What is a fixed term contract mortgage?

Getting a standard mortgage can be challenging for people on fixed-term contracts because lenders often see them as higher risk due to the non-permanent nature of their income. However, many lenders in the UK offer mortgage products specifically designed for these individuals.
When applying for a fixed-term contract mortgage, lenders typically want to see:

Evidence of your employment history: Some lenders may require a few years of consistent work in the same line of work.

Current contract details: Information about your current contract, such as its duration and rate.
Future Income: Some lenders may want to see evidence of future income, such as a contract extension or a new contract.

Professional sector: Some lenders may be more willing to lend to individuals in certain professional sectors where contract work is common and stable.

Remember, it’s important to seek advice from a mortgage advisor or broker who understands the unique challenges and requirements of securing a mortgage on a fixed-term contract. They can guide you to the right lenders and help you navigate the application process.

How does a fixed-term contract mortgage work?

A fixed term contract mortgage is designed for individuals who are employed on a fixed-term basis. These individuals may be freelancers, contractors, or temporary workers whose employment is bound by a contract with a specific end date.

Here’s a general overview of how a fixed term contract mortgage works:

Application process:

Income Assessment: The mortgage provider will assess your income, often looking at your day rate or annual income as specified in your contract. They may want to see a history of steady contract work or contracts that are renewed regularly. Some lenders may require a certain amount of time left on your current contract (e.g., 6 months) or evidence of contract renewals.

Employment History: The lender will want to see a track record in your line of work. Some lenders may require you to have been contracting for at least a year or two, while others may be more flexible.

Affordability Checks: Like any mortgage, the lender will carry out an affordability assessment. This considers your income versus your outgoings to make sure you can afford the mortgage repayments.

Mortgage offer:

If your application is successful, the lender will provide a mortgage offer. The terms of the mortgage, such as the interest rate, will depend on various factors like your credit history, the size of your deposit, and the lender’s assessment of your income stability.

Mortgage Repayments:

Once you have your mortgage, you’ll make regular payments to pay it off. These payments will be based on the interest rate and term of your mortgage, just like any other mortgage.
Remember, while some lenders have products specifically designed for contract workers, others may not. It’s important to seek advice from a mortgage broker or advisor who understands the unique challenges of securing a mortgage on a fixed-term contract.

What are the advantages of a fixed term contract mortgage?

Access to homeownership: For individuals working on a fixed-term contract, such a mortgage product provides an opportunity to become a homeowner, an opportunity that might be difficult with traditional mortgage products.

Tailored to contract workers: These mortgages are designed with the understanding that contract workers may not have a steady income throughout the year, but their overall annual earnings can still be sufficient to handle mortgage repayments.

Income calculations: Many lenders will consider the day rate or annualised contract rate when assessing income, which may lead to a higher borrowing capacity compared to a calculation based solely on drawn income.

What are the disadvantages of a fixed term contract mortgage?

Limited lenders: Not all lenders offer mortgages for contract workers, which can limit your options and potentially affect the competitiveness of the rates you’re offered.

Potential for higher rates: Due to the perceived increased risk associated with contract employment, some lenders may charge higher interest rates or require a larger deposit compared to those in permanent employment.

Income fluctuations: As a contract worker, if your contract isn’t renewed, there could be periods of time when you have no income. This could make meeting your mortgage payments challenging.

Proof of employment history: Lenders usually require proof of employment history or evidence of contract renewals. This could be a challenge if you’re new to contract work or if you’ve had breaks in your contracting.

Can I apply for a fixed term contract mortgage if I have a low credit score?

Yes, it’s possible to apply for a fixed term contract mortgage even with a low credit score, but it can be more challenging. Credit scores are one of the factors that lenders consider when deciding whether to approve a mortgage application. A lower credit score can indicate to lenders that you’re a higher risk, which could result in:

Higher interest rates: If a lender does approve your mortgage application, they may charge a higher interest rate to offset the perceived risk.

Lower borrowing limits: You may be allowed to borrow less money than someone with a higher credit score.

Additional requirements: You may be required to provide a larger deposit or meet additional criteria.

Fewer options: Not all lenders are willing to provide mortgages to individuals with low credit scores, which can limit your options.

While a low credit score can make getting a mortgage more difficult, it doesn’t necessarily mean it’s impossible. There are lenders who specialise in providing mortgages to individuals with low credit scores, and there are steps you can take to improve your credit score over time.

If you’re a contract worker with a low credit score looking to apply for a mortgage, it may be beneficial to work with a mortgage broker. A broker can help you understand your options, find lenders that are willing to work with you, and provide advice on how to improve your credit score.
Remember, it’s always important to ensure that any mortgage repayments are affordable and sustainable for your personal situation.

How does a fixed term contract mortgage differ from a regular mortgage?

A fixed term contract mortgage and a regular (or standard) mortgage are similar in many ways – they both involve borrowing a sum of money to purchase a property and repaying it over a period of time with interest. However, they differ mainly in how they approach the applicant’s income and employment status.

