Getting a mortgage on a fixed term employment contract (Part 1)
Anthony McQuilliam is here to talk us through getting a mortgage on a fixed term employment contract.
Podcast approved by The Openwork Partnership on 23/05/2024.
How does a mortgage on a fixed term contract differ from a standard mortgage?
With standard mortgages, most lenders look at the last three months’ payslips. If you’re self-employed, they want to look at the last two years’ tax information to see how much income you earned. This is all about meeting their affordability checks.
With a fixed term contract, you may only have six or 12 months’ proof of your income. So some lenders take a slightly different approach. They want potential proof that the contract may be extended, or that you’ve been doing it for long enough to show you can get another fixed term contract quite easily.
IT contractors are a good example, where you earn a lot more money on a fixed term contract than in employment or self-employment. We can potentially get you a mortgage based on the contract that you’ve got going forward, rather than historic evidence of income.
What documentation do I need as proof of income when applying for a mortgage with a fixed term employment contract?
Every lender is different when it comes down to the documents that you need. As a general rule of thumb, though, many lenders will need to see your current contract to show that you’ve got a certain amount of time left, plus your day rate and the terms and conditions.
Certain lenders also want to see historic contracts to show your track record in the contracting space. They’d still need payslips to show your income, bank statements, ID and proof of deposit. Depending on the lender and how much you earn on your fixed term contract, some may want to see your limited company accounts if relevant, or your tax year overviews and tax calculations.
What costs are associated with getting professional advice for a fixed term contract mortgage?
Most advisers would usually charge you in the region between £495 to £595 when you’re applying for a mortgage as a fixed term contractor. Some people do charge you a bit more – they market themselves as specialists within the fixed term contracting space.
However, other brokers out there still have access to the exact same rates and will charge you a more reasonable rate.
What kind of advice is available to those seeking a mortgage on a fixed term contract?
One of the issues you might have as a fixed term contractor applying for a mortgage, is that you might not fit the criteria for a traditional bank or building society. You might approach a bank and be advised that you need to have contracted for at least three years or they may only assess your SA302s, your tax year overviews.
But if you’re speaking to an advisor who’s experienced in dealing with fixed term contractors, they can link you up with lenders who will give you a mortgage based on the contract alone. They will take your day rate, multiply that by five to get your weekly income and use anything between 46 to 48 times that to figure out how much you earn in a year.
So it’s important to speak to someone with experience in the fixed term contracting space.
Otherwise you may be told it can’t be done, or the amount you can borrow may be reduced.
How does the length of your current contract impact your eligibility for a fixed term contract mortgage?
Some lenders limit what they can offer you if you’ve got less than three months left on your current contract. They might offer you a mortgage now, but by the time you get the keys for the house there’s no money coming in. Lenders want to make sure there’s a certain amount of time left on the contract, usually three to six months.
If you’re in the last three months of your contract they may want proof that your current employer is going to extend your contract, or that you’ve got a contract somewhere else so you can still afford the mortgage once you buy the house.
How can I improve my chances of getting a mortgage on a fixed term contract?
One of the biggest things is the length of time you’ve been a contractor. If you’ve been doing it for under 12 months, there are potentially some lenders out there for you. But the longer you’ve been doing it, the more lenders will open their doors up to you.
You also need to make sure you’ve got your deposit saved. You can still get mortgages agreed in the region of 5% or 10%. Make sure that your credit score is good and you’ve been keeping up with your payments. That said, when you are applying for a mortgage, you wouldn’t be declined just because of late payments in the past.
What kind of deposit do you need for a fixed term contract mortgage?
It depends on the lender. There are still some that will allow you to get a mortgage with a five or ten percent deposit, but once you get to a 15% deposit it really does open the doorway up to a lot of other providers.
It’s pretty much the same as your standard mortgage. The bigger the deposit, the more options you have. But if you’ve only got 5% it’s still possible for you to get a fixed term contractor mortgage.
Are there any additional steps to take when applying for a mortgage on a fixed term employment contract?
It’s really the standard steps – making sure you’ve got your deposit in place, making sure your credit’s good and you’ve got all of your documentation prepared. The only additional step is getting the proof of your contracting history together.
