Mortgage on Fixed Term Contract
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Mortgage on Fixed Term Contract
David Sharpstone explains how to get a mortgage on fixed term employment contracts.
How does a mortgage on a fixed term contract differ from a standard mortgage?
With fixed term contract workers, may not be the most difficult type of self-employed mortgage to obtain, but it’s definitely up there. So many things go into different types of fixed term contracts.
A fixed term contract can cover somebody who is employed or self-employed. People could even be paid through their own limited company, but they’ll all have a temporary contract to work for somebody for a period of time.
Contractors are often project managers or engineers – people commanding quite a high day rate. It might be that the employer doesn’t want to bear the cost of bringing that person on board permanently. They just need them for a period of time. The important thing is that it’s temporary.
How they’re paid can make mortgages more tricky. Is the contract between the company and yourself, through an agency or your own limited company? There’s lots of variables there.
A mortgage lender is going to be looking for consistency and your experience of doing this. Don’t be surprised if a lender wants your CV and contracting history. They’ll ask how many times your contract has been renewed and how long is left on the current contract.
Some fixed term contractors look like they’re employed, and you may have heard of a term called IR35, which is a way for the government to make sure you pay the right amount of tax. To get around IR35, a fixed term contractor may be paid through an Umbrella Company. That way, you’re self-employed but then you get PAYE payslips and pay tax and national insurance.
It’s usually possible to get a mortgage – your mortgage broker just needs to understand what they’re looking at. I’d say that a really experienced mortgage advisor should deal with contractors – not somebody who’s just qualified and is quite new to it all.
What documentation do I need to provide as proof of income when applying for a mortgage with a fixed term employment contract?
You’ll need a copy of your current contract. Some lenders just accept what the broker tells them about how many months are left on the contract, but have it ready. Your previous contract would also help.
If you’re working on a fixed term, employed arrangement or you’re self-employed but paid through an umbrella company, have some payslips ready for at least the last three months if not six months.
Your CV may help. Certainly when I’m filling out mortgage applications for fixed term contractors there are a smorgasbord of questions about the length of the contract, its history, the income earned previously and all sorts of things. Having a CV will help your mortgage broker fill out that application. The mortgage lender might need it as well.
What costs are associated with getting professional advice for fixed term contract mortgages?
I don’t know any brokers that charge a consultation fee for their time. I don’t charge you to sit down and assess the situation. We’re not giving advice and recommendations in that meeting – it’s a fact finding conversation. We’ll just chat about getting a mortgage, how it all works and potentially how much you can borrow.
When you go to apply for a mortgage, some national mortgage brokers may say they are fee free, but I suspect if there’s too much work involved they may reject your case or send you elsewhere. You’re more likely to get the best advice from a specialist, who is more likely to charge you for that advice.
Advice fees will vary from maybe £200 or £300 through to £1000. It really depends on where in the country you are. Somebody with an office in Canary Wharf in London will have higher costs than someone renting a desk above a pub in Northumberland, so that’s going to have an impact as well.
What income proofs are required for employed applicants when seeking a mortgage?
First of all, have the contract ready, whether you need it or not. If you’re paid through a PAYE scheme or if you’re inside of IR35, collect three to six months payslips.
If you’ve been doing this for a period of time, show previous contracts and your P60 if you’ve been employed. If you’re self-employed on a fixed term contract, lenders want to see that this isn’t just a flash in the pan income, so you need to show a history of earning that level of income.
We’re in a high-tech world of banking where mortgage lenders can access third-party information – which basically means access to HMRC and your incomings from other banks, even if you don’t bank with them.
If you’re telling a mortgage lender you earn £100,000 but they have access to information that says otherwise, be prepared to back it up. It might be that you didn’t previously earn that income, but now you do. We need to explain why your income has suddenly jumped up, with evidence, because a bank and your broker will ask.
What kind of mortgage advice is available to those seeking a mortgage on a fixed term contract?
To improve your success rate of getting that mortgage approved, don’t try and do it yourself. You could go direct to a bank, but do you know which banks are better at dealing with fixed term contractors? There are dozens of banks, building societies and other mortgage lending institutions.
Some online mortgage brokers offer ‘Robo-advice’ that’s a lot more automated. You click some buttons and it’s responsive depending on how you answer some questions.
