Contractor Mortgages – What You Need to Know

Applying for a mortgage can be a confusing and bewildering experience. Misconceptions and disinformation can lead to frustration and major headaches, with many choosing to accept that they don’t qualify without seeking proper financial advice. This applies to Contractors as much – perhaps more so – than PAYE-employed workers, as many Contractors accept that the nature of their work schedule which at times may be unpredictable or inconsistent, automatically disqualifies them from obtaining a mortgage.

This is simply not true – mortgage lenders are perfectly willing to speak with Contractors and many of the rules applying to permanently employed PAYE workers also apply to Contractors.

15.3% of Irish workers were self-employed in 2018 (World Bank figures), meaning that the self-employed represent a significant market share for lenders seeking to snare potential buyers.

Each of the standard benchmarks which apply to full-time employees are also applicable to Contractors -

Deposit Deposit rules don’t change. First-time buyers are still required to back their purchase by providing 10% of the property price up-front; it’s 20% for everyone else.

Loan to Income The benchmark for the amount you can borrow remains the same: Contractors can borrow 3.5 times their annual salary. Banks have some wiggle-room here. This threshold can be raised, but only for a limited number of mortgages.

Repayment Capacity Mortgage lenders will request evidence that an applicant possesses the capacity to repay their loan. Lenders tend to be flexible in this regard too: a paper-trail showing prior loans, rent payments or accumulated savings are considered demonstrable proof that an applicant has the scope to repay their loan.

Credit History Both permanent and contract workers will be subject to a review of their credit history prior to loan approval.

It is recommended that contractors avoid lengthy gaps between contracts. Although one of the perks of working contract-to-contract is the ability to take holidays at your discretion, banks will be examining your employment history of the last two (in some cases three) years – so demonstrating a consistent work history is still important.

Case Study – AIB Contractor Mortgage Application

John Smith worked for Microsoft for five years. He left his job two years ago and has been working as a contractor under an umbrella structure since. When calculating John’s income, a bank will take the last two years accounts from John’s umbrella company but will also request his CV and last P60 from Microsoft. This will allow AIB to assess John’s earnings for the last three years and clarify whether he meets the bank’s lending criteria. It’s important to note that AIB will take John’s average income over these three years, not one specific year.

If John were operating as a contractor for one year, his lender would average his last two P60s from Microsoft and his earnings from his year alone.

When applying for his mortgage, John will be expected to produce –

• Application form
• Certified confirmation of income paid to the applicant each year
• Printout from ROS that their tax is up-to-date
• Three years audited accounts
• CV
• P60s from last two/three years employment

Contractors seeking a mortgage should ensure that they keep their personal finances in order. Whether you are contracting or working a permanent job, banks don’t like to see bounced direct debits or customers dipping into their overdraft. Being able to demonstrate a strong ability to save and point to a favourable credit history remain vital indicators of financial health to mortgage lenders.

If you’re already contracting or thinking about becoming a Contractor, the Icon team would be pleased to field any questions you may have. You can get in touch here.