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Richard Campo explains the mortgage process and what to expect if you are an IT Contractor.
Are there specialist mortgages for IT contractors?
No, there are no specialist mortgages specifically, but most banks have a contractor policy. Obviously a lot of IT workers will fall under.
I want to put people’s minds at rest – specialist often means expensive or different, but that’s not true in the case of IT contractors. A high street bank would approve you at the normal pricing, whether you’re employed, self-employed or a contractor. You still get the same mortgage products.
What criteria do you need to meet as an IT contractor and how do you prove your income?
We’re looking specifically at IT contractors in this conversation, where you typically have a day rate and you’re liable for your own tax. You’re quite likely to be set up as a company. If you contract through an umbrella setup that’s slightly different, and there’s actually another specific part of our website that deals with that.
The distinction is if you’re paying your own tax – you’re not employed. If you want to get really technical, you’re also outside of IR35.
If you have a day rate, that’s most commonly how your income will be assessed. But if you are set up as a company, a lender may just treat you as a limited company director. We’ll cover this in more detail later.
How much can I borrow, and how much deposit will I need?
Here’s an example. You’re on a six month contract and you have a day rate of £500. Most banks will take that £500 as the basis of the calculation and assume you work five days a week over a 46-week year. That’s an important distinction – because by virtue of being a contractor, you don’t get paid if you’re on holiday.
On that assessment, banks would then treat your income as £115,000 a year. Some banks will then offer a loan worth five and a half times that income: around £635,000.
Like any other mortgage, the interest rate you pay will be driven by the level of deposit you have. The minimum deposit is 5% and if you have a 40% deposit, or equity in your property, you’ll unlock the cheapest level of pricing.
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How does it work if I have a limited company?
If you’re a limited company director, banks will normally take either your salary and dividends or your net profit. If you’re running a limited company, most people either put all their costs through the business, or only draw out the income that you need. That usually means using this income is not as favourable as using the day rate.
Where this is really relevant is in how much you want to borrow. Let’s look at an example. Your day rate is £500 a day, but you pay yourself a basic salary of £10,000. You’ve drawn out £70,000 in dividends that year. A bank will therefore assess your income at £80,000.
With that 5.5 multiple, the total you could borrow is £440,000 – but with our previous example, a contractor on the same day rate was offered £630,000. If you only wanted to borrow £400,000 that’s not a problem. We just go with the cheapest bank. But if you’re looking to maximise your borrowing you will probably lean more towards the day rate option.
Another thing to bear in mind is that limited company criteria are slightly different. Most banks want a two-year trading history. Some banks average out the two years, while others will accept the latest year. There’s a lot of variance there. Most banks also like to see a contracting track record of a year or two – but some will work off your very first contract.
How do I apply and what’s the process?
The process is largely the same as with any mortgage. A good broker will get your proof of income at an early stage. We normally ask for both your accounts and the day rate so we can assess what’s best, depending on your objectives.
We normally look at bank statements and the credit file as well, which means we can run the affordability calculations. There are something like 250 active banks in the UK and not all of them are very good with IT contractors – or limited companies, for that matter.
Once we have the information we need, we do all that research and report back on the most suitable options for your situation.
How can Rose Capital help me with an IT Contractor mortgage?
As a busy contractor you don’t want to spend a lot of time going up and down the high street and, worst case, not getting the outcome that you want. We can save you a lot of time and money.
We know the banks to go to, and we get exclusive rates as a broker. We’re part of a network that arranges something like £60 billion of lending a year so it’s no surprise that the banks make it cheaper to go through us.
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