Contractor First Time Buyer Mortgage Guide 2018
For the majority, buying a house will be the largest financial commitment you will ever make, we don't think it should be more stressful than it needs to be because you choose to be a contractor. Stricter lending criteria and the misunderstanding surrounding payment structures means securing a mortgage in your situation can often feel impossible.
At CMME, we believe taking your first step on the property ladder should be an exciting and joyous time, no matter what your chosen career path is, that’s why we’ve helped; contractors, freelancers, doctors, medical professionals, business owners and many more. One of our experienced mortgage consultants will provide you with straightforward, clear advice that will help you understand the entire home buying process, to ensure you understand everything before moving forward.
What’s in this guide?
• Whether a mortgage is right for you
• How much you could borrow
• Types of mortgages available
• Fees included in the mortgage process
• Tips to increase your chance of being accepted
• How to find and buy the right property for you
• Next steps
• Download the guide
Is a mortgage right for me?
It is now much harder for everyone, let alone contractors and independent professionals to secure a mortgage. Historically lenders could offer mortgages solely based on a deposit and a good credit profile. Economic factors, such as the credit crunch, have all contributed to the more conservative approach towards lending within the housing market. Although the Government has launched different schemes, it is now about ensuring you look as attractive financially as possible to prospective lenders. One of the key things you need to ask yourself before you start looking for a property is whether you can realistically afford a mortgage. Review your finances with a fine-tooth comb and then look at what a mortgage is likely to cost you each month. If you feel you can afford it, make sure you then account for rises in interest rates in the future.
Calculator: Estimate your monthly repayments
How much can I borrow as a first-time buyer?
In the past, most lenders worked out what they would lend you by typically multiplying your sole or joint income by a fixed number. This is now not the case. Currently, most lenders look at a full financial picture, including available credit, how much spare cash you have each month and other bills/debts etc. Make sure your spending habits are allowing you to live well within your means, before applying for a mortgage
Calculator: See how much you could borrow
Do I need a deposit?
To allow lenders to consider loaning you money, you’ll need a substantial amount of up-front cash: a deposit. A greater deposit means you will have access to better interest rates. However, most mortgages need at least 5% of the property value, which for some, can be a substantial amount of money. The money may come from hard work and saving, money from parents/grandparents, or even from receiving an inheritance. Either way, the larger the deposit, the better the rate you will receive. This, in turn, means lower monthly payments and a cheaper mortgage overall. However, obtaining that first deposit can be hard for some.
Learn more: Mortgage deposits
Schemes to help with deposits
In recent years, there have been a few schemes set up by the government that can help you to achieve your deposit goals.
Help to Buy ISA
This was set up by the government in December 2015. People over 16 can earn interest of up to 4% on money in the ISA and get 25% added on top when they withdraw the money to use it for a mortgage deposit. The Help to Buy ISA is available for new savers until 30th November 2019, however you can still keep saving in your account if you opened it before then. You must claim your bonus by the 1st December 2030.*
Help to Buy Equity Loan
Equity Loans are open to both first-time buyers and home movers on new build homes in England. Once you have acquired a 5% deposit, the government will add on a loan of up to 20%, meaning that you’ll have a total of a 25% deposit. No fees will be applied for the first 5 years of owning your home. In the sixth year, a charge of 1.75% of the loans value will be applied. Beyond this, the fees will increase each year in line with the Retail Price Index (RPI). In November 2015, the Government announced an extension of the initiative up to 2021.*
Help to buy London Equity Loan
Due to the increased property prices in London, Help to Buy will lend you up to 40% of the cost of your new home up to the value of £600,000 in all London boroughs. Along with your deposit of 5%, this will give borrowers a 45% deposit to purchase a new build property. As with the standard help to buy equity loan no fees will be applied for the first 5 years of owning your home.
Types of mortgages
Before you begin the process of finding a mortgage, you will need to consider which type of mortgage is right for you.
Repayment or interest only?
Repayment mortgage options guarantee that you are paying off some of your loan every month whereas Interest-only mortgages just pay the interest on the loan and none of the original loan. Most lenders will not usually offer interest only schemes unless the LTV (Loan-to-Value) ratio is below 50% or you are looking at an investment.
What type of deal?
As well as deciding how to repay your mortgage, you also need to think about various types of mortgage scheme. Usually, lenders offer new customers special low-interest deals for a set number of years to attract them, but many include a range of different advantages and disadvantages.
Fixed Rate: Gives you the security of knowing that regardless of what happens in the market, your payments and interest will stay the same. However, if rates fall, your payments will not.
Variable Rate: This rate allows payments to fluctuate (higher or lower) depending on factors such as the UK economy and the lender's appetite to retain existing borrowers. Within this rate, there are three different options:
Tracker Rates: This rate tracks another rate indicator, usually the Bank of England Base Rate. Although this is a transparent indicator and not influenced by the lender, if interest rates change dramatically so will your mortgage payments.
Standard Variable Rates: This is the rate set by the lender. After an initial product period, you would normally revert to this rate.
Discounted Rates: This product offers a discount off the Standard Variable Rate for an agreed period of time, usually 2 to 3 years.
Once you have decided on a fixed or variable mortgage, you then have to decide whether or not you want your mortgage to be flexible.
Some of the options available on a flexible mortgage allow you to increase or decrease the amount you pay each month.
For example, if you receive a sum of money you can choose to either pay this as a lump sum off your mortgage or as a regular additional payment, allowing you to decrease your overall balance and saving you on interest in return.
