What is a zero hour contract?
Just like any other employment contract, a zero hour contract sets out an agreement for work under certain terms, and at a specified rate. However, it does not contain any commitment from the employer to provide a specific, or even a minimum, number of hours the employee is required to work.
Employees are paid for the number of hours they actually work, but there is also no obligation on the part of the employee to accept work offered.
Many contractors, freelancers and employees enjoy this kind of arrangement, and it can make sense in many sectors where specialist skills and specific services will only be needed on an ad-hoc basis.
Very often, the employer will offer a regular working environment for minimal hours with the option to vary the hours worked during busy or quiet periods. But a level of uncertainty still remains, therefore many lenders are hesitant to offer mortgages to people on zero hour contracts.
Can you get a mortgage with a zero hour contract?
Yes, it is possible to do so, although it can be challenging at times.
As discussed above, when you’re on a zero hour contract, your employment and income can seem uncertain or unreliable to mortgage lenders. In turn, this can make it more difficult to find the right mortgage product and a lender willing to support you.
However, in recent times it has become easier for individuals on zero hour contracts to get a mortgage and it will only become increasingly easier with time. This is because there has been an increased number of individuals working on zero hour contracts, therefore a number of lenders have started to offer products to cater to their needs.
Previously, just specialist lenders offered support, although you will now find that even a handful of high street mainstream lenders have relaxed their rules and will offer you a mortgage as a zero-hours contractor.
In most cases working with a mortgage broker is recommended, this is because they will know which lenders to approach based on your circumstances. In turn, maximising your chances of success and also streamlining the overall application process. If you want to discuss your situation, reach out and we will be happy to organise a free consultation.
Borrowing will be based on a multitude of things, such as credit score, deposit amount and employment history, not just your income. However, to give you a rough guide you can typically borrow anywhere from 3.5 to 5 times your yearly income.
For example, if you have a good credit score, sizeable deposit, strong proof of consistent employment and income, and a yearly income of £40,000 you may be able to borrow the maximum.
Therefore, your maximum borrowing would be 5 times you annual income, so in this case it would be £200,000.
However, if you have a less-than-perfect credit score with gaps in your employment history the lender may only allow you to borrow 4 times you income. Therefore, you could borrow £160,000 instead.
You’ll be pleased to know that there is no difference in the type of mortgage, or the amounts available to borrow. While the assessment of your income and application will vary from that for a conventional employee or regular contractor, you should have access to the same borrowing amounts, terms and interest rates as anyone else.
How do you get a mortgage when on a zero hour contract?
The key to successfully applying for a mortgage whilst being employed through a zero hour contract is proof of income and affordability. Lenders will expect you to demonstrate a reasonable track record of consistent working hours and earned income, normally the minimum is 12 months.
To do so it’s best to get provide the following documents as supporting evidence:
- Payslips from the last 12 months
- Evidence of employment history such as previous and current contracts
- Your P60, an end of year certificate showing how much you have earned during a tax year
- Bank statements from the past 3–6 months
If you can provide this, then you should be able to get the same offer as any other self-employed person or salaried employee.
If the income from a zero hour contract makes up only a small part of your overall income, for example, if it is either a part-time job or a second income stream, lenders may adopt a more flexible approach. With a main or alternative income stream still in place, the existence of zero hours employment becomes of secondary importance.
Fortunately, the level of deposit you will be required to meet won’t differ from any other applicant applying for a conventional residential mortgage. Providing the rest of you application and affordability can support it, the minimum deposit is generally 5% of the property’s value, resulting in a 95% LTV mortgage.
Although, 10% or more is usually preferable and it can allow you to unlock things like more favourable interest rates, longer introductory periods, lower fees and lower monthly repayments. This is because the larger the deposit you are able to provide, the less risk a lender is taking on, as they have to lend you less money in comparison to the value of your property.
What interest rates to expect
You’ll be pleased to know that people on zero hour contracts are offered mortgage rates no different to anyone else applying.
On top of this, the mortgage rate types available to you will also be the same as any other applicant. This means you can access the following product types:
- Fixed rate products – allowing you to budget much easier, interest rates on fixed products will not change for a set period of time. Therefore, your monthly payment will not change during the agreed term. These products usually last anywhere from 2 to 5 years, although they can occasionally last longer.
- Variable rate products – unlike a fixed rate, a variable products interest rate will be guided by a benchmark rate, meaning the rate can change month to month. In turn, your monthly mortgage payment has the chance to both increase and decrease depending on reference rate. Commonly, lenders will use the Bank of England base rate as their reference the rate and then add a small percentage on top – this will be the rate they charge you.
If you want to discuss what interest rate you might pay, as well as what product is right for you, feel free to get in touch. One of our expert advisors will be happy to discuss you circumstances.
Frequently Asked Questions
It is definitely possible to get a mortgage with a zero hour contract as well as having a bad credit history.
The severity, frequency and type of any past or current credit issue will play a big part in how a lender perceives your application.
More recent and severe credit events like CCJs or bankruptcies would make it much more difficult compared to if you had a few missed payments several years ago, for instance. However, there still may be options available to you through specialist lenders.
One thing is for certain though, using a mortgage broker will almost always be required. Not only can they help you prepare your application, but they will also have access to those specialist lenders that aren’t directly available to the public.
These lenders will take a much broader approach to your application, using real people to understand your situation.
This is possible with the correct information gathering and application packaging, although it can require some extra leg work. Some lenders do require a minimum level of earned income regardless of the rental income, although it is the rental yield which is used primarily to assess affordability.
On top of this, deposit requirements are higher for Buy-to-Let mortgages, so you will need to put down around 25% of the property’s value down as a deposit.
Using a mortgage broker can help you access the right lenders as well as prepare you application in the best, most favourable way.