Having proof that you’ve been contracting for a certain period of time makes the process a lot easier. If you only have three months or less left on your current contract it’s about showing you have something in place after that contract ends.
Is it possible to get a re-mortgage on a fixed term contract?
Yes, of course. It’s the exact same process. As long as you’ve got historic proof of contracts for a certain period of time and what’s coming up in future you should get a remortgage. You obviously need to have kept up with your payments and have the relevant affordability.
Let’s say you haven’t proof of income going forward. You can still do something known as a product transfer. Even if there isn’t a remortgage option for you to go to a different lender, the lender you’re with at the moment will just allow you to change to a new product with them.
How would someone go about talking to a lender regarding their mortgage application?
If you’ve got all the time in the world, you could dig through all of the lenders’ criteria to find out who will offer you a fixed term contract mortgage, and make sure that the contract that you’re on fits with their particular requirements.
But as a fixed term contractor, the chances are you can’t have too much time off work. A much quicker way of finding a lender is to speak to a mortgage broker who’s got experience with fixed term contract mortgages.
You can have a conversation with just one person, explain your situation and based on our experience we can go and source lenders with a higher chance of accepting you as a fixed term contractor.
What determines how much you can borrow on a fixed term contract?
Every lender calculates this slightly differently. When you’re applying for a traditional mortgage they look at your income, taking an average of your last three month’s payslips. If you’re self-employed they look at the average of your last two years’ accounts.
But for a fixed term contractor, they usually look at your day rate. Let’s say your rate is £500 – they would calculate your weekly income as £2,500 then, depending on the lender, they would then multiply that by 46 or 48. That allows for a couple of weeks holiday per year where you won’t get paid.
So 46 times that income is £115,000. Lenders might lend you 4.5 to 5.5 times that total.
How can I increase my chances of getting a mortgage on a fixed term employment contract?
It’s all about preparation. When you’re looking at applying for a mortgage, it’s important to speak to somebody far in advance. We will assess how your current contract looks, your contracting history, plus check your credit score to make sure it’s all fine with no issues.
Then we will calculate how much you can borrow. Doing this research perhaps three to six months before you actually go out to look at properties can massively increase your chances, because any issues that arise can be put to bed. Once you’re ready to fully apply for the mortgage, it should be smooth sailing.
We see it time and time again – people find a house they like and try to rush everything through. We do our best, but sometimes things aren’t lined up in time to get the property they want.
How long should you be in your current job or agency before applying for a mortgage?
It massively depends on the lender. If you’ve got historic proof that you’ve been doing this for at least 12 months it will make it easier to get you a mortgage.
Some lenders will consider you even if you’ve just been contracting for three or six months. But once you have a 12 month track record, that really opens the doors up for you.
How do you go about getting a mortgage when you’re on a fixed term contract?
Again, you can go directly to the bank if you’ve got the time to research the criteria. However, if you haven’t got the time for that and you want someone experienced to manage the whole process, speak to a mortgage broker.
We assess your situation and look at multiple lenders with fixed term contracting criteria. We hold your hand and manage the whole process including solicitors, estate agents and everyone else.
We will see which lenders may offer you the better deal at the time and which lenders will lend you the most. There’s a much higher chance of getting your mortgage pushed through than if you just speak to one bank or building society.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
YOU MAY HAVE TO PAY AN EARLY REPAYMENT CHARGE TO YOUR EXISTING LENDER IF YOU REMORTGAGE.
Approved by The Openwork Partnership on 23/05/2024.
Speak to an expert
Our highly experienced Advisers are ready to help you with either buying or remortgaging a home, protecting your property and lifestyle along with saving you time and effort, ensuring you have a competitive deal right for you.
Podcast by The Openwork Partnership on 15/08/2023.
Getting a mortgage on a fixed term employment contract
Anthony McQuilliam continues the conversation about getting a mortgage on a fixed term employment contract.
How do lenders view fixed term employment contracts when applying for a mortgage?
Every lender has their own weird and wonderful criteria for fixed term contracts. A lot of lenders want to look first at the historic proof that you’ve been a fixed term contractor for a minimum of 12 months. Others are a bit more flexible depending on the kind of industry that you’re in.
