Mortgage on a Zero Hour Contract
Your home may be repossessed if you do not keep up repayments on your mortgage.
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Mortgage on a Zero Hour Contract
David Sharpstone talks us through zero hours contracts and how the mortgage process works.
What is a zero hour contract mortgage?
It’s not so much a specific mortgage – there isn’t a product called a zero hour contract mortgage. It’s more about making sure we go to the right lenders that understand that you’re working more flexibly.
It’s essentially a mortgage designed for somebody working on a zero hour contract, whose income is going to fluctuate. It’s a unique employment situation and something we get a lot of enquiries about.
The important thing is that you can get a mortgage – but not if you’ve just started. If you’ve only been working on zero hours for three or six months, the likelihood of you getting a mortgage is slim, because it’s all about the track record. Ideally we need at least one year’s history – and don’t be surprised if a mortgage lender wants to see payslips to cover that whole year.
Also, you might be self-employed, in which case you will need a work history to cover at least one year. Although I said there isn’t a specific mortgage, there are one or two specialist mortgage lenders with a product designed for a zero hour contract worker. Typically speaking it’ll be a higher rate, but at least we know that these lenders are used to dealing with this situation.
How much deposit do I need for a zero hour contract mortgage?
This varies from lender to lender. If you’ve got a very variable income, some lenders want to reduce the risk of you failing to repay the mortgage, by requesting a 20% deposit.
But more often than not, a minimum deposit is suitable for most lenders. So it might be possible with 5% or 10%, as long as you’ve got that track record of work.
The credit score is also a factor. If you’re on a zero hour contract and you’ve got a poor credit score, you might need a bigger deposit.
Can self-employed workers on zero hour contracts get a mortgage?
If you’re self-employed, a mortgage lender isn’t necessarily going to be looking at the hours you’ve worked. They’re just going to treat you as self-employed, in which case you need to show a two-year track record of your profits.
How do lenders assess income for zero hour contract mortgages?
The first thing mortgage lenders are looking for is consistency. They want to know that from month to month you have enough coming in to cover your mortgage and bills.
If you’re employed and paid through a zero hour contract, they need 12 to 24 months. They will take the time to make sure they look at it properly as it’s a risk for them. But it’s also a risk for you. No one wants you to be borrowing more than you can actually afford.
What documents and income history do you need to be considered for a mortgage on a zero hour contract?
Lenders aren’t going to be interested in the contract itself because it won’t confirm your hours. Quite often zero hours contracts are through agencies, in which case the most important thing would be payslips. Those will set out the fluctuations and confirm that income is paid into your bank account.
You will also need to provide bank statements to show the income is actually going in. In some cases, the mortgage lender might ask for a letter from your employer to confirm that there is enough work ongoing.
How much can I borrow when working on a zero hour or temporary contract?
A lender will work out your annual income from payslips and bank statements. It will be an average figure – and it might just come from your P60. They’d put that figure into their affordability calculator and factor in any other commitments – how many children you have or any adult dependents who are reliant on you. That would give them a figure of how much they’re prepared to lend.
Can I use benefits as income when applying for a mortgage on a zero hour contract?
Yes. As soon as you apply for a mortgage, the lender will ask if you have any other income to support this application. Most benefits can be considered, whether it’s child benefit or universal credit – although this can vary.
Benefits can be used as long as you can demonstrate that they are guaranteed for life, or for child benefit, it is based on the children’s ages. There’s no point including child benefit if you’ve got a 17 year old.
How does my age impact my eligibility when applying for a mortgage as a zero hour contractor?
Age is really important. If you’re nearing retirement it will impact the length of your mortgage. Most mortgage lenders are reluctant to lend beyond retirement age. If you say you will retire at age 68, the maximum mortgage term will be dictated by you reaching that age and no longer having employed income coming in.
The state retirement age is one thing, but for people in their 30s and 40s retirement age will probably shift later. So a lot of mortgage lenders may accept it if you feel that it’s feasible to work until 75.
If you’re a bricklayer, it might not be feasible to do that job to 75, but depending on the nature of your work it may be acceptable.
Generally speaking, a shorter term will have an impact on affordability, so you will be able to borrow less. A longer term usually means you can borrow more.
What is the maximum loan to value ratio for zero hour contract mortgages?
A 5% to 10% deposit would be 95% to 90% Loan to Value. If you’re a zero hour contract worker with a good record, you could go up to 95%. You just need to prove to the mortgage lender that you are a good candidate for their money, with evidence to back that up.
