Contractor’s Guide to Securing a Mortgage in Ireland

Contractor’s Guide to Securing a Mortgage in Ireland

Anyone providing professional services or consultancy as a self-employed contractor is among a growing cohort in Ireland’s labour market.  In Q3 2023, the number of self-employed here increased by 2,800, to 338,000, 15% of the total labour force, according to the CSO Labour Force Survey.   Many big employers work with contractors, rather than employing staff, for various reasons, not least their specialist expertise.

In reality, contractors fare no differently to PAYE employees who are looking to borrow, once they prepare.  In fact, professional contractors can often borrow more, as their income can be considerably higher, where specialist contractor skills are in demand.

Lenders obviously became more cautious since the property crash, and contractors sometimes found mortgages difficult, due to a lack of understanding of their work. Some banks were unsure of how to deal with them, as they hadn’t pay slips fitting standard criteria

Working with a mortgage broker who understands contracting is helpful; which is why our own business came about, as a division of Contracting PLUS.

And, the bottom line is that Irish lenders are open to lending to all customers.  Self-employed, professional contractors just need to satisfy different, specific lender criteria to prove income stability, business viability and, essentially, the ability to repay.

Mortgage Know How?

Here’s what to do, and the key questions professional contractors need answered, and need to answer, to secure mortgage approval.

For how long do you need to be contracting?

The 2-3 year’ requirement has fallen away.  Most of the main lenders can now facilitate a mortgage application, with assessment of income over the past three years.  Ideally, the applicant would have a 12-month contact in place, for the best chance of getting approval.

What financial documentation is needed?

If contracting for the past 12-24 months, proof of stable income in the form of 1-2 years’ certified accounts is good.  Six months business bank statements will help demonstrate the financial health of your enterprise.  Tax Returns, a Form 11 and Notice of Assessment is necessary for verifying annual earnings.

Is credit rating important?

A robust credit history is crucial for lender confidence.  Ensure your credit record is accurate by checking the Central Credit Register, www.centralcreditregister.ie.

Mortgages are underwritten based on previous credit history, whether contracting or not, so fix or adequately explain any issues from the past.

What if my partner is also self-employed?

It doesn’t make a difference, other than that they also need to provide two years business accounts, evidence of earning potential, savings etc. There isn’t a penalty for both parties to a mortgage being self-employed.

Will pension contributions affect a mortgage application? 

No, pension deductions are not assessed as income.  Whether you are an Umbrella Company Director/PAYE or have your own Personal Limited Company, banks see pension contributions as ‘discretionary’ expenditure that doesn’t count against the ability to borrow.

If I leave contracting, do I have to wait to get approval as an employee?

Most banks will accept a mortgage application with new employment, but may condition that probation is complete, prior to drawdown.  This is a case-by-case situation, and a request to exception can be made.

 

Tips for Mortgage Preparedness 

Organise Your Finances

Maintain clear separation and meticulous records of your business and personal finances, to simplify the application process.  Banks don’t like to see bounced direct debits or going into an overdraft.  Remember they are only looking for the last 6 months’ Bank statements, so it’s vital that these present the very best picture of your financial management.

Beyond basic financial statements, include comprehensive records like future business projections to bolster your mortgage application.

Show Repayment Capacity

You are only being assessed on a specific time period, so make sure you have earned as much as possible in that period of time, in order to enhance your repayment capacity.  It’s not the time to take an extended holiday from contracting!

Banks stress test repayment ability by assuming a 2% increase in the mortgage interest rate.  They want to see that applicants have been able to live without that amount for at least the previous 6 months.  This can be demonstrated in the form of a rent payment, savings accumulated, or a loan repayment which finishes prior to the mortgage being drawn down.

Increase Your Deposit

A larger deposit can significantly reduce the perceived risk to lenders, so save up, or get support from family.  Applicants will always be required to put down a deposit, to qualify for a mortgage. The criteria don’t change for contractors; it’s 10% minimum for us all.

Demonstrate Income Stability

Showing a consistent or ascending income trajectory over the past few years will prove your financial reliability to lenders.  A P&L needs to show that the business is viable, and the balance sheet needs to show it is solvent.  Income for a 100% director of a limited company is calculated by Directors Renumeration + Profit (+ Depreciation).

If you are paying yourself a low renumeration, and administration expenses are high, leading to low profit, beware that this will give a low multiple for ‘loan to Income’, the amount the lender will risk loaning.

First time buyers’ maximum mortgage level is 4 times their gross annual income, with the mortgage capped at 90% of the purchase price.

Reduce Debts

Aim to lower your debt-to-income ratio by paying off existing debts, like car loans, thereby increasing your attractiveness as a mortgage applicant.  And it’s not the time to draw down any new loans either.

Get a Professional Accountant and Mortgage Broker

Certified financial documents prepared by an accountant can lend additional credibility to a mortgage application, if you fear running into any difficulty.

A mortgage broker will also ensure your financial information is presented effectively, and will leverage broad understanding of the Irish mortgage landscape to ensure optimal borrowing.

Article by Margaret Barrett
Managing Director at Mortgage Navigators,

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