If you’ve been a contract worker for most of your employment history, lenders will often take an average of what you’ve earned in the last few years. That average is then used to calculate how much you can afford to borrow and repay. If, for example, you earned £30,000 in a year, £32,000 the next and £29,000 in a third year, the lender will calculate your average income to be around £30,000.
However, this may not work if your income fluctuates dramatically – for example, if you earn £30,000 in a year and £21,000 the next.
In these cases, lenders may use the most recent year, or the lowest, as an indication of your earning capacity. This will likely result in you being allowed to borrow less than you might have expected to get.
Example: John applies for a contract mortgage
John has been a contract worker in the same industry for 3 years and decides to apply for a mortgage. Because John's income has fluctuated over the past 3 years, his chosen lender takes an average to work out his mortgage affordability. This comes to £35,000 and allows John to borrow up to £165,000 over 25 years. At an interest rate of 4.23%, his monthly repayments work out to be £892.02.
To ensure his monthly repayments are more affordable in the event his income reduces, John decides to buy a smaller house and only borrow £140,000. This brings his monthly repayments down to £756.87.
* This is a fictional, but realistic, example.