How do I get a mortgage as a self-employed contractor?

How do I get a mortgage as a self-employed contractor?

As a self-employed contractor such as an electrician, there may be some concern as to how your income and job role can affect a mortgage application.

Although there can be extra considerations compared to other forms of income, a mortgage should still be very accessible for a contractor working on a self-employed basis.

Below we will answer some frequently asked questions related to accessing a great mortgage deal as a self-employed contractor.

Can I get a mortgage as a self-employed contractor?

Yes, a self-employed contractor will be able to access a mortgage loan and from a variety of UK lenders in most cases.

This will involve the same considerations as with any mortgage. Lenders will assess income, credit history, affordability criteria and other factors when deciding whether to approve a prospective borrower’s application.

Though areas such as income may be slightly different, there will be ways in which a lender can assess this by looking through accounts. As long as all business accounts are up to date, you should still be able to sufficiently evidence your income.

Usually, lenders find it preferable if contractors have accounts covering 3 or more years but will still consider applications with less than this. Whether those applications will be approved, is down to the policies of the individual lender.

If struggling to access a mortgage through a particular lender, compare deals across the market and speak to other mortgage providers. With a wide range of providers operating currently, even if one lender declines the loan there may be others who are still willing to lend to you.

For more information about contractor mortgages CLICK HERE.

How do I access a mortgage as a self-employed contractor?

You will access a mortgage in much the same way as any other applicant. There will be several things a mortgage provider (building society, bank or specialist lender) will consider before approving a loan application. These include factors such as:

  • Credit history
  • Affordability checks
  • Amount of loan requested
  • Value of property

With a self-employed contractor, the lender will most likely also question:

  • Proof of income
  • How the income is earned (e.g. salary, profits, dividends)
  • Amount of deposit saved
  • How long you have been self employed? 3 or more years?
  • Is your income stable?
  • If a business owner is your business financially viable and profitable?

All of these questions are simply intended to allow lenders a better overall picture of your financial history. This means they can make a fully informed decision before approving a loan.

For even more information on how to secure a mortgage, you can read our full guide on this topic by clicking HERE.

How do lenders assess a self-employed contractor’s income?

For a self-employed person, evidencing your income can be slightly more complicated than with those employed through another business or company. Generally, though, lenders will still be able to assess your income.

You will need to supply evidence of accounts, ideally over as long a period of time as possible. A good way of doing this will be to supply the lender with a copy of your SA302 (self assessment tax return).

There will be certain requirements for self-employed mortgages. Lenders will have different policies related to how long the business has been trading for as to whether you will qualify for a mortgage – the longer the business has been established for the better.

If a self-employed person’s business and income has been steady and stable for several years this will be preferable to lenders. This is because the application will seem less risky than with a more unstable or newer source of income.

 This doesn’t mean accessing a mortgage will be impossible if you have been self-employed for less time than this. It will probably be worth speaking to a mortgage specialist or broker in this case to find the right deal, as certain lenders may charge higher rates for newer businesses.

For more information on self-employed mortgages CLICK HERE.

For information on using an SA302 to evidence self-employed income, CLICK HERE for our extensive guide.

Will being self-employed cause issues with my mortgage application?

It can be a serious concern for self-employed people that their employment status may cause issues with securing a mortgage.

This is not the case. There is no preferential treatment for those who are employed through bigger businesses versus those who are self-employed.

Lenders will go through the same checks as with any other mortgage application and as they are heavily regulated through the Financial Conduct Authority (FCA), there will be no bias in this process.

In most cases, the lender will request:

  • Profit projections for the coming year
  • 2 to 3 years worth of accounts (if possible)
  • SA302 forms or tax-year overview
  • Profits/dividends evidence
  • 3 months worth of bank statements
  • Information and reference from your accountant

As long as this information can be supplied, there should be no major issues with the mortgage application.

They will also take into consideration the business structure  – whether you are a limited company, a partnership or a sole trader.

Each of these will come with different considerations. Generally any one of these business types should not cause issues with accessing a mortgage, as long as correct and sufficient evidence of income is provided.

