Mortgages for IT Contractors

IT Contractors

In the fast-paced realm of Information Technology, flexibility and expertise often go hand in hand. IT Contractors, also known as freelancers or consultants, are professionals who bring their specialized skills to the forefront through short-term engagements. Unlike traditional employees with long-term commitments, IT contractors operate on a project-by-project basis, contributing their proficiency for a defined period.

Mortgage lenders want to know that the borrower has a sustainable and reliable form of income. The short term contracts will be regarded as negative unless there is a history of continuous contracts

IT Contractors typically engage in fixed-term contracts, often spanning 6, 12, or even longer periods. The contracts are typically renewable with the agreement of both parties. This flexibility allows companies to explore new projects without committing to a much larger workforce.

The IT Contractor can often expect higher income. This income being based on an agreed day or hourly rate

The Contractor may be contracted in his or her own name or under a Limited Company or even under a third party (Umbrella) Company. 

Umbrella companies are often set up by the Employment agencies and there are Mortgage Lenders that will accept this arrangement

Mortgages for IT Contractors working under a Limited Company

There are tax benefits for IT Contractors who bill their clients through a Limited Company

The IT Contractor will be regarded as an employee of the Limited company. He or she will receive both a Directors salary and can draw dividends.

The dividends represent a share of the profits

The Directors salary is regarded as a business expense so will reduce the business profits

Mortgage Lenders will take the salary plus dividend income averaged over the last 1 or 2 or 3 years OR

The net taxable profits may be taken OR

The actual daywork rate multiplied by a notional annual figure

You will appreciate that the method used to calculate income could make a huge difference to the calculated income

We can help identify mortgage lenders that are more generous with their income calculation and providing your mortgage is at least £100k there are no Broker fees to pay. Please complete our Enquiry form today! 

How long do you need to be contracting before applying for a mortgage

What other factors should I consider

With a potentially large disposable income you might be in a position to make overpayments or you may want to consider an Offset (flexible) mortgage.

Overpayments

Most high street mortgage lenders offer you some limited overpayment options.

You might be offered the option of overpaying your mortgage by up to 10% of your mortgage balance each year

There are some issues to consider.....

How is the interest charged

This is important. You need Interest to be charged on a daily basis

If your mortgage lender charges interest annually on the 1st January (say) and you make an overpayment on the 1st February, you would not benefit from the overpayment until 1st January of the following year

If however a lender calculates interest daily then any overpayment will be calculated from the following day

What are the limits of any Overpayments

If you are in the fortunate position of receiving Bonuses or large payments then a good option for those funds is to pay down your mortgage. 

Think about whether it is likely you will receive large lump sums and how large will be these funds and bring this fact to the attention of your Mortgage Adviser

Offset mortgages

As a rule, you should aim to repay your mortgage as quickly as possible. One way you can use savings effectively is by using an Offset Mortgage

Offset Mortgages provide a separate savings account for you to use. The money in this account does NOT earn any interest. Instead funds are Offset against your mortgage balance so, in effect, reducing your mortgage balance. 

You are typically given the option of whether you want to benefit from these savings by a reduction in your monthly mortgage payment OR you might prefer to keep your mortgage payment the same. This will in effect mean that you are overpaying your mortgage and accelerating the repayment of your mortgage

Advantages of Offset Mortgages

The big advantage of an Offset mortgage over making overpayments is Accessibility - you do not lose access to your Overpayments. You can add and withdraw funds from your Offset account as required.

For example, you may need to keep back funds to pay your income tax - why not put those funds in your Offset account where they can help to reduce the interest on your mortgage

What will you need to get a mortgage

The exact requirements will depend upon your situation

You will need your Contract and at least 3 months bank statements showing a regular income

You should (ideally) be in a contract at the time of application. Preferably the contract should have at least 6 months to run OR you have been offered the opportunity to renew. Your employers should be prepared to put this in writing.

Employed as IT Contractor

In addition you will need your latest 3 months payslips

Self Employed as an IT Contractor

In addition you will need your latest 2 years Tax Statement of income from the Inland Revenue and Proof your Income Tax is up to date (paid)

Proof of Identity and Address

You will need to prove your identity and address

Your passport and your driving licence will be suitable to prove your identity, providing your driving licence shows your current address.

A current council tax bill or latest Utility bill (Gas, Electric, Water, Telephone) will be fine to prove address

Your Bank statement will also serve to prove your address

Evidence of Deposit

All Mortgage lenders need to satisfy the Money Laundering regulations

You will need to show where your deposit funds have originated

Your deposit funds may be savings, in which case you just need your latest Annual statement showing the credits to your savings account

Your deposit can be in several accounts or investments you just need to show where the funds have come from

What to do next

At Mortgages Direct, we recognize the distinct challenges and opportunities that come with the IT contracting lifestyle, and we're here to support you on your journey to homeownership.

Ready to explore mortgage options designed for IT Contractors? Contact Mortgages Direct today.