Working as a contractor can offer flexibility but at the same time, stability can sometimes be a problem. Although you may be financially secure, proving this to lenders is key. Mortgages for contractors can be difficult to come by for this very reason.
A contractor or a freelancer can be defined in a number of different ways. As a result, lenders assess mortgages for contractors in varied ways. Although some lenders view fluctuations with income as a bad thing, not all do. In fact, more and more lenders are offering deals to contractors than ever before. Working as a contractor is also becoming a popular option when compared to traditional employment.
This article will explain how you can get a mortgage if you’re a:
- Self-employed contractor
- Contractor who recently became self-employed
- Contractor working through an agency
- Fixed-term contractor with a history of other contracts
- Contractor of umbrella companies
- Professional contractor (accountant, medical/legal professional, teacher)
There are also lenders that may consider approving you, even if you’ve been a contractor in the UK for just six months. Every case is unique, so we’ve organised this guide to be as helpful as possible. If you’re still unsure of what to do next, you can always speak to one of our advisors.Enquire Now
Mortgages for self-employed contractors
A self-employed contractor is classed as an individual who is registered as self-employed with the HMRC. Contractors typically pay their own tax and national insurance. Self-employed contractors may 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 or subcontractor, then you’ll need to have work history for at least 12 months. Lenders will then base your affordability on the net income declared in your self-assessment.
You’ve recently become a self-employed contractor
If you don’t quite have one years history, you may still qualify for a mortgage. For instance, you may have been employed by a company but have recently become self-employed. Despite the change, you’ve continued to work for the same company.
In scenarios such as this, lenders may feel as though there’s enough stability for mortgage approval. This is because your lack of self-employed history is justified. This is just one example of where lenders may lend to contractors having less than 12 months of history.
It’s important to note that contractors with at least twelve months of history with future contracted work will have a choice of lenders and mortgage deals. Contractors with less than six months history may still be approved for a mortgage, 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.
Getting a mortgage on a fixed-term contract
If you’re self-employed and have a fixed term or a short-term contract, then getting a mortgage may not be easy. High street lenders don’t often entertain mortgages for applicants that are on fixed-term contracts. This is especially true if the 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 enables lenders an insight into the duration and income involved with the contract. Even if you only have a contract for twelve months, specialist lenders may still approve you a mortgage.
There are some exceptions for new contractors. New contractors will likely be required to have at least six months of history with a pipeline of future work. Renewed contracts can also help satisfy concerns from lenders.
Having a contract with an Umbrella company
If you’re a contractor 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 you have that your income is sustainable. 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 right lenders to approach to avoid being declined.
Working through an agency
A common misconception is that contractors who work through an agency will be unable to get a mortgage. This is untrue. Although it may be difficult, there are lenders that have approved mortgages under these circumstances.
Professional contractor mortgages
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 even without working history. This is related to the specialist skills associated with the profession that the contractor may be in.
Learn more: Mortgages for professionals explained.
How much can contractors borrow for a mortgage?
Lenders have different methods to assess the affordability of contractors. The amount you can borrow will vary. A lot of specialist lenders will usually assess affordability by using the below 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 contracted rate was £250 a day 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 3x your annual income, with others lending up to 4-5x your annual income. In this case, your maximum mortgage amount based on 4x 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 a contractor for. Other assessments will be made on whether your contracts have been renewed, your credit score, monthly outgoings and any other unsecured or secured loans you may have. That’s why there isn’t one answer for everyone.
Find out more: How much can you borrow?
How much deposit does a contractor need?
Usually, we’d recommend contractors to have at least a 10% deposit for a mortgage. The reason being, anything less and the rates start to become unattractive. 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 the period of your mortgage term.
Declined a mortgage as a contractor
Reasons lenders may decline contractors
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. Mortgage applications should also be placed with a suitable lender. If the application hasn’t been placed with the right lender or presented correctly then lenders will be quick to decline.
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. If you’re in a rush to buy a house, you can also ask your mortgage advisor to speak to the estate agent on your behalf. This can minimise the chances of you losing the property to another buyer.
Our advisors can also go through your application and make sure it’s strong enough and placed with the best-suited lender. Not only should an advisor be able to secure you a mortgage, but they should be able to secure the best possible rate available to you.
Contractor mortgages with bad credit
Although possible, it can be difficult to obtain a contractor mortgage with an adverse credit history. We would recommend you to speak to an advisor that specialises in mortgages with bad credit.
Enquirers often assume they 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 been on time since, then lenders may take your recent financial stability into consideration.
All of our advisors specialise in mortgages that may involve adverse credit, as well as mortgages for contractors. Simply make an enquiry to get started.