How does the interest rate rise effect contractor mortgages?

Recently, the Bank of England (BoE) decided to increase the base interest rate charged in the UK from 1.25% to 1.75%. With a rise of 0.5%, this is a significant increase.

The rise in interest rates will have an effect on a lot of mortgage deals moving forwards, as all mortgage loans will incorporate an interest element in the repayment plan. There are ways to still ensure you receive a favourable rate – the main one being comparison across lenders.

The inflation of interest rates will affect the base standard variable charged by a lender, but these rates can be set at the lender’s discretion. This means there will be some mortgage providers that will have lower rates in place than others so research is key to finding the most competitive pricing.

You can also opt to take out a fixed-rate mortgage, meaning the amount of interest charged on the loan will be set at a fixed price for a certain period of time. This will usually be 2, 5 or 10 years. This can help buyers protect themselves from further interest rate increases for this amount of time.

Who is the best lender for a self-employed contractor mortgage?

The best lender for any mortgage will ultimately depend on the type of mortgage required (buy to let, joint mortgage etc) and the rates of individual lenders at the time.

The best way to find the most favourable mortgage deal and lender is by comparing all of the deals available on the market currently. With so many lenders available, some will have better rates than others.

A specialist in self-employed contractor mortgages will be best placed to offer advice and source information on the best possible lenders for each specific applicant and their business.

Is it worth speaking to a mortgage broker or specialist?

If concerned about your profession in relation to getting a mortgage, it is always a good idea to speak to a mortgage specialist such as us. A specialist in contractor mortgages will be able to:

  • Compare deals across lenders to find the most favourable pricing
  • Save time and hassle by speaking to lenders and sourcing information on your behalf
  • Can potentially access better rates due to pre-existing relationships and agreements with lenders
  • Have experience in packaging contractor mortgages

We have over 20 years of experience in securing mortgages with excellent rates for contractors working on a self-employed basis (or running their own business).

We are experts and able to compare pricing across a variety of lenders UK-wide to find the most competitive prices possible.

Useful resources

Below we have linked some useful resources related to the topics mentioned in this article:

Gov.uk – Employment status: self-employed and contractor

CIPD – Self-employed contractors: Understanding the law

Interest rate rises: what does this mean for mortgages? 

Interest rate rises: what does this mean for mortgages? 

There has been a major shift in attitudes to lending recently following the Bank of England’s recent increase of 0.5% to its Base Rate, in the July ‘22 review meeting. This is the highest increase to the Bank of England (BoE) base rate in 27 years and a big blow to mortgage borrowers across the UK. 

As the ‘Cost of Living Crisis’ intensifies, this is yet another blow to homeowners all over the country, many of which are already struggling to meet their monthly commitments. The cost of mortgage borrowing is likely to increase as the banks and building societies react to the news. Any borrowers who are not currently on a ‘Fixed Rate’ deal will be likely to see an increase to their monthly mortgage payments in the next month or two.  

Anyone with an existing mortgage deal will be understandably concerned as to how these changes will affect their finances moving forwards. Generally, a mortgage will be a household’s largest monthly expense, so price increases are less than ideal combined with the rising cost of other expenses such as energy bills.  

Below we’re going to outline inflation, the cost of living crisis and what the interest rate rise means for borrowers and mortgage providers moving forwards. 

Why does inflation increase interest rates? 

We stated above that the Bank of England have put the interest rate up to fight rising inflation. This presents the question “how does increasing interest rates reduce inflation?”. 

Inflation is affected by supply and demand. If the general public have less disposable income, due to the cost of borrowing increasing, there is less demand for things like loans or mortgages which slows price rises.  

An increase in interest rates will equal a decrease in demand, meaning in an ideal world inflation will stop rising drastically – though of course this isn’t guaranteed. 

During the pandemic, banks slashed the base interest rates to a record low of 0.1% in an attempt to try and protect the housing market from collapse. 

The decrease in interest was designed to encourage buyers not to put off moving house to minimise the impact on the housing market and in turn the UK economy.  

