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Mortgages for contractors


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Mortgages for contractors

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Last reviewed on 22nd March 2022

Working as a contractor offers flexibility but it can be difficult when applying for a mortgage. Although you may be financially secure, proving your income to lenders isn’t always easy. This is because your income is likely to be varied which is why mortgages for contractors can be difficult.

Although some lenders view fluctuations with income as a bad thing, not all do. More lenders are approving mortgages for contractors than ever before. This is because contractual working is becoming a popular option when compared to traditional employment.

What is a contractor mortgage?

A contractor mortgage is for those who don’t have permanent employment. This doesn’t mean to say that contractors don’t have work all year round, but without full-time employment, lenders may decline suitable applicants. This is because lenders prefer applicants to have a long-term fixed employment contract.

With employed applicants, lenders would request payslips and a contract of employment. As a result, lenders are able to assess an applicant’s income and whether it’s sufficient to repay a mortgage. In comparison, contractors will have a varied income structure and may even have gaps in their income history. That being said, lenders do have their own unique assessments for assessing contractors.

Who can get a mortgage as a contractor?

To get a mortgage as a contractor, your employment will need to be structured in one of the following ways:

  • Self-employed
  • Sub-contracting
  • Agency workers
  • You have a fixed-term with a history of other contracts
  • Working with umbrella companies
  • In a professional field (accountant, medical, legal, teacher)

There are also lenders that may consider approving you, even if you’ve been a contractor in the UK for just six months.

How much can contractors borrow for a mortgage?

Lenders each use different methods to assess the affordability of contractors. The amount you can borrow will vary depending on the lender you’ve applied with. Nonetheless, lenders will usually assess affordability by using the following calculation:

  • Contracted day rate x number of days worked each week = your weekly income
  • Your weekly income x 48 weeks = Your annual income
  • Your annual income x 3, 4 or 5 = Your maximum mortgage amount
  • If your daily rate was £250 and you worked 4 days a week, your weekly income = £1000.
  • Over 48 weeks, your contracted annual income = £48,000.

Some lenders may only lend up to three times your annual income. Others may lend up to four or five times your annual income. In this case, your maximum mortgage amount based on four times your annual income would be £192,000 for that specific lender.

Lenders also assess applications on other criteria such as how long you’ve been contracting for. Further assessments will be made on whether your contracts have been renewed. Your credit score, monthly outgoings and any other loans you may have will also be taken into consideration.

Use our self-employed mortgage calculator to check how much you can borrow.

How is a contractor’s income assessed for a mortgage?

A self-employed contractor is someone who is registered as self-employed with the HMRC. Contractors typically pay their own tax and national insurance. As a result, it’s common to subcontract for one or a number of different companies.

But, what does this all mean when you’re applying for a mortgage?

If you’re a self-employed contractor, then you’ll need to have at least one year’s accounts. Lenders will then base your affordability on the net income declared in your self-assessment and accounts. The way your employment is structured will also have an effect on how your income is assessed.

Lenders will assess the following factors:

  • The length of time you’ve been contracting for
  • Whether you’ve had contracts renewed
  • The industry in which you’re working
  • How long you have remaining on your current contracts
  • Your average income from contractual work

What if I’ve recently become self-employed?

If you don’t quite have one year’s history, it may still be possible to qualify for a mortgage. For instance, if you’ve been employed by a company but have recently become self-employed, you can use income from your previous role to document your earnings. Furthermore, you may be working for the same company, but have taken on a contractual role instead.

Under similar circumstances, lenders may feel as though there’s enough stability for mortgage approval. This is because your lack of self-employed history is justified and is an example of where lenders may approve you without having 12 months of history.

If you have at least twelve months of history with future contracted work, it’s likely you’ll have a choice of lenders to approach. Contractors with less than six months history may still be approved, but will only have a handful of lenders that may say yes.

As each and every case is individually assessed, it’s always best to consult an experienced advisor who specialises in this field. For instance, you may be a freelancer with little or no contract history. As a result, your application will need to be prepared accordingly.