Will I have to pay more on my mortgage as a zero hour contractor?
On the whole, no. Most high street lenders won’t have a specific product for zero hour contract workers, so you’d pay the same rate as anybody else. It’s up to the mortgage lender to figure out what your average income is, and to do that they will ask for a lot more evidence.
But if you’re a zero hour contract worker and things are a bit quirky about your circumstances, or you’ve got a less than perfect credit record, we might not recommend a high street lender. We might need a specialist lender with products designed for zero hour contract workers. For those sorts of products, you might pay a little bit more.
How likely is it that I will be successful in obtaining a mortgage while having a zero hours contract job?
The chances of getting the mortgage approved are pretty good – although not as high as if you had a permanent contract. But no mortgage is ever guaranteed. A lender can decide at any stage that they no longer want to lend – we do see that happen.
Your chances are probably a little lower than an employed person who has guaranteed income every month. You have to cover a longer period with your payslips – a year minimum, sometimes even two years.
If there are ups and downs in that period of time, it could impact the decision. You might be earning a £40,000 a year salary based on the last six months, but perhaps before that you were earning half as much.
A mortgage lender is unlikely to work out mortgage affordability on that £40,000. It can be a bit of a red flag for them. They will ask lots of questions. And that’s why mortgage lenders look at your income over a much longer period, because there’s more chance of peaks and troughs.
What factors should I consider when applying for a mortgage on a zero hour contract?
As we’ve said, you need to come to your mortgage advisor with at least a year’s worth of income evidence. Having a healthy deposit helps, but it’s not the be-all-and-end-all. If you’re thinking about buying a property, pay all your bills on time in the year leading up to that.
Nobody wakes up one day and decides to go and buy a house. You think about it. Check your credit report online and get your paperwork sorted out. That’s really it.
How can I improve my chances of getting a mortgage on a zero hour contract?
The most important thing is consistency of income and a good clean credit history. If you can evidence those, throwing more money at it isn’t necessarily going to improve your chances. Your likelihood of getting a mortgage could be just as good with a 5% or 10% deposit.
What is your experience with zero hour contract mortgages? What role does an expert broker play in applying and getting a mortgage on a zero hour contract?
As a broker I see this situation multiple times in a month. With the growth of the Gig Economy, with Uber drivers and food delivery apps, the zero hour contract industry has grown massively and a lot more people are coming to us with zero hour contracts.
A lot of people prefer this flexible approach to working, too. It’s not just beneficial to the employer. So over the years I’ve placed hundreds of people on zero hours contracts.
The typical challenge is always demonstrating affordability and consistency. Before people come to see me I will always have an initial chat with them to make sure they aren’t wasting their time – or mine. I want to check their expectations are not in Cloud Cuckoo Land before they come in.
If they want to buy a property for £2,000,000 and they’re taking home £100 a week I’ll set them straight about that. And if they’re on a zero hour contract, we can make sure they come prepared to the appointment with details of their history.
If somebody hasn’t got the history I will still speak to them. I work with lots of people that aren’t ready yet. We can get things arranged in six months, 12 months or two years’ time.
What I bring to that is knowledge of mortgage lenders’ criteria. As mortgage brokers, we play a game of ‘guess what the mortgage lender is thinking’ – and the longer you’ve been doing this, the better you get at it.
I’ve been a broker for 17 years and before I do a mortgage, I do a ‘pre-mortem’ – which is what could possibly go wrong in this case. I look for all the hurdles, come up with the answers and work to deal with that particular situation. We want to try and answer all of the lenders’ questions before they even come up.
That’s what an expert mortgage broker with experience is going to do – rather than you going directly to a bank or going to a mortgage broker that has only been doing the job for six months.
If you speak to a mortgage broker and you feel that your situation is a little bit complex for them, there’s no harm in asking how long they’ve been doing this job and their experience in dealing with your situation. That’s a perfectly acceptable question to ask. Don’t be shy to do that.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
Approved by The Openwork Partnership on 04/01/2024.
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Mortgage on a Zero Hour Contract (Part 2)
We continue the conversation about mortgages on a zero hour contract with David Sharpstone.
Podcast approved by The Openwork Partnership on 25/01/2024.
What role do your earnings play in your eligibility for a mortgage on a zero hour contract?
You have to have at least a year’s track record in evidencing your earnings before you can even start talking to mortgage lenders. That’s the most important thing.How does your work experience and industry affect your eligibility for a mortgage on a zero hour contract?