But a human mortgage advisor will give you the most tailored, personal advice. There’s so many nuances to fixed term contracts – a proper conversation with a specialist mortgage advisor who’s used to dealing with your situation day in, day out, is what you should be looking for.
You might think doing it yourself will save you money, but you could end up costing yourself more if it goes wrong. You could waste money on survey fees and lender fees for a mortgage lender that would never accept you.
How does the length of your current contract impact your eligibility for a fixed term contract mortgage?
Success rates are going to come down to evidence of consistent earnings. In a contracting environment, somebody who’s got two years left on a contract is generally going to have more chance of having their mortgage approved than somebody with two months remaining on their contract.
When there’s not much time remaining, a mortgage lender might ask for a letter from the company you work for, to state the likelihood of extending your contract when it ends.
Are there any specific income proof requirements for self employed applicants?
If you’re a self-employed fixed term worker you could be still paid on PAYE through umbrella companies. Or, you could be self-employed through your own limited company or as a sole trader.
If you’re going to be treated as self-employed by the lender, it comes down to self-employed rules. Generally you need a two to three year track record of tax calculations or SA302 forms from HMRC to show your level of profit.
Sometimes mortgage lenders want to go deeper and get other tax documents, to look not only at profit but also turnover. That’s more and more common these days. You may also need proof that you’ve got more work lined up.
Are there any specific things you should do to improve your chances of getting a mortgage while you’re on a fixed term contract?
Nobody wakes up one morning and decides to go and buy a house. It takes time to start preparing and get yourself mortgage ready. Even simple things like labelling documentation correctly for your mortgage broker is a huge help – please don’t send me a hundred screenshots of your contract.
Being organised makes your mortgage broker’s life a bit easier, but can improve your chances. Check your credit history – not the score – you want to look at the history that the mortgage lenders are going to see.
Is there anything there you don’t know about? Checkmyfile.com will show you Experian, Equifax and Transunion side by side. If there are blips on there, often if we wait three months a lender won’t care about it.
There may be things on your credit report that you don’t agree with – I’ve seen plenty of times where a child has the same names as their father, and they share the same initial and surname at the same address. If a parent has terrible credit it can pull through to your credit report by mistake. You might have to have things removed or become financially disassociated.
Sometimes companies simply make errors. Maybe you’ve paid a bill but they continue to report it as unpaid. You need to get that sorted before we apply for a mortgage, so that it won’t reduce your chances of approval. You could end up paying a higher rate for something that isn’t your fault.
What kind of deposit do you need when looking for a mortgage on a fixed term contract?
Generally speaking, the more deposit you’ve got, the better. It reduces the risk to the mortgage lender, because if you’ve got a smaller mortgage you’re more likely to afford it.
That said, you can still get a mortgage with a 5% or 10% deposit if you are working on a fixed term contract.
Is it possible to get a remortgage on a fixed term contract?
Everything I’ve said already about mortgages applies in the same way to remortgages. Mortgage lenders are going to be looking at the length of time you’ve been working on your contract, your track record, how long is left on the contract and your day rate.
They will explore if you are paid as employed or self-employed and if you’re inside or outside IR35. It all applies the same way if you are looking to remortgage your property.
How would someone go about talking to a lender regarding their mortgage application?
Unless you are Martin Lewis or incredibly confident I would go and see a mortgage broker. Ask the broker about their experience in dealing with your specific situation and how long they’ve been doing the job.
Make sure you’ve got somebody who knows what they’re doing and understands the nuances of your situation. If you’re not sure, go to another one.
What are some of the factors that determine how much you can borrow on a fixed term contract?
Different mortgage lenders will have different ways of calculating your annual income. That’s the first point a mortgage lender wants to get to – they look at your payslips and take an average monthly income from those.
They could look at your day rate and ignore the payslips. They might look at your turnover if you’re self-employed. Once they have an annual income for you, it goes into the standard affordability calculator along with your commitments and dependents – and out pops the maximum loan they’re willing to give.
How long should you be in your current job or agency before applying for a mortgage?
Most mortgage lenders will lend to somebody on a fixed term contract, but you need at least six if not 12 months in that contract already. That’s the ideal situation. The longer you’ve been working in that field or as a contractor, the better, and proving that track record is important.
Some mortgage lenders that will lend on day one. But that wouldn’t work if you’re a window cleaner and the next day you decide to be an IT contractor. Even if you’ve got a contract for the next 12 months, a lender is unlikely to be comfortable with that situation.