The same for if you need to underpay or need a payment holiday for a set period as agreed to by your lender.
An offset mortgage is linked to one, or sometimes multiple, bank or savings accounts, and allows you to use your additional savings to decrease your interest payments. For a standard mortgage, your interest payments are calculated based on the total amount you owe. With an offset deal, you deposit your savings into an account that is linked to your mortgage. These savings are deducted from amount you owe before interest is calculated – so you only pay interest on the difference.
Whether you are buying a house for the first time or the third, there are other costs involved which need to be taken into account. It is possible to add some of the costs of the fees on to your mortgage, but some individuals prefer to pay them upfront. Fees you can expect are:
This is a fee the lender charges for setting up your mortgage. The amount you can expect to pay varies depending on the mortgage scheme, rate and lender.
This is a fee the lender charges for carrying out a valuation of the property. The purpose is to reassure the lender that the property is a solid asset to lend against. The cost varies depending on the lender and the value of the property.
This is a fee the solicitor or conveyancer will charge for the legal work they carry out. This includes conveyancing and searches on the property. The cost varies depending on the solicitor, the property and the type of buyer you are.
Helpful tool: Find a solicitor
As of the 22nd November 2017, the government announced a stamp duty relief for first-time buyers, provided the property purchase price is £300,000 or less you will pay no stamp duty (SDLT).
If the property is valued over £300,000 but does not exceed £500,000 you will pay 5% of the purchase price. This applies to properties in England and Northern Ireland, however, there are different transaction taxes to pay in Scotland and Wales.
How do I apply for a mortgage?
Qualifying for your mortgage could not be more straightforward once you have worked out your budget and affordability. As a specialist broker for independent professionals and complex incomes we have negotiated special underwriting with certain high street lenders.
We can either use your gross annualised contract rate or your limited company accounts to assess the best option for you and how much you can afford to borrow. This ensures the amount you can borrow is based on what you actually earn, rather than what you draw as income. So rather than looking at the income you took from your business, we could use the contract rate you charge or your annual accounts to work out how much you can borrow.
Doing this allows you to borrow more. Typically, lenders will only look at your taxable income via the tax saving methods that you employ, but at CMME we look directly at your full income pre-tax mechanism when calculating mortgage affordability.
Learn more: Application documents for contractors
Learn more: Application documents for business owners
Tips to increase your chances
A minimum deposit of 5% of the property value will be required, subject to criteria and credit profile. Plus, you’ll need to allow for additional costs involved when purchasing a property such as stamp duty, solicitor fees, mortgage product/application fees, property surveyor fees.
Obtain a copy of your credit profile
For example, through Clearscore. This will provide details of any credit issues that may need to be overcome or considered when applying and it will give you time to correct discrepancies on your report. It is essential to keep your credit rating up to scratch, leaving the lender no reason to turn you down
Pay off any unsecured loans and credit cards
If you’re able to, as they will impact your borrowing potential should they remain.
Get your paperwork together
Being able to provide supporting documentation to the mortgage lender in a timely manner is critical to a successful application. Typical requirements include; ID and proof of address, so, ensure your passport and driving license is correct and in date. Income evidence and proof of financial readiness are also key, and you will likely need to provide a combination of the following - P60, 2-3 months of bank statements, payslips or 2-3 years of company accounts/SA302’s. If you are a contractor, make sure your CV is up to date as it may be used to prove your skills and experience. You will also need to obtain a copy of your current contract as this will be used to demonstrate your earnings. Using both documents we can avoid any issues to do with affordability.
Do your homework
With the increasing number of banks and mortgage lenders in the UK market, there are thousands of mortgage deals to choose from, so ensure you take time to understand the different options. Using a mortgage broker can help you determine the most suitable options. Moreover, if you’re self-employed or contracting, lenders do not always take a holistic view of your income or borrowing potential and a specialist broker can help you present your case to secure the best deal for you.
Use a specialist broker
The truth is that most lenders have little understanding about the contracting market, and as a result, their standardised lending procedures do not accommodate contractors. We have bespoke underwriting arrangements with a comprehensive range of lenders, enabling us to secure mortgage funding often based on a multiple of your contract rate alone.
Finding and buying the right property
Once you have worked out your budget and chosen the right mortgage type, you will now have a better idea of what properties you can afford to purchase. You will have to consider whether you want to buy a flat or a house, or a new build or existing.
When you start to view properties make sure you have a list of important questions to determine if the property is right for you.
Questions can include:
• Why is the owner selling?
• How long has the property been on the market?
• Have the owners already found another property?
• What is included in the sale of the property?
Don’t be surprised if it takes a while to find the right property. You will have to consider everything from location to transport links to make sure you are picking the best property for you
Put in an offer
Once you have found the right property, you need to put an offer to the estate agent to relay to the owner. For this you will most likely also need to prove that you can secure a mortgage. Ask your Mortgage Advisor for an Agreement in Principle. Once your offer has been accepted you will need to formally apply for your mortgage.
The solicitor will now take over all the legal and admin work to complete the transfer of the property, known as conveyancing. This includes transferring the money, arranging stamp duty and generally acting as an intermediary.
Once the contracts have been exchanged you are legally locked into buying the property. Once this is completed, and the previous owners have moved out, you are ready to move into your new home!
To get more information or to speak to our expert team contact us on
01489 555 080
or email us at email@example.com
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