What Are Mortgages For Fixed Term Contracts?

What are mortgages for fixed term contractors?

Mortgages for fixed term contractors refer to a mortgage on a property taken by a person that is working and paid on a fixed term contract basis, for example, nine months.

This can commonly be a contractor that is paid by the day. For instance, this may be a project manager earning £250 per day and on a fixed term contract that will expire on a certain date in the future, e.g, in five months. Gov.uk provides a good page about Fixed-term contracts and employer responsibilities.

This would mean the contract has five months remaining on it and when it finishes, the contractor would have to search for another position and a new fixed term contract.

Many lenders view this as higher risk as when the contract finishes, if there is no demand for the person’s services, they could be without an income.

Mortgages for fixed term contractors are often underwritten based on the contractor borrowing based on the day rate of the contract using the lender’s calculation. Remortgages for contractors are assessed the same.

Can a lender use the day rate of the contract when assessing mortgages for fixed term contractors?

Some lenders can use the daily rate of the applicant’s contract instead of looking at the contractor’s income over a certain period (e.g. net profit averaged over two years).

For example, if the contractor earns £400 each working day, many lenders will take this figure for their lending calculation. A calculation that is often used is the daily rate of the contract x 5 (days) x 46 (weeks).

For lenders using this calculation, this means that the contractor is viewed as earning £92,000 by the lender using this earned income to calculate their lending for affordability purposes.

Lender to lender, their calculation method will change when assessing affordability. Some will not use the daily contract rate and will instead go off the tax documents treating the applicant as a standard self employed person.

This could be negative for the applicant as they might need to be contracting for a longer amount of time to get the number of accounts required to meet the criteria of the lender. The income on the applicant’s tax papers might be lower as they have been able to offset certain expenses.

To get advice on which lenders may lend on the daily rate of the contract and how much you might qualify for, it’s best to talk to an experienced professional mortgage adviser.

Do I need to have been contracting for a certain amount of time to qualify for mortgages for fixed term contractors?

Most lenders require you to have contracted for a certain period before they will be willing to lend to you on mortgages for fixed term contractors or purchases for contractors.

A vast amount will not be prepared to lend when you have just begun contracting as they like to see you gain experience contracting before they are prepared to lend. The period that they require as a minimum will differ between lenders and their rules may change from time to time.

A common minimum contracting period is 12 months and the lender will also likely need to see that you have been in that same industry for a longer period, such as two years.

Some lenders can be cautious about the amount of time that is between your contracts, for example, if there was a three-month gap between your last one and the one that you have just begun, some lenders would not accept this.

If you are interested in applying for mortgages for fixed term contractors, it would be prudent to talk to a qualified professional mortgage adviser that could look at your contracting situation and work out which lenders may be able to offer mortgages for fixed term contractors.

What is IR 35 and how does this affect mortgages for fixed term contractors?

The IR35 rule is a set of regulations that decide whether someone is an employee and should be PAYE or self-employed for tax purposes. It is designed to stop contractors from avoiding paying tax and National Insurance by trading via an intermediary, such as an ltd company.

If a person provides services to the client through an intermediary and the person would usually be a PAYE employee of the client if the intermediary did not exist, then the working person will be treated as if they were an employee for tax purposes and will be subject to tax and national insurance contributions on their earnings.

If the lender thinks that the worker should be on the company payroll (for instance, they have worked there each day for 4 years but paid a daily rate into a company) they might be uncomfortable lending to this person.

For more info about ‘off-payroll’ working and IR35, see guidance from HMRC.

How long needs to be left on the contract to be offered mortgages for fixed term contractors?

The length of time that needs to be left on the contract to qualify for mortgages for fixed term contractors will differ depending on the lender.

Some will need a minimum of 3 months left on the contract before they will consider lending to you for a mortgage. However, some lenders can look at contracts with short periods left, such as 1 month.

In this scenario, the lender may request more information so they can be comfortable that you will remain at work. This might mean requesting a letter of intent from the company that you are currently contracting.

Lender criteria change on a regular basis so ask your mortgage adviser to find you a lender that can consider your current contract.

Do I need a certain mortgage broker when applying for mortgages for fixed term contractors?

You do not need a specialist mortgage adviser when applying for mortgages for fixed term contractors but it’s prudent to use a mortgage broker that has experience in mortgages for day rate contractors.

An experienced mortgage broker will be able to speak with you about your scenario looking at when you started contracting, the length left on the contract and any other things that they are needed to be considered when searching for the most suitable lender for you.

I NEED ADVICE can match you with a qualified mortgage broker who can call you to advise you of your options regarding mortgages for fixed term contractors.

How much can you borrow on mortgages for fixed term contractors?

The amount that you can borrow on mortgages for fixed term contractors will depend on many things.

These things are the way that the lender calculates your contract, the amount of deposit that you have, details of your debts and the monthly payments, details of any other commitments such as maintenance payments, Car Finance, Student Loans and your credit history.

When considering mortgages for fixed term contractors, it is best to talk to a mortgage adviser that can take all of the above into account to work out your borrowing potential.

Can you get mortgages for fixed term contractors on buy to let properties?

Although buy to let mortgages would not necessarily be referred to as mortgages for fixed term contractors, it is certainly possible for contractors to apply for mortgages on buy to let properties.

Different buy to let lenders have different criteria so it will depend on the level of your income and when it started. Not all buy to let lenders will accept fixed term contract workers unless they were paid through a limited company and could demonstrate one to two years of company trading to then be assessed as a standard self-employed applicant.

This will not be the case with all lenders though so if you are a contractor looking to take a mortgage on a buy to let property, speak with a mortgage adviser that can understand your contracting income and search for a lender accordingly.

Does every lender offer mortgages for fixed term contractors?

Not every lender will offer mortgages for fixed term contractors to day rate contractors and some will need contractors to provide self employed paperwork showing a period such as 2 years before they will lend.

This may make things more difficult for an applicant that has been contracting for only a short period, such as eight months, but has been in the same industry for 5 years. In this scenario, they wouldn’t have the 2 years accounts that some lenders would need so would then have to wait longer to get the mortgage.

Luckily, some lenders will lend on the day rate of the contract if the borrower meets the remaining criteria so speak to a qualified mortgage adviser that advises you.

What can I use the funds for when raising money with mortgages for fixed term contractors?

There are multiple things that you can use the money for when raising funds with mortgages for fixed term contractors. You might be looking to raise funds for such things as home improvements, deposits for other properties, to pay off debts or gifts to relatives.

The use of funds when raising capital with mortgages for fixed term contractors will result in the same rules as if you were raising funds with any other mortgage.

The use of the funds that are permitted will depend on the mortgage lender. Speak with your mortgage adviser about how you intend to use the funds so they can research the most suitable lender.

Conclusion

Day rate contractors definitely can get mortgages for fixed term contractors using the contract value but not all lenders do this.

I NEED ADVICE  can put you in touch with a qualified mortgage broker that can give you your options. If you would like this, please complete the contact form.