Learn more: How to get a mortgage as a freelancer.

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Applying for a mortgage on a fixed-term contract

If you’re working on a fixed-term or a short-term contract, then getting a mortgage may not be easy. High street lenders rarely consider applicants that are on fixed-term contracts. This is especially true if your fixed term is for a short period of time.

Don’t panic, there are specialist lenders available that offer some pretty competitive rates.

Having a contract for a single term gives lenders an insight into the duration and income involved with your contract. Even if you only have a contract for one year, specialist lenders may still say yes.

If you’re a new contractor, it’s likely that you’ll be required to have at least six months of history with a pipeline of future work. Renewing previous contracts also shows lenders that your income and employment is sustainable for a mortgage.

What if I have a contract with an umbrella company?

If you’re working through an umbrella company, mortgage approval is slightly more complex. This is because it can be difficult for lenders and particularly underwriters to establish whether or not your income is sustainable.

Some lenders will decline applications altogether and simply won’t lend no matter how much proof of income you have. That said, this will only happen if you approach an unsuitable lender.

If you’ve been working through an umbrella company for over twelve months or have a history of contract renewal, getting a mortgage should be straightforward. That being said, approaching a lender by yourself may prove difficult. Speaking to an advisor first can give you an insight into the correct lenders to approach to avoid being declined.

Can I get a mortgage if I work through an agency?

A common misconception is that contractors who work through agencies will be unable to get a mortgage. This is untrue. Although it can be difficult, there are lenders that have approved mortgages under these circumstances.

Contracting in a professional field

This section relates to self-employed professionals who work in fields such as the medical profession, accountancy, law, IT and teaching, to name a few.

Professional contractors often have access to a number of lenders without a working history. This is related to the specialist skillset associated with the profession that you’re in.

Learn more: Mortgages for professionals explained.

How much deposit will I need as a contractor?

As a rule of thumb, it’s always advised to have at least a 10% deposit for a mortgage. The reason is, anything less and the rates can be higher than average.

Generally, the more deposit you can put down the better. This is because rates tend to be cheaper with larger mortgage deposits.

It may be possible to get a mortgage with a 5% deposit by using schemes such as Help to Buy. Don’t forget to calculate your mortgage and whether you can sustain payments over your mortgage term.

Declined a mortgage as a contractor

Applicants that have been declined tend to give up and often believe getting a mortgage isn’t possible. Depending on the nature of your work, certain lenders will be better suited than others.

Reasons lenders may decline you

The reason lenders use a restricted approach is because the field of contracting is so varied. Lenders base their mortgage assessments on risk. If lenders deem you to be too much of a risk then you’ll be declined.

This often happens when contractors approach lenders direct, as the application isn’t presented in the best possible way. If your application hasn’t been placed with the right lender or presented correctly then lenders will be quick to say no.

Brokers who have experience with mortgages for contractors can help prepare your application before applying. Advisors can also help find the most suitable lenders for you, greatly improving your chances of getting the mortgage you want.

What should you do if you’ve been declined?

If you’ve been declined, then don’t panic and certainly don’t give up. There are many different ways to approach lenders and there are specialist advisors that can help you every step of the way.

Establishing why your mortgage was declined is a good start to understanding where the gaps in your application are. We can go through your application and make sure it’s strong enough and with a suitable lender.

Not only should an advisor be able to secure you a mortgage, but they should be able to secure the best possible rates available.

I’m a contractor with bad credit

As a contractor, it’s difficult to get a mortgage with bad credit. We would recommend you speak to an advisor that specialises in mortgages with credit problems.

Homebuyers often assume they’ll have a really bad credit file, but in reality, their credit files are adequate enough to be approved. If your credit issues happened over two years ago and your payments have since been on time, then lenders may take your recent financial stability into consideration.

All of our advisors specialise in mortgages that involve adverse credit, as well as mortgages for contractors. Simply make an enquiry to get started.


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About the author

Mortgage Advisor | More Articles

Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.