They also want to see how long the contracts are and the daily rate you’re paid. They’re also interested in the sector you have worked in. If you were previously working in a zoo, for example, and then all of a sudden you’re a doctor in the NHS, there’s a bit of an issue there.
What is the duration of a Mortgage in Principle for a fixed term employment contractor?
If you’re getting an Agreement in Principle on a fixed term employment contract it will last the same length of time as any other Agreement in Principle. They usually last in the region of three months.
They can be changed after that time, it’s just a case of speaking to a mortgage adviser. We will check if the lender you have the Agreement with is still the right option. If so we get you re-agreed. If not we will look at other lenders and find a suitable one to approach.
Do you need to have an existing contract extension to be approved for a fixed term contract mortgage?
It massively depends on how long you’ve been in your line of work. If you’ve been a fixed term contractor for three or four years, you don’t always need to have an extension approved.
But for example, if there’s one or two months left we will look at the contract to make sure that you’ve got enough time left to get yourself agreed for the mortgage at that point.
What eligibility criteria do lenders consider when approving a fixed term contract mortgage?
Most lenders would look at your deposit. You need a bare minimum of a 5% deposit. The bigger the deposit you’ve got, the cheaper the interest rates tend to be.
They also want to make sure that your credit score is good enough to feel comfortable lending to you. The main difference with eligibility is that rather than looking at your annual salary from your monthly payslips, they calculate your daily rate based on your contract.
They multiply that by five to work out the weekly income, and then some lenders calculate that over 46 weeks, and some use 48 weeks, to get an annual income for you.
The criteria is very much the same for any applicant – the only difference is the way they assess your income from your fixed time contract.
What steps should you take when preparing for a mortgage application on a fixed term contract?
Everybody is in a different situation, so to decide the next steps, speak to a broker. We will look at how long’s left on your contract, if you’ve got a deposit in place and what your credit’s like. Then we can give you a personalised plan for your next steps, so that applying for the mortgage is as smooth as possible.
Even if you’re not looking at buying a property for 12 months or more, speak to somebody way in advance. Then, when you are ready to apply for a mortgage there’ll be no hiccups.
How long does the mortgage application process take for those with fixed term employment contracts?
Once your offer is accepted on a property, you will sit down with your mortgage advisor to explain the ins and outs of the mortgage and the recommended protection. Once we’ve submitted the mortgage application it takes on average two to three weeks for the lender to come back and give you the full mortgage offer.
In terms of how long it will take to get you into the property, the most drawn out part of the process is the legal work. That usually takes about three and a half to four months.
Is there a difference in how much temporary workers can borrow as compared to permanent employees?
Everything is still based on the income that you can use. For example, as a temporary worker if you are on £50,000 per year, you’re going to be able to borrow the same as someone that’s employed permanently on £50,000 a year. It won’t affect how much you can borrow.
When you need a mortgage, a lot depends on how long you’ve been a temporary worker. If you’ve been a temporary worker for 12 and you have 12 months’ payslips, but you’re going from one temporary job to another, that does limit the options you’ve got for lenders. But there are still providers out there who will lend to you.
What are some of the common issues faced by temporary workers while securing their mortgage.
One of the biggest issues is having been out of work for a while and you’ve just started a new temporary job in a different area. Some lenders may frown upon that. Being in temporary work, if you don’t have a consistent history of work in your field it can be tricky.
Another thing, just as with a standard mortgage, is your credit. If you’ve got poor credit or you’ve had missed payments in the past, or CCJs or defaults, it may limit the lenders further. You already have a smaller pool of lenders because you are in temporary work.
What’s the impact of having a proven track record when applying for a mortgage on a fixed term contract?
This can make or break the deal in some cases. If you are a temporary worker or fixed term contractor but you’ve been doing this for the past six or seven years, the lender has more confidence. Your history proves you’ve had consistent work in your field.
With somebody who has just started three or four months ago, once their current contract is over, they may not have work at the end of it. So that track record of employment is very helpful in getting your mortgage accepted.
Can people with indefinite leave to remain in the UK get a fixed term contract mortgage?
