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Mortgages for contractors

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Mortgages for contractors

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Last reviewed on 14th November 2023 by Martin Alexander (Mortgage Advisor)

Working as a contractor offers flexibility but can cause problems for your mortgage application. Although you may be financially secure, proving your income to lenders can be challenging. This is because your income is likely to vary, which is why mortgages for contractors aren’t straightforward.

Although some lenders view fluctuations in income as a bad thing, not all do. More lenders are approving mortgages for contractors than ever before.

Can a contractor get a mortgage?

You can get a mortgage as a contractor, but you’ll need to prove your income is sustainable. Contract work can lead to gaps in your income, which is the issue which lenders have.

You’ll need strong evidence of a track record proving your income is sustainable to pay a mortgage. There are ways to do this, such as providing proof of future contracts and having little gaps between work.

The key takeaway of this guide is that you must apply with a mortgage lender that accepts contractors. You’ll also need to check you meet the rest of your lender’s criteria. Even if a lender accepts contractors, it doesn’t mean you’ll be eligible.

For instance, some lenders don’t accept zero-hour contract workers, whereas others do. Some lenders will require you to working for six months, whereas others will only assess your income.

What are the mortgage criteria for contractors?

Each lender varies in their mortgage criteria. However, every lender will assess contractors on criteria such as:

  • Minimum contracting period – Most lenders require you to have worked continuously in the same occupation for six to twelve months. This doesn’t have to be with the same employer, but it can help if it is.
  • Gaps in employment – Some lenders may allow small gaps in employment, such as 4-6 weeks in the last year. However, the fewer gaps in work you have, the better. You may fail to meet the criteria if your gaps in employment exceed two months in the past year.
  • Renewable contracts – Having renewable contracts will place you in a much stronger position to get a mortgage. On the other hand, unrenewable contracts can cause doubts.
  • Remaining months on contract – Lenders will assess how many months remain on your contract. You’ll need at least six months on your current contract to be eligible unless your contract is renewable. Some lenders may accept you with fewer months remaining, but you’ll need to be strong in other areas of your application.
  • Your field of work – Working in a particular career for over one year can make it easier to meet a lender’s criteria. You may even qualify for better rates if you work in professional fields such as teaching, emergency services or the medical sector.

What type of contractors do mortgage lenders accept?

Your employment structure will determine the type of contractor you are. Lenders have different criteria for each type of arrangement:

  • Self-employed contractors – You must register at least one tax year’s income to qualify for a mortgage. However, most lenders will require three years of SA302s to be approved.
  • Agency workers – If you work through an agency, you’ll likely be paid through PAYE. In this case, you’ll need at least three months of payslips and evidence of consistency in employment.
  • Zero-hour contracts – Lenders will require evidence of a track record in your profession. You’ll need at least one year of consistently working in your career.
  • Umbrella contracts – You’ll need to show consistency of employment. While it’s possible with six months of employment, some lenders require at least a year of working under an umbrella company.
  • Limited company – Lenders will assess your application on any salaries and dividends you take from the company. You’ll need at least one year’s accounts to be eligible.

How to get a mortgage as a contractor

To get a mortgage, lenders must verify that you’re earning enough to repay the mortgage you’re applying for. You can take the following steps to do this:

  • Minimise breaks from employment. Fewer breaks between contracts will strengthen your application and give you access to more lenders. Aim for at most 4-6 weeks of gaps each year.
  • Show a consistent pattern of work. Doing so shows lenders you have a continuous income. If your work pattern is scattered, it can weaken your application.
  • Plan for future contract renewals. Showing lenders that you have a contract starting when your existing contract ends will help your application. Problems can arise if you don’t have another contract to start when your current work expires.
  • Collect evidence of your employment. Although lenders will check your income, proof of previous contracts will support your application. Showing lenders you’ve been working in the same field will also help.
  • Check your credit score. Doing so allows you to check your credit history for issues or errors. You can then amend your credit file before applying for a mortgage.

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What documents will I need to get a mortgage as a contractor?

To get a mortgage as a self-employed contractor, you’ll need to provide the following documents:

  • SA302 – Your SA302 summarises your income and the tax you’ve paid. You can download your SA302 forms online from the HMRC self-assessment portal.
  • Bank statements – Lenders typically need three months’ bank statements to assess your income and spending habits.
  • Invoices – If you invoice your employer, providing them to your lender will support your application. Invoices show the dates and amounts of payments, such as your day rate, which lenders can check against your bank statements.
  • Evidence of contracts – Lenders will request the terms and conditions of your contract. Providing older contracts can also help your application, showing proof that you’ve had little gaps in employment.

If you receive payslips, then you’ll need to present at least three month’s payslips to your lender.

How much can contractors borrow for a mortgage?

Lenders will typically lend between three and five times your annual income. If your annual income has varied, lenders will use an average income across the last three years.

Can I get a mortgage if I’ve recently become a contractor?

Getting a mortgage is possible if you’ve recently started contract work. You can use income from your previous role to document your earnings if you’re working for the same company but have taken on a contractual role instead.

If you have at least twelve months of history with future contracted work, you’ll likely 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.

Speak to an advisor if you’ve recently changed employment, as only a few lenders will consider this. For instance, you may be a freelancer without much contract history. As a result, an advisor will need to prepare your application before finding a suitable lender.

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

FAQs

You can get a mortgage on a fixed-term contract, but you’ll need to show evidence of future employment. You’ll certainly need to do this if your fixed-term contract ends shortly.

The length of your fixed-term contract will also be a factor, with most lenders requiring between six and twelve months.

Yes, you can get a mortgage on a contract inside IR35, but you’ll need an advisor to find a lender.

There aren’t many lenders that accept IR35 contractors due to changes in legislation and complex company structures. However, some lenders will consider applicants inside IR35.

As a rule of thumb, the higher your deposit, the better. Although getting a 5% deposit mortgage is possible, rates and fees will be expensive.

On the other hand, a 15%-25% deposit will unlock much better rates and a cheaper mortgage overall.

As a contractor, getting a buy to let mortgage can be easier than a residential mortgage. This is because lenders will assess the rental income of the property you’re buying rather than your income. As a result, your contract work will have less relevance.

Your occupation can make it easier to get a mortgage. For instance, if you work in the medical profession, accountancy, law, IT, or teaching, you could even qualify for a larger amount and discounts.

Professional contractors often have access to several lenders with little work history. Lenders are less strict as they understand applicants are qualified to work in their career and more likely to be without work.

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About the author

Martin Alexander
Senior 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.