How Much Can I Borrow as a Contractor
When considering contractor mortgages, one may find themselves contemplating the essential question, “How much can I borrow?” This inquiry is of utmost importance and should be addressed prior to initiating your search for an ideal home.
Upon applying for a mortgage, the lender will perform an affordability assessment to ascertain the maximum amount they are prepared to lend you. This assessment will take into account various factors, including your income, expenses, and the perceived stability of your earnings.
It is a common misconception among contractors that they may not be able to borrow as much as permanent employees who receive a consistent monthly salary. However, by consulting with a specialist contractor mortgage broker, such as My Contractor Broker, early in the mortgage application process, you can secure the most favourable deal tailored to your unique circumstances.
How Much Can I Borrow?
To provide a preliminary estimate, here is a straightforward calculation to assist you in determining the potential value of a mortgage.
Multiply your current daily rate by the number of days you work each week. Subsequently, multiply this figure by 48 weeks, and then multiply the total by 4.5.
For instance, if your current contract day rate is £700 and you work five days per week, you could potentially borrow £700 x 5 x 48 x 4.5 = £756,000 for a mortgage. However, it is important to note that different lenders may adopt varying approaches when assessing your borrowing capacity, depending on your individual circumstances.
The magnitude of your income is not the sole determinant of your borrowing capacity for a contractor mortgage. Several additional factors must be considered, including:
Your Deposit Amount
Providing a deposit of 15 to 25% will enable you to secure a more favourable interest rate compared to a 10% deposit, for example. Nevertheless, contractors are not necessarily required to provide a larger deposit than permanent employees to obtain a mortgage.
A substantial deposit is advantageous for all mortgage applicants, as it helps mitigate issues such as negative equity and provides access to a broader range of mortgage options. Various strategies can be employed to enhance your deposit, such as releasing profit from an existing rental property.
My Contractor Broker can assist in arranging a remortgage that allows you to transition to an alternative scheme while simultaneously releasing equity from your rental property.
Your Long-Term Security
Mortgage lenders favour applicants who can demonstrate long-term financial stability. Supplementing your mortgage application with an ongoing agreement letter from your client or evidence of past contract renewal agreements can significantly enhance the appeal of your application.
Additionally, it is advisable to minimise lengthy breaks between contracts prior to applying for a contractor mortgage.
Your Credit Rating
Your credit rating can influence the amount you are able to borrow. This is particularly pertinent for contractors, as it reflects sound financial management to lenders, despite the absence of guaranteed income. Therefore, it is recommended to focus on improving your credit score prior to submitting a mortgage application.
Other Financial Commitments
Dependents and regular financial obligations can impact your borrowing capacity. Since the Mortgage Market Review in 2009, all mortgages are assessed based on affordability, which considers both income and outgoings. Therefore, it is prudent to evaluate your expenses, operating costs, standing orders, and other regular payments at least three months prior to applying for a mortgage.
Streamlining your outgoings before your mortgage application can potentially enhance your borrowing amount.
In conclusion, addressing the question “How much can I borrow?” in relation to contractor mortgages can be complex without a thorough review of your individual situation.
As contractors often fall outside the standard criteria utilised by many mainstream lenders, failing to engage a specialist contractor mortgage broker may result in a rejected mortgage application.
Furthermore, a declined application can adversely affect your credit rating and future mortgage applications, thus caution is advised.
At My Contractor Broker, our team has been advising contractors for over 15 years and possesses direct access to underwriters who comprehend the unique operational dynamics of contractors. One of our team members will require only 10-15 minutes of your time to provide you with an accurate indication of your borrowing potential. Alternatively, you may utilise our online mortgage calculator.