Yes, they can. Again, it depends on the lenders – it doesn’t necessarily mean that you’re going to have access to every single lender. But the majority will be more than happy to lend to you and treat you the same as someone born in the UK.
With some lenders you may need a larger deposit to put down on the property, but others won’t treat you any differently from another customer.
What are some of the challenges faced by individuals on fixed term contracts when attempting to get a mortgage.
One of the main challenges involved in applying for the mortgage on a fixed time contract is not having history in your line of work. If you have been working as a fixed-term contractor in an IT company for three months and it’s a short-term contract, there’s no proof that you’re any good at it. You may not be able to get extra work once your contract is over.
Somebody that’s been in the same line of work for 10 years on constant temporary fixed contracts will be seen in a much better light. Having that history is a big thing.
Make sure that your credit is all up to date and get well prepared in advance. Get that deposit saved. If you haven’t got your deposit, you’ve got bad credit and you’ve just started your fixed term contracting career, you will have really limited mortgage options.
What income criteria do lenders consider when reviewing mortgage applications?
In the fixed term contract or temporary worker space, lenders will look at the contract to get your day rate. If, for example, if you were on a £500 day rate, they will multiply that by five to get your weekly income of £2,500. They multiply that between 46 and 48 times to figure out the total for the year, including your holidays.
For example, if that calculation got you to a position where you earned £70,000, the lender might then decide to lend you 4.5 times that amount. Some will go up to 5.5 times that annual income.
Is it possible to get a mortgage if you’ve just started a new job on a fixed term contract?
It is as long as you’ve got history. If you’ve been doing this for three to four years and you’ve just started a new contract, that’s absolutely fine. If you’ve been working as a zookeeper and all of a sudden you decide to go into IT work, that may be frowned upon and you may have limited options.
But if you’ve been in the same line of work or you’ve been on a fixed term contract already, there should be no problem.
How do you calculate the maximum borrowing amount for someone on a fixed term contract?
Speak to a mortgage advisor. We will look at your situation – your income, your expenditure, your commitments, whether you have children etc. That will give you an accurate idea.
As a rough amount if you are on a fixed term contract, multiply your daily rate by five to figure out your weekly rate. Then multiply that by 46 or 48 depending on the lender to calculate your income for the year. The amount you could borrow could be between 4.5 times that total and 5.5 times.
If you’ve got debts, or you can include your partner’s income in that total, that could also change how much you could borrow.
What tips do you have for someone looking to secure a mortgage whilst on a fixed term contract?
Make sure you’ve got as much history as you can. If you don’t have that history, it doesn’t necessarily mean you have no options. But having that history all prepared, showing how long you’ve been a fixed term contractor can massively help.
It’s worth speaking to somebody that has experience in dealing with people on fixed term contracts. You could go and speak to your personal bank or building society, but they may not have criteria set up that favours people on fixed term contracts or temporary workers. You may be told you can’t get a mortgage.
You could even talk to a mortgage broker who also has no experience in this area – and they might also say no – but there are lenders out there. So my advice is to speak to someone who specialises in fixed term contractors. They will know exactly which lenders to look at. You’ll be getting the advice that best suits your needs.
Your home may be repossessed if you do not keep up with your mortgage repayments.
Podcast by The Openwork Partnership on 15/08/2023.
Speak to an expert
Our highly experienced Advisers are ready to help you with either buying or remortgaging a home, protecting your property and lifestyle along with saving you time and effort, ensuring you have a competitive deal right for you.
Podcast approved by The Openwork Partnership on 08/08/2023.
Getting a mortgage on a fixed term employment contract (Part 3)
Anton McQuilliam returns for the last part of our podcast about getting a mortgage on a fixed term employment contract.
What kind of interest rates can I expect on a mortgage if I have a fixed term employment contract?
We can’t talk too specifically about interest rates as they change on a daily basis. But if you’re applying for a fixed term contractor mortgage you will get the exact same rates as a permanent employed person.
You won’t be charged more just because you are a fixed term contractor. The rates are standard to a certain product, with a certain lender, no matter who is applying.
Can you share more about contractor mortgages?