If you’ve got a year’s worth of history, you’ve got a year’s worth of experience. But you can’t go from a permanent contract with guaranteed income and be just three or four months into a zero hour contract job. That history doesn’t really matter – you need a year. That’s standard across the board.How does the structure of your income affect your eligibility for a mortgage on a zero hour contract?
I’m going to assume that means PAYE as opposed to being self-employed. If you’re self-employed it’s a completely different conversation. Let’s assume that if you’re on a zero hours contract, you have to be registered for PAYE. Then you’ll be seen by lenders as employed.How can I showcase my earnings to improve my chances of getting a mortgage on a zero hour contract?
It’s unlikely that you’d have to show a year’s worth of payslips, especially if you’re getting them weekly. I don’t think any bank or underwriter wants to look through 52 payslips.Generally they look at the last three months, or eight weeks with some banks, and they’ll know it’s zero hours because the income will fluctuate. I get cases where I look at payslips and if I’ve got no idea what the basic salary is, it’s because they are on a zero hour contract.
The lender would then take an average of those payslips and annualise that figure.
How do you download your credit report when applying for a mortgage on a zero hour contract?
You can download your credit report in exactly the same way if you’re employed or self-employed or a day rate contractor. A credit report isn’t linked to how you’re paid.You’d go to a credit reference agency such as Experian or Equifax. Or the best option is Checkmyfile because it shows all the agencies side by side. You just go to the website, register and download.
How does my employment history impact my chances of getting a mortgage on a zero hour contract?
From the 12 months history there isn’t anything that a lender is going to be looking for particularly. I’d like to say you’re home and dry, but that’s not quite the case as there’s a lot more to your mortgage application. That’s really the minimum requirement.What impact does my profession or role have on my mortgage eligibility?
There are different aspects to this. Plausibility is important. If you’re a cleaner earning £60,000 a year on a zero hour contract, that might raise some eyebrows with the lender. Certainly, your income needs to be plausible.
But somebody in a higher position – an architect compared to someone working at McDonald’s – would they have a stronger chance of getting a mortgage based on that job? No, I don’t believe so.
It might have an impact on some things about your mortgage. If you wanted to take the mortgage beyond state retirement age, if there is a strong manual element to your job then that might have an impact.
How does a zero hour contract affect my chances of getting a mortgage?
It’s very black and white. If you’ve got less than 12 months’ history in the job, you’re unlikely to get a mortgage. If you have got 12 months or more, you’re in exactly the same position as anybody with a full, guaranteed income.How can you prove income for a mortgage application?
We talked about having 12 months history, but you don’t need 12 months payslips to show your income. A mortgage lender would just ask the question of how long you’ve been in the role.They might ask for a P60 to show that you’ve got consistency of income. Or they might ask for some payslips from a year ago. Usually it’s three months payslips and bank statements showing that income being deposited.
Is it possible to get a mortgage on a zero hour contract with bad credit?
Yes – I was just working on one this morning. It does limit the mortgage lenders. Some lenders will not take on zero hour contracts and then adding some kind of bad credit to the mix can complicate it further.If you’ve had a missed payment, CCJ or a default in the last six years that’s certainly going to restrict the field. But yes, you can get a mortgage. We found a couple of lenders today that will do zero hour contracts with bad credit [podcast recorded in January 2024].
What are the considerations for NHS mortgages on zero hour contracts?
I get asked that a lot, as a lot of NHS nurses choose to work through the nursing pool – they’re called bank nurses. It’s almost like an agency where they’ll have no guarantee of income, but a lot of flexibility.Again, the same thing applies. You need that year and then you can get a mortgage.
What is an umbrella company mortgage?
This applies if you are working in a situation where you’re considered to be inside of IR35, which basically means you might not be directly working for an employer. Your employer brings in a payroll company to pay you an income on a PAYE basis and tax and national insurance is paid at source. That’s called an umbrella company.Often that arrangement happens where you have previously been self-employed, but everything about your job looks, feels and smells like it should be employed. You’re working for one company, doing set hours and they’re providing you with equipment or perhaps clothing.
That would be considered to be inside of IR35, so they would use this umbrella mechanism. Sometimes that happens when you’re on a zero hour contract as well.
What documents are required for mortgages on a zero hour contract?
Probably not a contract because it won’t have any guaranteed hours. So we ignore that.I would always get a credit report so you know exactly what the banks can see about you. Check through your bank statements to make sure that there’s nothing that might raise questions to a mortgage broker or lender.