The government also approved additional measures like the Stamp Duty holiday and the housing market actually thrived for a time, with many taking advantage of these temporary measures.  

But of course, these lower interest rates and other measures couldn’t stay in place forever especially with costs everywhere else rising.  

The cost of living in the UK has been increasing drastically following on from the Covid-19 pandemic and the current Russia-Ukraine conflict. Both of these issues have affected easy access to products such as crude oil, with this creating a ripple effect to other vital resources. 

Inflation has spiralled in response, and the Bank of England is taking drastic steps to try and get it back under control – ensuring a big impact on financial services in the UK for the foreseeable future. 

Cost of living increase 

The UK is facing a cost of living crisis, with the current cost of living being at a 40 year high. Vulnerable groups such as pensioners or those with disabilities may be particularly worried how they are going to be affected by this, though there are some provisions now put in place by the government – with £37 billion of support pledged this year. 

There are now schemes such as council tax rebates and additional cost of living support packages available. Check the gov.uk website for further details of the additional support in place HERE

There are many factors in play at the moment increasing the cost of living in the UK, such as soaring energy costs. The wholesale price of gas quadrupled last year leading to an energy price cap rise of 54% in April, with a further increase in energy prices expected in October.*  

Also needing to be considered is the price of petrol and diesel, which has risen exponentially over the last few months. Someone with an average family hatchback can expect to now be paying £85.69 for a full tank of petrol in 2022 compared to £60.87 in 2021 – a rise of £24.81 in just one year.** 

With cars, vans etc being vital to many people’s livelihoods both for leisure and for work purposes (either for commuting or for the job itself), people all across the UK have really felt the impact of this increase.  

Even leisure activities, such as restaurants and hotel stays, are increasing their prices in line with inflation according to the Office for National Statistics (ONS). 

Review your mortgage 

The various price increases UK wide are also guaranteed to affect mortgages, with inflation directly influencing the increase in interest rates – inevitably causing the cost of monthly mortgage repayments to increase if not on a fixed rate. 

Our biggest advice for anyone who has an existing mortgage deal in place: review it. Even under normal circumstances, borrowers may choose to look into reviewing an existing mortgage arrangement for various reasons. A remortgage can be used to pay for a house remodel for example.  

In the face of the economic situation in the UK at the moment, it is vital to consider the impact on costs of big monthly expenses such as mortgage payments. Even though interest rates have gone up, there is still the potential for saving on monthly repayments in various ways. 

We have highlighted some of these in the table below: 

Switch to another lender There is always the option of moving to a new lender even with an existing mortgage in place, but this can incur charges from the current lender for doing so – this could lead to significant savings long term though. 
Remortgage with the current lender Lenders can sometimes offer a special rate for existing customers who choose to remortgage so make sure to speak to the lender, to ensure the best deal possible is in place.  
Change the type of mortgage agreement In some circumstances, it could be possible to agree a new mortgage type on a fixed rate of payment. Speak to the individual provider for further information. 
Shared ownership scheme: sell some of the property back to the landlord Anyone who has bought a house under a shared ownership scheme has the option of selling a percentage of the property back to the landlord. Some of the money from this could be used to pay off part of your mortgage, which in turn would lead to lower monthly repayments.  
Having equity in a property could lead to lower payments in some cases  If a property has been recently renovated, it may now be worth more than when it was initially bought. If there is equity in this property, the lender may agree to lower the monthly payments. Speak to the lender to see if this is a possibility. 
Increase the term of your mortgage Borrowers are able increase the term of their mortgage provided the lender agrees to those terms e.g. you could add an additional 5 years to the mortgage term. This would lower monthly payments but will lead to paying more interest long term. 

Anyone who is unsure of their best option for a mortgage can get in touch with a team of specialists like us. We can source the information needed to decide whether remortgaging is the right financial decision.  

If interested in remortgaging your property but unsure where to start, CLICK HERE for more information.

First-time buyers: I am a first-time buyer, how will interest rate increases affect me? 

