As a contractor, you benefit from flexibility in your work but when it comes to applying for a mortgage, you may find that the way you’ve chosen to work makes the process more challenging.
You may operate as a sole trader, as a limited company or via an umbrella company. Your work may be intermittent and your income is likely to be variable. These factors mean you won’t fit a lender’s standard criteria, making the assessment process more complex.
But will that prevent you from being approved altogether or can you get a mortgage as a contractor?
Can you get a mortgage as a contractor?
Yes, you can get a mortgage as a contractor, although it’s slightly more complex than for someone who is a full-time employee. Whilst some mainstream lenders still prefer standard affordability assessments that are best-suited to those in traditional employment, many lenders recognise the growing number of contractors and freelancers in the UK’s workforce. As such, they have changed their assessment criteria accordingly.
Your affordability for a mortgage is evaluated differently and lenders look at other factors, such as the type of contractor you are, the stability of your industry and your work history.
When do you classify as a contractor?
Lenders vary in how they define contractors and the lending criteria that apply to them. You can be classified as a contractor if:
- You’re self-employed and only work for one company at a time
- You’re employed via an umbrella company
- You work through a limited company
- You have a Construction Industry Scheme (CIS) contract
- You’re working under a fixed-term contract
- You have short-term renewable contracts
- You have a zero-hours contract
- You’re an agency worker
- You’re a professional contractor
Your contractor status can determine whether you’re self-employed or employed in the eyes of a lender. How you receive your income, such as a daily rate, earnings through PAYE or a director’s salary and dividends, affects how a lender assesses you for affordability.
What is a contractor mortgage?
There isn’t a specific contractor mortgage product but the term ‘contractor mortgage’ is used when applying for a standard mortgage as someone who works as a contractor rather than in full-time employment. You have access to the same mortgage deals as everyone else; it’s just that different assessment and underwriting processes are used.
As a contractor, you’re considered a higher risk by lenders because of your irregular income. Many mainstream lenders still use employee-style affordability rules, which can restrict how much you can borrow. Specialist lenders, on the other hand, recognise your unique income structure and use contract-based underwriting for a fairer outcome.
Instead of asking to see your payslips or self-employed accounts, a more tailored approach is taken. Your gross contract or daily rate is usually assessed to determine your borrowing capacity. This more accurately reflects your financial capability.
How long do you have to be a contractor to get a mortgage?
There’s no standard minimum for the length of your contract history, although many lenders prefer you to have a contract term of at least 6 months. Having a strong work history, especially within the same field, can strengthen your application.
Some lenders may have stricter criteria and stipulate a longer minimum contract term, such as 12 months, with a specific duration left on the contract. You’re also more likely to be approved if you can show evidence of recent contract renewals. The longer your experience as a contractor, the more you should benefit from a wider range of mortgage options.
If you’re new to contracting, don’t be disheartened as there are some lenders who will consider your application. You’ll need to provide evidence of your current contract, which confirms your rate. You’ll also need to show that you have a good track record in that field; for example, if you’ve just moved from permanent employment into a contractor role within the same industry. Your mortgage choice will be limited but you won’t need to miss out on a mortgage just because you’ve recently started contracting.
How much can you borrow as a contractor?
Each lender’s criteria for calculating how much you can borrow are different and the type of contractor you are also affects this.
Your gross contract value
Typically, lenders calculate your affordability based on your gross annual income, using your hourly or daily contract rate. Usually, your day rate is multiplied by the number of days you work per week and this is then multiplied by the number of weeks you work in a year. As lenders allow for gaps between your contracts and holidays you take throughout the year, this tends to be based on 46 weeks.
When you have this figure, it is multiplied by the lender’s affordability factor, which is usually 4.5. Some lenders do offer higher income multipliers, such as 5 times your annualised contract rate.
For example, when you work 5 days per week at a daily rate of £300, you earn £1,500 each week. For 46 weeks, this makes your annual income £69,000. When multiplied by 4.5, the resulting figure of £310,500 is the amount the lender is prepared to loan you.
Earnings through PAYE
If you have a pay-as-you-earn (PAYE) income, your basic salary is usually taken into account as well as any commission payments or bonuses you receive. Some lenders restrict the commission and bonus amounts that can be included in the affordability calculations. Others, however, are willing to accept the total amount you receive. An income multiplier of 4.5 is then generally used, although some lenders may go higher than this.
If you have a limited company
Many contractors set up a limited company and in this case, different affordability criteria may be used. Instead of your total earnings, the salary and dividends you receive may be used as your income figure.
If you are drawing a low salary but your limited company is profitable, a lender that provides specialist underwriting is better equipped to help you. Your full accounts will be taken into consideration in this scenario. Another option is to use your director’s salary and your share of the company’s retained profit. As long as the retained profit is higher than the dividends, this can increase your borrowing potential.
What deposit do you need for a contractor mortgage?
Lenders generally require you to have a 10% deposit. This gives you a loan-to-value (LTV) ratio of 90%, which gives you better rates than a higher LTV would. If you can pay a higher deposit, such as 15–20%, this will unlock even better rates as you’re reducing the level of risk for the lender. A lower interest rate will keep your monthly mortgage payments lower and will reduce the overall cost of your mortgage.
Some specialist lenders will accept a smaller deposit than 10%. Just be aware that you’ll pay a higher interest rate and face stricter eligibility criteria.
Increase your chances of approval for a contractor mortgage
There are various steps you can take to improve your chances of having a successful mortgage application:
- Make sure that your current contract is up to date. Some lenders also request copies of invoices, bank statements and accounts. Gather as much evidence of your contractual work as you can in readiness for your application.
- Minimise the breaks between your contracts. Try to keep breaks between your contracts shorter than 6 weeks. Also, try to avoid any gaps in the 12 months before submitting your application.
- Check that the information on your credit report is correct. Ensure that any inaccuracies are changed or removed. For example, check that your current address is correct and remove any previous financial ties that no longer exist.
- Improve your credit score where possible. For example, make sure that you’re on the electoral roll, cancel any unused subscriptions, reduce outstanding debts as much as possible and make sure that all payments are made on time. Our mortgage brokers can guide you on how to improve your credit rating.
- Pay off as much as you can of any outstanding debts. Not only does this help to increase your credit rating but it also lowers your expenditure, improving your affordability for a mortgage in the eyes of the lender.
- Save as much of a deposit as you can. The more deposit you can put down, the less you need to borrow, which reduces the lender’s risk. Having a bigger deposit opens up a wider choice of deals and better interest rates.
- Trade for as long as possible before submitting your mortgage application. This shows lenders that you’re able to secure consistent work as a contractor.
- Establish future contracts. Try to secure as many new contracts or contract renewals as you can to convince the lender of a stable income.
We specialise in arranging bespoke contractor mortgages
Our specialist mortgage brokers have a wealth of experience when it comes to arranging mortgages for contractors. They understand how to present your income in the best light and they know which lenders offer contract-based underwriting. This ensures that your genuine earning capacity is recognised and your borrowing potential is maximised. Contact us on 01322 907 000 for expert advice on how to proceed with your contractor mortgage.