However, let’s say you’ve been employed doing a particular job in IT, you’ve spent all of your life in IT and decide to start contracting. Some mortgage lenders will lend on effectively day one of your contract, even if you’ve got no contracting history behind you. But they will look for evidence of you being able to work in that role.
What is the role of a mortgage broker in helping individuals on fixed term contracts secure a mortgage?
I would reiterate that if you are paid on a fixed term contract, in my opinion, you are the most complicated type of client. It’s not too complicated to me, but it could be to others.
It’s really important to speak to a mortgage broker that specialises in fixed term contracts and understands what mortgage lenders look for. We will guide you. The worst thing you can do is try and do it yourself, unless you are incredibly confident and know what they’re looking for.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
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Mortgage on a Fixed Term Employment Contract (Part 2)
We continue the conversation with David Sharpstone about mortgages on a fixed term contract.
How do lenders view fixed term employment contracts when applying for a mortgage?Mortgage lenders need to establish whether it’s an employed position or self-employed position. Let’s say you work in the arts and if you’re working in theatre, quite often you have an employed position with a production company. But that might only be for as long as that show is running – maybe a year or two, or less. It could be an employed position with an end date.
These can in fact be a little bit trickier to place. The alternative is working on a fixed term contract in a self-employed position. Or you might be employed, but through an umbrella contract, so you’re not paid directly by the client, you’re paid through a payroll company. The important thing is you’d have a contract stating your day rate.
Mortgage lenders work out affordability by factoring in the value of how much you’re going to earn each day. So the structure of your contract is probably the most important thing for a fixed term contractor.
What is the duration of a Mortgage in Principle?It depends on the mortgage lender. I often say to people that a Mortgage in Principle lasts for 90 days. But in reality it doesn’t always, because I know lenders who only allow it to last 30 days, and with others it’s 60. So it’s a range of 30 to 90 days depending on the lender.
Do you need to have an existing contract extension to be approved for a mortgage on a fixed term contract?Mortgage lenders like to lend to people who have some history doing what they’re doing. They might ask if the contract has already been extended once, or if it’s a new position.
The lender might also ask to look at your history of contracts in that same line of work for different employers.
What kind of eligibility criteria do lenders take into consideration when approving a mortgage on a fixed term contract?A mortgage lender is going to be looking for your work history – how long you’ve been doing the role and earning this sort of money.
I’ll give you an example. If you’re earning the equivalent of £100,000 a year at a brand new job but prior to that you were only earning £30,000 a year, that might flag up a conversation with the lender.
Mortgage lenders also want to see whether you’re working inside or outside of IR35, and how long is left on your current contract. Six months is a good amount of time to remain on your contract – but it’s not essential. A lot of IT contractors and engineers are only contracted for six months at a time, in which case there’s always going to be less than six months on the paperwork.
What steps should you take when preparing for a mortgage application on a fixed term contract?Before you even speak to a bank or a mortgage broker, get your ducks in a row. This is really important. Whatever your employment position is, if you’re a fixed term contractor you need to make sure that you have a copy of your contract ready. Make sure that it’s signed by both you and the employer. I’ve seen them rejected if it’s not signed by one party.
Make sure it’s really clear on the contract about the hours that you work and the pay you’re going to get for those hours. I’ve scoured through all the pages of contracts and not been able to find that information.
I would also have a CV ready – or a job history. When did you start your previous contracts? When did they end? Go back over the last two or three years. If you do have copies of any of your previous contracts, have those ready to give to your mortgage broker or lender. That will really help you when it comes to applying for a mortgage.
How long does the mortgage application process take for those with fixed term employment contracts?For somebody on a PAYE employed position with the same pay every month, the process is normally done in five to 10 working days. Where contracts are involved, it might take longer, because those contracts have to be read by the mortgage lender and more background checks are done.
So I would say 10 to 15 working days is pretty typical. It can happen quicker, but generally the more complex the situation, the longer I would allow the mortgage lender to come to a decision.
What is considered unacceptable employment income when applying for a mortgage?The difficult ones to place are people who say they have cash as an income but don’t declare it. From a mortgage lender’s perspective that is a no-go. It brings in different issues to us because as authorised advisors we have certain obligations.