Some first time buyers could now feel a little wary about taking out a mortgage, with the potential extra costs due to higher interest rates. Some buyers may even want to put plans to buy a home on hold for the time being. 

With the rate of inflation on the rise, leading to more and more increases in interest rates, the longer buyers wait the more they will risk paying long term.  

The best plan of action if committed to taking out a mortgage would be to do this sooner rather than later to avoid increasing costs. If concerned about pricing, it is a good idea to check and compare prices across lenders to secure the cheapest deal possible.  

For more information about securing a great mortgage as a first time buyer CLICK HERE.

For information about first time buyer mortgages with only a 5% deposit CLICK HERE.

Fixed rate mortgages: is the interest rate increase something to worry about? 

With a fixed rate mortgage, it is possible to fix the cost of monthly mortgage repayments for a set number of years usually 2, 5 or 10 years. About 75% of mortgages in the UK are on a fixed rate. 

This is a popular choice for buyers as they are guaranteed a set price, allowing people to plan their finances years in advance. A fixed rate mortgage allows for peace of mind knowing prices will remain steady throughout the fixed rate period.  

However, any borrower near the end of their fixed rate agreement with a lender may be concerned, as when the fixed term ends, they will automatically be moved to the lender’s standard variable rate (SVR).  

With an increase in interest rates, this could lead to the amount borrowers pay every month going up significantly if a good rate was secured in the initial agreement with the lender. 

With this in mind, it is worth speaking to an adviser before a fixed rate mortgage term runs out. There are ways around extreme price increases, with the best option being a remortgage to a new mortgage with better rates.  

For more information about fixed rate mortgages CLICK HERE.

Standard Variable Rate (SVR) and tracker mortgages: you may be able to remortgage and get a better deal 

A Standard Variable Rate (SVR) mortgage refers to a mortgage where the monthly repayments on the loan could increase or decrease depending on the lender’s standard base rate of interest at the time. 

With interest rates now rising, this could affect anyone with an SVR mortgage in place. Roughly 21% of homeowners in the UK have a Standard Variable Rate mortgage. 

Unlike a tracker mortgage which is tied directly to the Bank of England’s base rate, with an SVR mortgage the particular lender can change the standard base rate of interest they charge at their own discretion. With interest rates rising, these lenders are very likely to increase their prices, but by how much will depend on the individual provider. 

Anyone on a tracker rate mortgage can expect price increases for certain in line with the Bank of England increases, as these mortgages will always charge the Bank of England’s base rate. 

However, there are still options for people with these mortgage types. Speak to the mortgage lender as negotiation is most likely an option. Increases in rates do not have to be blindly accepted without question. Some lenders may be able to offer a better rate for existing customers. 

The option to remortgage is always there and sometimes this will allow for swapping to a deal that has more favourable payment rates long term. Consider talking to a mortgage specialist to find out if there are lenders with better rates available. 

When will banks increase interest rates again? 

It is hard to predict an exact timeline for this, but it is likely interest rates will rise again. Interest rates have been on a steady upward climb for months and the UK has been predicted to be in a recession by the end of the year, according to the Bank of England (BoE).   

Inflation is currently just above 9% and expected to rise to more than 13% before the end of the year. With such a direct correlation between inflation and interest rates, it is to be expected that the Bank of England will approve a further increase if things do not improve. 

With this in mind, it is essential to put provisions in place where possible, to try and cut costs to avoid financial difficulty. This could be cutting out several smaller expenses such as gym memberships/streaming services etc or readjusting a bigger expense like your mortgage. 

If you need advice on the best options for your mortgage, get in touch with our team today. We are experts in this industry and dedicated to helping people secure the mortgage that is perfect for them. 

*according to Ofgem 
**according to the BBC 

Resources 

Below we have linked some helpful resources with further information on this subject: 

Bank of England – Why have interest rates gone up? 

BBC – UK Interest Rates: How does a rise affect me? 

The Times – How do interest rates affect inflation? 

BBC – What is a recession and how could it affect me?