Make sure you’ve got full evidence of your deposit and where it’s come from, with a full paper trail. You also need proof of address and photo ID.
What tips can help me strengthen my mortgage application as a zero hour contractor?
The biggest tip is to be patient. If you haven’t got 12 months, you’ve only got 11 months and a month – hold on. There’s not a lot else you can do other than wait.Make sure that you keep all of your payslips, because if you can’t evidence your income you can’t get a mortgage. Those are probably the two biggest tips.
Which lenders offer mortgages for zero hour workers?
Most of the high street lenders will, bar two or three. That’s probably the easiest way to answer. As long as you’ve got a track record of the last year, most lenders probably will.YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
Approved by The Openwork Partnership on 25/01/2024.
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Mortgage on a Zero Hour Contract (Part 3)
David Sharpstone is back for the last part of our podcast series on getting a mortgage on a zero hour contract.Why is it difficult to get a mortgage as a zero hour contractor?
It can be, because mortgage lenders are looking for some consistency of income. So if your contract says that potentially you could go a week without working, that’s a concern to your mortgage lender.
They will be looking for at least a one year track record of your earnings in the last 12 months on a zero hour contract..
Do lenders view zero hour contract workers as high risk clients?
Yes, because compared to somebody who’s on a fixed term contract or somebody who is employed on a salary, there is no guarantee of how much they will earn from week to week.
That does make the risk profile higher. There’ll certainly be more underwriting needed for anybody on a zero hour contract. That then means that the mortgage application can take longer – and the chance of being turned down is potentially higher.
Can I take out an interest only mortgage as a zero hour contractor?
We’d need to separate two lots of lending criteria – one for interest only and one for zero hour contracts.
As a borrower, once you’ve met the lender’s criteria of being a zero hour contractor, you then need to meet the interest only criteria. You will need the minimum one year track record on your contract and be able to evidence that consistency of income.
With interest only, as we’ve discussed on previous podcasts, often the income now has to meet a minimum requirement. A lot of lenders for interest only expect a minimum income of up to £75,000.
The next thing to consider is whether there is enough deposit if you’re buying, or enough equity if you’re remortgaging the property. There are often minimum deposit or equity criteria for interest only.
So it’s possible, as long as you meet the lender’s criteria on both parts to that mortgage type.
Can I get a mortgage on a zero hour contract without affecting my credit score?
In reality, you can’t get any mortgage with any lender without it affecting your credit score. Even if you’re just doing the initial checks with a lender for an Agreement in Principle, which is also called a Mortgage in Principle or Decision in Principle, that often involves a soft footprint that doesn’t affect your credit score.
But once a mortgage application goes in, any lender needs to be certain of your credit history. So they’ll do a deeper credit search that involves a hard footprint. At the point of application or during the underwriting process, that hard footprint will drop your credit score by a few points.
How does continuous employment affect your eligibility for a mortgage on a zero hour contract?
It’s a really good thing – being able to evidence continuous employment, especially over a period of longer than 12 months, will massively improve your eligibility to get that zero hour contract mortgage.
You’re giving the mortgage lender confidence that you are a good borrower. That reliability of income means you’re going to be able to pay the mortgage and not default.
Are there Buy to Let mortgage lenders who consider zero hour applicants? Can I get a Buy to Let mortgage on a zero hour contract?
On a Buy to Let mortgage, earned income is not quite as important as the perceived rental income that the property could achieve.
So to get a Buy to Let with a zero hour contract, the same rules are going to apply for you as anyone else. Some Buy to Let lenders have no minimum income; some will not assess income. They might assess whether your higher rate or a lower rate taxpayer based on the previous tax year of earnings.
If they are checking income, however, they may want to see that you have a year’s worth of consistent income as a zero hour contract worker.
What are the latest news and views about mortgages for people on a zero hour contract?
[podcast recorded in January 2024]
In recent years, zero hour contracts have been increasing within the workforce. This is largely to do with people working in the gig economy – for firms like Deliveroo or Uber. That’s having a knock-on effect on the rest of the labour market.
Zero hour contracts benefit the employer and can give the employee good flexibility. Businesses can adjust to market conditions, and zero hour contracts often work for people that need flexibility around their family life or studying.
We’re certainly seeing more mortgage applicants like that and I don’t see it slowing down. Mortgage lenders are also trying to be more flexible and understanding, seeing this as the norm now, and an important part of the workforce.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.
Approved by The Openwork Partnership on 30/01/2024.
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