Gambling winnings are not allowed, unless you are a professional gambler and that’s your main line of work. I’ve never actually placed gambling winnings as a source of income but I know other mortgage brokers that successfully have. It would be a very specialist mortgage for winnings.
Foreign currency can also be challenging. If you’re working for a company that’s based abroad and they’re paying you in any other currency, most mortgage lenders will not accept your income due to fluctuating exchange rates. There are one or two lenders that might accept dollars, but as a general rule of thumb foreign currency is difficult.
Is there a difference in how much temporary workers can borrow compared to permanent employees? Are there any options for temporary workers who need a mortgage?If you’re temporary, let’s assume you’re working through an agency – most temporary workers are. If you’re an agency temporary worker you would need 12 months’ employment history with that agency before you can apply for a mortgage.
With that 12 month history, you’re in exactly the same position as anybody who is employed. Your average income would be considered, or it might be the income on your P60. It also depends whether your income is going up or down.
What are some of the common issues faced by temporary workers while securing their mortgage?The main one is the length of time doing the job. You need to have 12 months’ history in that job, even as a temporary worker. If you don’t, it’s very unlikely you’re going to get a mortgage.
If your job is not secure and there’s no track record, a mortgage lender would be concerned about your ability to make the mortgage payments.
What is the impact of having a proven track record when applying for a mortgage on a fixed term contract?It makes a massive difference. You’re effectively giving the mortgage lender confidence that your income isn’t just a flash in the pan. This is your normal working pattern. That way, you will be a much lower risk of defaulting on the mortgage.
You will have a much higher chance of getting the mortgage and the property that you want if you’ve got a proven track record on fixed term contracts.
Can people with indefinite leave to remain in the UK get a mortgage on a fixed term contract?A lot of fixed term contract workers do come from outside of the UK. But as long as you’ve got indefinite leave to remain, you will be treated exactly the same as somebody with a British passport from a mortgage lender’s perspective.
The same goes for full settled status if you are from the EU. Even if you don’t have full settled status but you have pre-settled status, a lot of mortgage lenders are quite flexible.
What are some of the challenges faced by individuals on fixed term contracts when attempting to get a mortgage?The biggest challenge if you’re on a fixed term contract is going to be the job history. If you’ve gone from a secure, employed job and have just taken a fixed term contract, it can be difficult to get a mortgage lender.
If you’re in the same line of work, doing exactly the same role on a fixed term contract, they might be more forgiving.
The other challenge to face is that if you’re on a day rate, not all mortgage lenders take that rate over 52 weeks of the year. They usually scale it back to 46 or 48 weeks a year, whereas on an employed regular contract, all of your income will be taken into account.
What income criteria do lenders consider when reviewing a mortgage application?For fixed term contractors, the most important thing is your day rate. On your fixed term contract, somewhere it will say how much you’re going to be earning per day before tax. That’s going to be the most important factor to a mortgage lender when they’re working out your mortgage borrowing capacity.
Then they will look at how long you’ve been in that particular role for, how long you’ve been with the same company and how many times your contract has already been renewed. Some lenders will even ask for a letter from the employer to confirm the likelihood of ongoing work.
Is it possible to get a mortgage if you’ve just started a new job on a fixed term contract?It’s not the easiest, but some lenders will lend from day one to a day rate or fixed term contractor, assuming you’ve got a contract and you’ve started it. That’s important.
They would look at whether you have history in this role, as employed or or self-employed. If you’ve just decided one day that you want to be a telecoms engineer and beforehand you were working as a hospital porter, you’re not going to get a mortgage. It’s all about the plausibility.
How do you calculate the maximum borrowing amount for someone on a fixed term contract?If I’m having a conversation with somebody I generally say they will be able to borrow roughly five times their day rate, over 46 weeks of the year. That is the income figure I would put into different mortgage lenders’ calculators.
If you don’t have financial dependants, loans or credit cards, your borrowing capacity is going to be somewhere between four and five times that figure. That just gives a very broad brush approach.
What tips would you give someone looking to secure a mortgage whilst being on a fixed term contract?Make sure you have all the documents prepared, check your contract, make sure it’s signed. Definitely speak to a mortgage broker, as we have good knowledge of all the banks that specialise in lending to fixed term contractors. We know which lenders can go up to 48 or in some cases 52 weeks of the year – that’s really the main place to start.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
Approved by The Openwork Partnership on 24/01/2024.