Here’s how a fixed term contract mortgage differs from a regular mortgage:

Income assessment:

Fixed term contract mortgage: Lenders understand that contractors and freelancers may not have a consistent monthly income, but rather a daily or weekly rate. Therefore, they typically annualise this rate to assess the borrower’s income. They may also take into account the nature of the industry and the likelihood of contract renewal.

Regular mortgage: For those in permanent employment, lenders usually consider the borrower’s salary and any regular bonuses or overtime. The income assessment is straightforward because the applicant has a consistent monthly income.

Employment history:

Fixed term contract mortgage: Lenders will typically want to see a track record of steady contract work, often for a minimum of 6–12 months. They might also want evidence of contract renewals or a future contract lined up.

Regular mortgage: Lenders generally prefer applicants to be out of their probation period and to have a history of stable employment. However, they don’t usually require evidence of future employment security.

Lender options:

Fixed term contract mortgage: Not all lenders offer mortgage products for contract workers, which can limit the options available.

Regular mortgage: As this is the norm, virtually all mortgage lenders cater to applicants in permanent employment, providing a wider range of options.

It’s important to note that regardless of the type of mortgage, lenders will assess other factors such as credit score, deposit size, affordability, and the property itself when deciding whether to approve a mortgage application.

How long does it take to get approved?

The time it takes to get approved for a fixed-term contract mortgage can vary widely depending on a range of factors, including the lender’s process, the complexity of the applicant’s financial situation, and the applicant’s efficiency in providing necessary documentation.

On average, the mortgage approval process can take anywhere from a few weeks to a couple of months. Here’s a rough timeline:

Mortgage application: Once you’ve selected a lender and a mortgage product, you’ll need to submit your application. This typically involves providing various documents, including proof of identity, evidence of income (such as contracts), bank statements, and information about your expenses and debts.

Mortgage underwriting: After receiving your application, the lender’s underwriting team will review the information and assess your creditworthiness. This process can take anywhere from a few days to a couple of weeks.

Mortgage offer: If your application is approved, the lender will issue a mortgage offer. This document outlines the terms of your mortgage, including the loan amount, interest rate, and repayment terms.

Conveyancing: Once you’ve received your mortgage offer, you can proceed with the property purchase. The conveyancing process, which involves the legal work to transfer ownership of the property, can take several weeks.

Completion: Once all the legal work is done and the mortgage is in place, you can complete the purchase. At this point, the mortgage will officially start.

What factors should I consider before applying for a mortgage?

Before applying for a fixed-term contract mortgage, there are several factors you should consider:

Income stability: While lenders understand that contract workers may have fluctuating income, they still need assurance that you can consistently meet your mortgage repayments. Consider the stability of your contracts and the likelihood of their renewal.

Employment history: Lenders usually prefer to see a consistent history of contract work in the same line of work. If you’re new to contract work, it might be worth waiting until you have a more established history before applying for a mortgage.

Future contracts: Some lenders may want to see evidence of future contracts or work prospects. It’s beneficial if you can demonstrate a pipeline of future work.

Deposit: As with any mortgage, the size of your deposit can significantly impact your mortgage options. The larger your deposit, the lower your loan-to-value (LTV) ratio, which often results in access to better mortgage deals.

Credit history: A good credit score can help you secure a better mortgage deal. If your credit score is low, consider taking steps to improve it before applying for a mortgage.

Affordability: You need to be sure you can afford the mortgage repayments, even if there’s a period where you’re between contracts. Make sure to consider all your expenses and have a financial buffer in place.

Mortgage broker: A mortgage broker experienced in fixed term contract mortgages can be invaluable. They can guide you to suitable lenders, help with the application process, and offer advice tailored to your situation.

Rate type: Decide whether a fixed-rate mortgage (where the interest rate stays the same for a certain period) or a variable-rate mortgage (where the interest rate can change) is right for you. This decision often depends on your financial situation and your expectations of future interest rate changes.

Term length: Consider how long you want to take the mortgage out for. A longer-term loan means lower monthly payments but more interest paid over the life of the loan.

Are there specific laws or regulations?

There are no specific laws or regulations in the UK that pertain exclusively to fixed term contract mortgages. However, all mortgage lending is regulated by the Financial Conduct Authority (FCA), and these regulations apply to all types of mortgages, including those for individuals on fixed term contracts.

What steps can I take to increase my chances of getting approved?

Getting approved for a fixed term contract mortgage can be more challenging due to the perceived instability of income. However, there are several steps you can take to increase your chances of approval:

Maintain a strong employment history: Lenders like to see a consistent track record in the same line of work. If you’ve been contracting in the same field for several years, this can be a positive factor in your application.

Keep your contracts updated: If your contracts are regularly extended or renewed, this could indicate to lenders that your employment is stable. Keep records of your contract renewals.

Save for a larger deposit: A larger deposit can lower the loan-to-value (LTV) ratio, reducing the lender’s risk. It can also potentially give you access to better mortgage deals.

Keep your credit score high: A good credit score shows lenders that you’re a responsible borrower. Pay your bills on time, avoid high levels of debt, and regularly check your credit report to ensure it’s accurate.

