How to maximise borrowing as an Independent Professional
Most contractors, freelancers and the self-employed – unless they are very wealthy – need to raise a mortgage to buy a house.
So it goes without saying, that if you are in this bracket – perhaps a young professional, first-time buyer – then you’ll want to raise the maximum you can while ensuring you keep up payments without overstretching yourself.
There are a number of steps you can take to help maximise your borrowing, which will put you in good stead when you find your ideal property and investigate the mortgage market.
Steps to maximising borrowing
Your first step is to accurately define your income so you know your borrowing power.
If you are a freelancer or contractor working through your own LTD company, one lender may decide to base their decision on your salary and dividend draw; another may use net profit after tax; a third could use profit before tax.
A fourth way, and one which will help you present your income to its best advantage, would be to use a specialist broker. Here your whole contract value will be utilised and in this way, ensure you can borrow the maximum amount.
A second step is to take a look at your credit score. There are a number of providers – such as Experian, and Clear Score – who will give you an accurate picture. Lenders often ignore good credit scores and can reject mortgage offers based on your behaviour as opposed to your score. This could be previous late payments or not engaging to payment notifications and therefore it is important to consider your spending behaviour as you are more likely to get a higher mortgage offer if you have kept up with payments.
There are a number of ways you can improve your credit rating, such as by clearing down debts on credit cards, loans or car financing.
But not all debts are viewed in the same light. A £2,000 credit card debt, for example, will not score as highly as a student loan. So if you’re a young contractor, with a student loan to pay off, this should be of less concern to a mortgage provider than if you have racked up debts on store cards!
Step three. It may be obvious, but your level of income has an impact. The higher your household income, the more disposable income you generally have, which gives the lender reassurance that you can afford to borrow more.
And as a contractor or freelancer you may have the edge here. Those on PAYE will probably have to wait for their annual pay rise for their income to go up. As a contractor, you may be able to pick a higher paid job with the intent of increasing your income for mortgage assessment purposes. Worth thinking about …
Step four – let’s look at the maximum allowable term. Most lenders offer their highest level of borrowing over a 25-year term or longer. This is then affected by your planned retirement age, because as this lowers so does the maximum you will be able to borrow. And at the same time, the shorter the mortgage term, the higher the monthly mortgage repayment. So another way to maximise your borrowing is to go for as long a mortgage term as you can, however bear in mind that you’ll need to pay back more interest over a longer term than a short one.
Moving on to step five. Do you have dependents? If so, this will affect your borrowing because dependents equal increased outgoings. If you have children, they come with a cost – but we’re not advocating sending them to an orphanage for the sake of a greater mortgage!
If, however, you have a dependent who is a non-working spouse or partner, is there any action you can take here? Again, it is all about maximising income to maximise your borrowing potential, so even a small, part-time job will have an effect.
Step six. Where do you live? The average household expenditure varies geographically.
According to the most recent figures from the Office for National Statistics, to the year ending March 2016 the average weekly spend per household in the UK was £528.90.
But there are big regional variations. Further ONS figures for the same period show London households’ average weekly spending was one and-a-half times more than households in the North East of England. At £652.40, households in London spent the most each week, on average, of all the UK countries and regions, while households in the North East spent the least at £423.50.
In short, if you live in an area of high average household spending, this may impact on your mortgage offer.
On to step seven. If you have other properties that are not self-funding – maybe you rent out a property where the rental doesn’t cover the income because it’s sometimes empty (perhaps a holiday let?) – lenders will reflect this additional cost in an assessment of your outgoings and take this into consideration.
And finally, take an objective look at your bank statement, just as your mortgage lender will want to do. What does it say about your spending habits? If you come across as parsimonious – in other words, you don’t spend a lot on leisure and lifestyle – this will stand you in good stead. But if you like to splash the cash around, and spend what you earn – money in equals money out – then this may speak volumes!
If you are a contractor, freelancer or self-employed and would like to talk about how to maximise your borrowing, please get in touch with the team.