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Mortgage on a Fixed Term Contract (Part 3)
David Sharpstone answers the last set of questions on getting a mortgage if you have a fixed term employment contract.
Podcast approved by The Openwork Partnership on 30/01/2024.
What kind of interest rates can I expect on a mortgage if I have a fixed term employment contract?Once a borrower has met the lender’s criteria on fixed term employment contracts, there’s no difference on interest rates. If a high street lender can lend on fixed term contracts – and many of them do – you will get the same interest rates as somebody who is employed or even self-employed.
It really comes down to what banks are we limited to, based on your credit history and the size of the deposit. They’re the other main important factors.
Will gaps in work history negatively impact one’s chances of getting a fixed term or a mortgage on a fixed term contract?Yes, if you’ve got long gaps between the last piece of work that you did on a fixed term contract and when you start a new one, it will be much more difficult. Mortgage lenders like to see continuous employment.
It’s understandable if you take off two to three weeks between contracts, have a little holiday, recover and then go again. Anything more than a month can start to raise questions.
Can getting a guarantor help with obtaining a mortgage on a fixed term contract?Often the guarantor is a parent who will come on the mortgage to help boost affordability so you can borrow a little bit more. And yes, that can help.
It means we’ve got two incomes – the fixed term contract income and the guarantor’s income, whatever that may be. They could be employed, self-employed or even on a fixed term contract themselves. Combining those salaries together can help to obtain the mortgage required.
What factors can affect the amount you can borrow on a fixed term contract?The key factor is the day rate. If your contract is based on a total that you’re going to earn each day, that will translate into a weekly amount, a monthly amount and an annual amount.
A lender works out what you would earn in a year doing this job, based on that day rate figure, to assess the mortgage borrowing capacity from that particular lender.
Can you change jobs after being approved for a mortgage on a fixed term contract?If we’re talking about the time between being approved for a mortgage and it completing, then changing a job at that point can be a problem. It’s part of the conditions of the mortgage application that if anything material changes, including your employment, it’s the duty of the mortgage advisor to inform the lender.
It’s also your duty as the borrower to inform your mortgage adviser or the bank directly. Otherwise the terms that the mortgage has been approved on don’t reflect the new reality.
But if you have completed on that particular deal and your contract changes, as long as you haven’t misled the bank, that’s fine. Just make sure that if you change jobs you can continue to afford the mortgage payment.
How do brokers that specialise in fixed term contract mortgages differ from traditional brokers?The best way to describe this is to imagine you have an illness or a disease – it’s the difference between going to see your GP compared with a specialist consultant.
Some mortgage brokers like to generalise and be a bit of a jack-of-all trades, master of none. Other mortgage brokers like myself specialise in mortgages for CIS subcontractors. I additionally consider myself a specialist in mortgages for people who are fixed term contractors and in other self-employed roles.
Are there any special mortgage products for those with fixed term employment contracts?Almost none. A couple of building societies do have a range of products designed for people on a fixed term contract, but 99.9% of the mortgage products available are the same that anybody who’s employed, self-employed or CIS employed can obtain. So, generally no, but there’s a small exception to that rule.
What should I keep in mind when applying for a mortgage if this is my first job?Assuming this is going to be your first job on a fixed term contract, seriously think about whether this is the right time to buy a property.
You need to understand whether your contract is likely to be extended or how quickly you can find work at the end of this job.
Once you’ve decided that you are going to buy a property, it’s a good idea to speak to the people who are employing you. If it’s your first fixed term contract, it’s perfectly normal for a mortgage lender to ask for a letter from your employer to confirm if there will be further work at the end of the contract. You may only have six months left and we need to understand the chances of your income continuing in the future.
How can individuals on low incomes improve their chances of getting a mortgage on a fixed term contract?Low income is tricky as it’s a very subjective phrase. If income is low then you wouldn’t start thinking about buying a five-bedroom detached property.
You just need to be realistic – it might be a one or two bedroom flat. It might be a property that’s not perhaps in the smartest, trendiest part of town but on the outskirts.
The other consideration is that if now’s not the right time, what can you do to improve your chances of getting the property that you want? By upskilling, for example, you would be able to command a higher day rate on a fixed term contract, and eventually be able to borrow more to get your target property.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
Approved by The Openwork Partnership on 30/01/2024.