Consultant Eric Seery joins forces with Director of Client Services in Fenero Claire Fagan to discuss the truth behind the mortgage myth in contracting.
After years of working with contractors, a big issue that I have found when talking to people who are considering going into contracting is getting a mortgage. Some are nervous about the perceived instability and are worried about how that instability will affect the mortgage process.
There is widespread misconception that contractors will struggle to get a mortgage because of the nature of their work. Some people even believe that you cannot get a mortgage if you are a contractor. This is untrue. Contractors can still apply for mortgages and may even be able to borrow more as their income would be more than what they would have as a permanent employee.
Sometimes I find that half the battle when talking to those who are thinking about taking on a contracting role is opening their eyes to the possibilities and benefits.
We met with Director of Client Services in Fenero, Claire Fagan to chat through the different options that are out there to contractors.
Claire explained that nothing’s impossible when it comes to contracting. “One of the biggest benefits that contracting can bring is that your income is higher than if you were in a permanent role. This is crucial when it comes to saving for a deposit and evaluating the level of lending you can take on.”
The bigger the deposit you build up, the less risk you pose to a bank and the easier it will be for you to obtain your mortgage; Plus an added benefit of having a sizeable deposit is it lowers the interest rate you will be charged by the bank. Through the assistance of tax planning and the ability to claim expenses, Contracting can be a fantastic way to accelerate savings when it comes to building a deposit.
When it comes to the level of lending, banks typically cap lending at an upper limit of 3.5 times a person’s earnings when applying for a mortgage; this is true for employees and Contractors alike. However the good news is that Professional Contractors can often earn anything from 15% to 40% more than their permanent equivalents. This possible additional earning potential of Professional Contracting will allow for a greater sum to be borrowed. Alternatively, if you do not need to borrow 3.5 times your earnings for the house you want to buy, your greater level of income will still be beneficial to your mortgage application as your risk profile to the bank is reduced if you are borrowing less than 3.5 times your earnings.
A lower risk profile is a factor in increasing the likelihood of a successful mortgage application.
When speaking with contractors, figure out how far along they are in the mortgage process, this information will help you guide a candidate in the right direction.
Claire explained that taking time to compare contracting and perm roles is vitally important. Look at what you can make as a contractor and as an employee and work from there.
Of course, there are occasions, when contracting isn’t appropriate, or indeed moving jobs. This is where timing is important and ensuring you have mapped out a timeframe for when you intend to apply for a mortgage and if you are moving jobs, that you have factored this into your plan.
But don’t rule contracting out! Once a property is secured you could also consider contracting as the extra money coming in per month will definitely help with those repayments. As mentioned, Professional Contractors can often earn anything from 15% to 40% more than their permanent equivalents.
There is a big demand for skilled IT contractors at the moment and organisations are willing to pay for top talent.
As the prices of property rises, people are looking to get the best for their money. Working from home has emphasised the need for comfortable, multifunctional homes that can work for the whole family.
My advice? Have those conversations with your recruitment consultant and talk through the options that are available to you. Contracting can accelerate your mortgage journey so don’t be afraid to take it on!
Interested in learning more? Contact me today!