Demonstrate savings or a Financial Buffer: If you can show that you have savings or a financial buffer to fall back on during periods between contracts, this may reassure lenders about your ability to make mortgage repayments.

Maintain proper documentation: Keep all your financial documents, including tax returns, bank statements, and details of your contracts. Lenders will likely ask for these during the application process.

Use a specialist broker: A mortgage broker who specialises in fixed term contract mortgages can be invaluable. They understand the market, know which lenders are most likely to approve your application, and can help you present your financial situation in the best possible light.

Limit your borrowing: The lower your other financial commitments (such as personal loans, car finance, or credit card debt), the more likely lenders are to view you as a lower risk.

Be realistic about affordability: Apply for a mortgage that you can comfortably afford. Lenders will carry out affordability checks, and being realistic about your income and outgoings will increase your chances of approval.

How does the interest rate on a fixed term contract mortgage compare to a variable-rate mortgage?

The interest rate on a fixed term contract mortgage isn’t inherently different from a variable-rate mortgage because of the borrower’s employment status. Rather, the difference lies in the nature of the mortgage products themselves: fixed-rate vs. variable-rate.

Here’s a quick comparison:

Fixed-Rate Mortgage:

In a fixed-rate mortgage, the interest rate is set at the time of closing and does not change over a specified term. This term can be between 1 and 10 years, depending on the specific mortgage product.

The advantage of a fixed-rate mortgage is that the borrower knows exactly what their monthly payments will be for the duration of the fixed term, which makes budgeting easier.
However, if market interest rates fall, the borrower won’t benefit from the decrease unless they decide to refinance their mortgage, which could involve additional costs.

Variable-Rate Mortgage:

In a variable-rate mortgage (also known as an adjustable-rate mortgage), the interest rate can change over time. The rate is usually fixed for an initial period (say, 2 or 5 years), after which it will vary based on a benchmark interest rate.

The advantage of a variable-rate mortgage is that if market interest rates fall, the interest rate on the mortgage will likely fall as well, potentially lowering the borrower’s monthly payments.
However, if market interest rates rise, the rate on the mortgage will likely rise as well, which could increase the borrower’s monthly payments.

The choice between a fixed-rate and a variable-rate mortgage often depends on the borrower’s individual circumstances, including their risk tolerance, their expectations about future interest rate changes, and their ability to handle potential changes in monthly payments.
It’s always advisable to discuss your options with a mortgage advisor or broker to determine the best type of mortgage for your specific situation.

Can I refinance a fixed-term contract mortgage? If so, how does the process work?

Yes, you can refinance a fixed-term contract mortgage. The process for refinancing is similar to that of applying for the original mortgage, with the main difference being that the funds from the new loan are used to pay off the existing mortgage. Here are the steps involved:

Can a fixed-term contract mortgage be transferred to another property?

Yes, many mortgage lenders allow their mortgages to be “portable,” which means that you can transfer them from one property to another. This can be a useful feature if you plan to move home before the end of your fixed term, as it can help you avoid early repayment charges (ERCs).

However, there are a few things to be aware of:

Re-application: Even though you are technically moving the mortgage to a new property, the lender may still require you to re-apply or go through a new affordability assessment. This is to ensure you can still afford the mortgage payments, particularly if you are planning to borrow more money.

Property acceptance: The new property will need to meet the lender’s criteria and be acceptable as security for the loan.

Additional borrowing: If the new property is more expensive and you need to borrow more money, the additional amount might not be on the same fixed rate as your original mortgage. Instead, it might be at a higher rate, or it might be subject to the lender’s current rates and terms.

Timing: The timing of the move needs to be coordinated with the mortgage transfer. If there’s a gap between selling your old property and buying the new one, you might have to pay an ERC.

Fees: There may still be fees associated with porting a mortgage, such as valuation fees or arrangement fees for the new property. 

Can I pay off my fixed-term contract mortgage early? Are there any penalties for doing so?

Yes, you can typically pay off your fixed-term contract mortgage early, but there may be penalties for doing so. These are called early repayment charges (ERCs). The purpose of these charges is to compensate the lender for the interest they will lose if you repay your mortgage ahead of schedule.

ERCs are typically calculated as a percentage of the outstanding loan balance. The exact amount will depend on your mortgage agreement, but it often decreases the closer you get to the end of the fixed term. For example, if you’re in the third year of a five-year fixed term, the ERC might be 3% of the outstanding balance; if you’re in the fourth year, it might be 2%; and so on.

However, many lenders allow you to overpay a certain amount each year without incurring an ERC. This is often around 10% of the outstanding balance, but it can vary. If you stay within this overpayment limit, you can reduce the amount you owe without having to pay a penalty.

It’s important to read your mortgage agreement carefully or consult with a financial adviser to understand what charges may apply if you want to pay off your mortgage early. In some cases, the savings from paying off your mortgage early can outweigh the cost of the ERC, but in other cases, it might be more cost-effective to wait until the end of the fixed term.

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