How much can I borrow?
How much you can borrow all depends on how you're assessed for income verification.
Income assessment for day-rate contractors
It's common for workers with fixed-term or rolling contracts denominated in foreign income to receive earnings into a limited company and pay their own tax.
However, in the right circumstances, contractors can be treated as employed for mortgage purposes. In such cases, the lender will base affordability and income assessment using your contract's daily rate of pay.
This can be hugely advantageous, as it often means you can borrow more than if you're assessed as a self-employed company director.
In the latter scenario, your share of your UK limited company net profit and salary or dividends and salary is calculated to produce a maximum borrowing figure.
Many providers will average the last two financial years or the latest year's figures if it's higher or lower than the previous year.
How lender's determine if they'll use your day-rate
Whether you are classed as employed or self-employed is lender dependent. Each uses different criteria. For example:
- A minimum income level of £50,000 - £75000 p.a. Employed
- More than one contract running simultaneously. Often self-employed but some providers can treat as employed.
- Employ other contractors - Self-employed
- More than six weeks gap between contracts in the last year. Self-employed
- Pays their own tax - Self-employed.
Some of these criteria have exceptions and/or override one another. For example, one major lender will treat IT contractors on any income as employed even if they pay their own tax.
The only exception is if the IT contractor employs other contractors through a limited company.
Day rate income calculations using foreign income
Banks and building societies that accept overseas earnings will use your day rate and multiply it by either 230 or 240 days a year (46 or 48 weeks respectively), depending on the lender's criteria) to work out your income.
Of course, the income is prorated if the contract(s) stipulate fewer hours a week,
Next, the currency exchange is applied at the spot rate on the day of mortgage application, along with any 'haircuts' to produce the sterling-denominated annual income.
Committed expenditure reduces maximum borrowing
Finally, the provider applies their loan-to-income (LTI) multiple and makes any deductions for ongoing committed expenditure such as spousal support, credit card balances, car finance etc.
An example borrowing calculation
Let's assume our example contractor is paid $600 a day for 35 hours a week work, over 5 days. His USD earnings works out at $138,000 p.a (600 x 5 x 46).
On the application date, the USD to GBP exchange rate is 1.2 dollars to the pound, giving a sterling income of £115,000.
Now some lenders won't apply any 'haircut', allowing the contractor to potentially borrow up to £517,500 on a 4.5 x earnings multiple. Some lenders may even allow a higher borrowing multiple due to the high income.
Applying a forex 'haircut' for mortgage borrowing
But let's say the lender automatically deducts 20% to protect against variance in the Forex rate. Now the borrower's income is assessed as £92000, giving a maximum borrowing figure of only £414,000 based on 4.5 times income.
Other lenders will only work from your limited company accounts net profit and salary or, for sole traders, gross income before tax as shown in your SA302 / tax calculations.
Regardless of your trading status, some banks and building societies are happy to provide foreign currency mortgages to contractors based on assessing just your latest year's income, rather than an average of the last two.
What documents do I need to show lenders?
The precise documents you'll need to get a foreign currency mortgage will depend on whether the lender considers you self-employed or employed for income assessment.
Our self-employed mortgage document checklist here has more details.
Getting a mortgage quote
As you can see, the eligibility criteria for foreign currency contractor mortgages becomes increasingly complex when you're paid in a currency other than sterling.
As an independent, whole-of-market broker specialising in self-employed mortgages, SEMH will assess your circumstances and credit history before sourcing the most suitable mortgage with foreign income for you.
We'll save you hours of time and frustration, and potentially a lot of money as well. To get started, schedule an initial enquiry call with an advisor now.
The call should take no more than 15 minutes, you can book a slot at a time and date to suit you, and there's no-obligation.
