I am a self employed IT consultant. How will my income be calculated for mortgage purposes?

Posted on 11 April 2016 by Ian

"I am looking to buy a small home in Essex as our primary residence and need to borrow 65,000. I have a new contract with an agency and I am a self employed IT consultant . The contract is initially for 6 months but will go on until the end of 2017. My daily rate is £550 and I have been self employed since 2002 with only a 4 month break from employment throughout that period. I want to borrow the sum repayable over a maximum period of 2 years. Could you confirm what I can borrow and the best approach. I have no other property."

It's certainly true that are a number of specialist lenders who have specific criteria for contractors, and there are also lenders who manually underwrite cases and will look at contractors a little more sympathetically than the high street tends to. The majority of banks and building societies will always class contractors as self-employed and always ask for a track record, in the same way as if you ran your own business.

At John Charcol we have access to a range of lenders who will look at your gross daily pay rate, as opposed to your accounts or tax returns. The lender will take that pay rate, multiply it by five, so getting to the weekly figure, and then multiply that by forty-six, so giving a whole year, with six week’s holiday. This equates to £126,500 and property LTV of 65% (subject to valuation) which puts you in a very good position to proceed with this type of transaction. The lender may want to see a copy of your contract and a CV showing your experience and feasibility of re-employment. Some lenders like to see that a contract has been renewed, others though will accept the first contract.

Here are examples of mortgages that may suit contractors:

Offset mortgages: These deals work by ‘offsetting’ your savings against what you owe on your mortgage, therefore reducing the overall amount of interest you pay. So, if you have a £100,000 mortgage and £20,000 in savings with the same institution, with an offset you’d only pay interest on the £80,000 difference, which means you may be able to pay down your mortgage more quickly. The downside is that you don’t earn interest on your savings at this time. These can be advantageous for people likely to earn bonuses or regular high value contracts who wish to minimise interest charged.

Flexible mortgages: A flexible mortgage is just a normal mortgage, but with special flexible features bolted on. The features and how they work will differ between providers so it's important when you're searching for a mortgage to find one that has the facilities you need. For example, you might have repayment holidays, unlimited overpayments or droplock – where you can move to a fixed rate deal with no financial penalty.

I would like to know the reason for borrowing over 2 years only. As with any mortgage application to enable me to provide you with more definitive clarity we would need your full financial details, I would suggest that you contact a John Charcol adviser directly who will be able to recommend the most suitable lender based upon your complete circumstances.

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Answers provided in response to Ask the experts are based on the information provided and do not constitute advice under the Financial Services & Markets Act. They reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.

We recommend you seek professional advice with regard to any of these topics where appropriate.

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