Contractor Buy to Let Mortgages
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Mark Notley talks all about the Buy to Let mortgages process for Contractors.
How does a Buy to Let mortgage for Contractors work?
Generally a Buy to Let mortgage is based on the rental income for the property. You find out what the potential rental income of the property is and, depending on whether you’re a basic rate or additional rate taxpayer. If the rental income covers the mortgage payment then being a Contractor doesn’t change how much you can borrow.
The only difference is, some lenders want to know that their clients, particularly if you are landlords that have bought a property before, may want you to have a more solid income. The lenders offer Buy to Let mortgages because the rental income of the property meets affordability. The Contractor income just provides the lender knowledge that they’ve got income to support their personal circumstances in the background. It’s a case of taking information to your broker, letting them sort out the most reliable and flexible lender for you.
Why should Contractors invest in Buy to Let properties?
It’s down to the individual really. Some people want the rental income to produce extra income, some take out a Buy to Let mortgage for the equity it can gain when property values increase.
Contractors, in most cases, are a little bit more highly paid than standard workers, so they might be looking to get some extra return on the spare income. There’s no reason really as to why they should, depending on whether they are running a limited company. There may be some favourable tax reasons as to why they might want to invest in a Buy to Let as a Limited Company Director.
How will lenders assess my income for a Buy to Let Contractor mortgage?
As long as the rental income will cover the mortgage amount and a little bit more, that’s what’s going to support the Buy to Let mortgage. They assess your income to look at what you earn over the annual period to fit their requirements. Some lenders say if you’re going to take out a Buy to Let mortgage with us, we want you to earn a minimum of £40,000 some say none.
When they assess your income, some will look at a forty six week period or forty eight week period, but generally, it’s what the rental income of the property is. The minimum deposit is 25%. but some lenders say 20% if you’re an existing Buy to Let holder. If you haven’t bought a property before you certainly need a 25% deposit and as a contractor, it’ll be no different than if you are employed.
Should I Buy to Let as an individual or through a limited company?
Not all companies offer limited company options for their Buy to Lets and quite a few of the lenders have a slightly higher interest rate if you want to set up as a limited company. It’s down to whether you see yourself buying more than one property. Generally if someone is buying one, you may pay a very cheap rate buying it personally.
If you’re buying more than one property, the tax situation may be more favourable for you to buy through a limited company. It depends on your personal circumstances and what you want to achieve. Be open with the broker, tell them what your thoughts are for the future, and let them come to you with the options available and then make your decision from there.
How does tax work with a Buy to Let property?
I’m not a tax accountant and can’t really give advice, because the tax situation is going to depend on the customer’s individual tax situation, whether they are a basic rate tax payer or an additional rate taxpayer. If you’re buying one or more Buy to Let’s, then there are more things you can claim back by buying through a limited company.
Take it to your mortgage broker, preferably Total Home Loans, and let us work through that with you. Tell us what you want to do, what your circumstances are and let us go and get the options and present them to you. It costs nothing upfront for you to do that and I’d certainly recommend anyone not to pay up any front money to anyone that’s just going to provide information.
Your property may be repossessed if you do not keep up repayments on your mortgage.The Financial Conduct Authority does not regulate some Buy to Let Mortgages.
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Why is the deposit amount critical if I have bad credit?
As Mortgage Lenders will consider you to be a high risk borrower, they will need to feel confident that the level of risk involved with lending to you is acceptable for them to take on. A deposit’s purpose is to mitigate some of the risk involved in lending to you. Therefore the less stable your income and credit file appears to the lender, the larger deposit they will need to mitigate their risk.
The amount of deposit necessary will be closely linked to your specific circumstances. For example, an established Contractor with one default over twelve months old, may achieve a 90% Loan to Value mortgage, therefore needing a 10% deposit. Higher risk borrowers typically have to provide a 15-20% deposit.
What if I am declined for a Contractor mortgage?
If you’re declined at the current time, your chance of being accepted will generally improve over time. We can help you to decide whether now is a good time to apply, taking into consideration the likelihood of rejection, as multiple mortgage applications can further impact your credit score, making future applications even more difficult
How can I Improve my chances of getting my Contractor mortgage application accepted?
If your employment or credit score is affecting your ability to get a mortgage, there are things you can do to help improve your chances over time, including only approaching specialist bad lenders for people with bad credit scores. Time itself can help reduce the impact of credit problems and increase the length of your working history. You can also try the following tips to help speed up the process
- Try to offer a larger deposit to mitigate some of the risk
- Focus on improving your credit rating by paying bills on time and repaying the debts that caused your credit issue
- Provide guaranteed future contracts from clients
- Avoid gaps between contracts – including holidays if possible
- Applying jointly with someone else can improve your chances
- A range of guarantor mortgage options may be available to you
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.