?
That’s why contractors get paid slightly more. While they might earn £600 a day, they don’t have the same guarantees that an employee has.
Are there any restrictions on the type of properties that can be purchased by IT contractors?
No, there are no restrictions on properties – as long as the lender is happy with it and the surveyor is happy with it, that’s fine. There are no restrictions.
Properties built with certain materials like concrete or very niche types of material could have an impact – but we’ll let you know if that were to come up.
What steps can IT contractors take to improve their chances of getting approved for a mortgage?
It’s all the standard things with a mortgage. Make sure that you keep up to date with your payments, make sure your credit is good and you’re not overstretched. If you’re an IT contractor, it’s an advantage to have your contracts renewed, but don’t wait for them to be renewed. Come to us beforehand and have that conversation.
Are there any tax implications or considerations that IT contractors should be aware of when applying for a mortgage?
We don’t get involved in the tax side of things. The way you structure your income should be discussed with an accountant or employer.
We only get involved in dealing with that structure – whether it be income as a sole trader, through limited companies or through umbrella companies. We’ll explain what you can afford on a mortgage. We don’t get involved in tax implications.
How does the affordability assessment work for IT contractors?
Lenders often take your contracting day rate and multiply it by the days you actually work to get a weekly income. Depending on the lender, they then multiply that income by 48, 46, 42 or even 52 weeks to get your annual income.
If you need a high borrowing amount, we’ll go to a lender that gives us the highest annual multiplier on the weekly income for the maximum loan. We’ll take a view on that, along with rates, to decide what’s cheapest for you as well. So there are a few things we consider.
Are there any specific mortgage products or schemes available to support IT contractors?
All the schemes are available as long as the lender takes your income into account in the most appropriate way. IT contracting is just a job and an income type. There isn’t a specific product for it.
Contractors are eligible for all the schemes, it’s just about opting for the most appropriate lender for your situation and affordability.
Can you explain the concept of contract-based underwriting? How does it apply to contractors looking for a mortgage?
Contract based underwriting is where someone assesses your income documentation and makes a judgement on whether you’re going to get a mortgage or not.
They assess income based on the type of contract. For example, if you’re paid through an umbrella company, that company would pay your taxes and then pay you. You have specific documentation for that.
If you have a day rate contract we can assess income based on that contract value by annualising that income. It’s effectively treating the applicant as employed – but that complexity comes in where that day rate income is paid into a person’s limited company.
That way you can draw a salary and dividends, but the underwriter assessing the mortgage wouldn’t take your salary and dividend income. They would take the contract-based income, and that’s why it’s contract based underwriting. Assessing the contract gives you the mortgage amount.
It requires a lot of knowledge about contracting, the different types of contracts and the different types of contractors.
For us, the more complex something is, the better. We love a challenge – and we also find that a lot of people just bury their heads in the sand – they think they need to have all the answers. Don’t worry about that. Just come and talk to us. We’ll tell you what you need and what you can and can’t do, and we’ll answer all your questions for you. And it doesn’t cost you a penny for that conversation.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
Hemat Natha, trading as Mortgage Advice Point, is an Appointed Representative of HL Partnership Limited which is authorised and regulated by the Financial Conduct Authority.
A fee for our service is charged. This is typically £495 but the exact amount will be dependent upon your circumstances and we will discuss this with you.
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