Can I get a mortgage if I’m on a zero-hours contract?
Controversial zero-hours contracts have been widely discussed during this election cycle after Labour announced plans to ban them in its manifesto.
But despite being used as political weaponry, the fact is a record 905,000 people were on one of these contracts in the final three months of 2016, about 100,000 more than a year earlier.
These contracts come with benefits; they can provide flexibility for both employer and employee. But they can cause problems when someone is looking for a mortgage.
Workers on zero-hours contracts are not guaranteed a minimum number of hours each week. This means they may find it harder to prove their regular income to a lender.
New regulation introduced in 2014 made it tougher for everyone to get a mortgage. Lenders now apply much stricter affordability criteria and scrutinise a borrower’s incomings and outgoings more carefully before offering them a loan.
This includes proving a borrower has a strong track record of earnings.
Ray Boulger of mortgage broker John Charcol, says: “What lenders will look for is consistency of income. If someone has not been working on a flexible contract for long enough to have established a track record, at least six months but preferably a year, or their income is volatile, lenders will be more cautious and some will ignore the income completely.
“As you would expect, someone with a large deposit may be able to obtain a mortgage, whereas if only 5% or 10% deposit is available, they may not.”
Some lenders will not lend to borrowers on zero-hours contracts at all. However, given the increasing popularity of this type of employment, some mainstream lenders will now consider an application, when in the past they may not have.
Andrew Montlake of mortgage broker, Coreco, says: “Halifax and NatWest will look at evidence of earnings over the past two or three years and take a view. For Halifax, you must have been employed on a zero-hours contract for at least 12 months. Other lenders may only consider this type of income as ‘secondary’ earnings and take 50% of it.”
David Hollingworth of L&C Mortgages points out that lenders typically require at least 12 months’ earnings history so it might not be straightforward for prospective borrowers who have recently taken on a zero-hours contract.
Hire an adviser
That’s not to say zero-hours workers shouldn’t apply for a mortgage. It’s just more important than ever to seek professional advice.
“A good independent mortgage broker will not only be able to advise whether you are likely to be able to obtain a mortgage, but also which lenders are most likely to offer an appropriate mortgage,” says Boulger.
Hollingworth adds: “As long as they have an adequate track record to meet the lender’s requirements, they should have the full range of standard deals to choose from, the same as any other borrower.”
While a lender will not insist on any particular protection if you are on a zero-hours contract, it makes sense to have a contingency plan in place – something your adviser can help with.
Those who are nervous about the effect varying income levels have on their monthly budgeting may prefer the idea of fixing their mortgage.
“That will give some budgeting certainty when it comes to mortgage payments, irrespective of what happens to mortgage rates and other outgoings in the meantime,” says Hollingworth.
“Fixed rates are at record lows at the moment so the majority of borrowers are electing to lock their rate in anyway.”
According to David Shelton, a senior underwriter at Ipswich Building Society, someone applying for a mortgage on a zero-hours contract can improve the likelihood of being accepted by having the following documents:
- A P60, otherwise known as an End of Year Certificate, which is issued to taxpayers at the end of the tax year (5 April) by their employer. This must be given to you by 31 May. It will show how much you have earned during the tax year
- Bank statements
- Evidence of child tax credits
- Balances of outstanding loans and credit cards.