A contractor mortgage is one and the same as a standard mortgage. You still need your deposit, which is a minimum of 5%. The bigger deposit you have, the more you can potentially borrow. Plus, as deposits increase in 5% multiples, the interest rates tend to become slightly cheaper.
You need to make sure that your credit score is up to scratch. Ideally you won’t have missed any payments and or had any CCJs or defaults. These won’t necessarily mean you can’t get a mortgage, but they could limit your options.
The main factor that’s different for a contractor is assessing your income. So unlike an employed person, where you’re looking at your last three months payslips, for a contractor lenders look at your day rate. They multiply that up by five to get your weekly income and then again by 46 to 48 to figure out how much your income is for the year.
Will gaps in work history negatively impact my chances of getting a fixed term contract mortgage?
Potentially – it depends on the number and size of those gaps. Some lenders are happy if you’ve got a month or a few weeks’ gap. They are flexible about you applying for a mortgage with a gap between jobs.
However, if the gap is too long, a year’s gap, for example, it’s almost like you’re starting your contracting work all over again. We want to make sure that you’ve got that history of being able to get work once your contract ends.
Can getting a guarantor help with obtaining a mortgage on a fixed term contract?
It could. It will massively limit your options, though, because not all lenders will allow a guarantor on the mortgage. That said, a guarantor going on the mortgage could help.
For example, if your income is £40,000 per year and you need to borrow a lot more than your income will allow you to, if you find a guarantor that also earns £40,000, you can use their income to boost your borrowing.
On the flip side of that, the lender also takes into account any debts they have, such as mortgages, loans or hire purchase. If you only need to stretch your income a little bit further, a guarantor could boost things up for you.
What kinds of things can affect the amount you can borrow on a fixed term contract?
The main thing that will affect the amount you can borrow on a fixed term contract, first of all, is your income. The higher your day rate or the higher the contract value, the more you’d be able to borrow.
What may decrease that borrowing is the number of children you have and how many financial commitments you’ve got – such as credit cards, loans and hire purchase.
What should I keep in mind when applying for a mortgage if this is my first job?
Once you’ve been contracting for 12 months or more, it opens you up to the vast majority of lenders. If you have only just started and you’re looking at applying for a mortgage, it may limit your options.
Can you change jobs after being approved for a mortgage on a fixed term contract?
You can, but if you’re changing jobs in between your mortgage offer being accepted and getting the keys for your new house, you will have to let your mortgage lender know.
If your income is significantly reduced it could put you in a position where your mortgage offer is no longer applicable. You may not actually be able to go ahead if your income has dropped as you go through the process.
How do brokers that specialise in fixed term contract mortgages differ from traditional brokers?
If you’re a permanent employee with a simple, basic salary it’s very easy to find a lender to accept you. But as a contractor, if you’re speaking to a standard traditional broker that hasn’t dealt with people on a contract before, they may not have the experience to seek out the correct lenders.
Getting an appropriate lender is crucial in getting you the borrowing you need and even getting you approved at all. Quite a few lenders just won’t accept you if you’re on a fixed term contract or you take temporary work. So make sure you talk to a broker with experience in this area.
Are there any special mortgage products for those on fixed term employment contracts?
There’s not so much a special mortgage product, but there are lenders whose criteria is geared towards people on fixed term contracts.
The mortgage products are identical, whether you are employed, self-employed, a limited company director or temporary worker. The rates are also the same, regardless of the kind of employment.
How can individuals on low incomes improve their chances of getting a mortgage?
The simplest way to improve the chances of getting a mortgage is to look at smaller properties. Just because you’ve got a low income, you could still get a mortgage. It just may be a smaller mortgage than somebody on a higher income.
So instead of looking at a five bed mansion with a helipad on the roof, you might have to settle for a one bedroom flat – but that gets you in the ladder. From there you can gradually work your way up.
Another thing that you can do is find a guarantor for the mortgage. You can then include their extra income to increase how much you can borrow. Last but not least is your deposit. With a low income it may be harder to save, but if you have a much bigger deposit you won’t need to borrow as much to buy the property you want.
Your home may be repossessed if you do not keep up with your mortgage repayments.
Approved by The Openwork Partnership on 08/08/2023.
