Mortgages For Contractors

Compared to traditional employment, contract work offers quite a few advantages. 

These include better compensation, flexibility, and independence. However, on the flip side, getting a mortgage for a contractor can sometimes be more challenging.

Some lenders may not be as flexible with their criteria in such cases as the income is not as consistent as in other types of employment. 

That being said, it is not impossible to find lenders providing mortgages for contractors. But finding a suitable lender is just one step in getting a mortgage. There are many other things to be aware of, and this guide aims to help you learn more about them. So, let’s get started!

Getting A Mortgage As A Contractor

The number of contract or temporary workers in the UK increased from 1.45 million in 2020 to 1.64 million in 2023.

And with more people opting for this form of employment, the number of lenders providing mortgages to contractors is also growing. However, the type of mortgage you get will depend on the nature of your work.

The following types of contractors are eligible for mortgages:

• Professional contractors (teacher, legal, medical, accountant)
• Sub-contractors
• Zero-hour contractors
• Agency workers
• Umbrella company contractors
• Short-term renewable contractors
• Fixed term contractors
• Self-employed contractors

When considering the contractor’s eligibility for a mortgage, a lender usually considers the method of income tax payment. Those paying income tax via self-assessment are usually considered self-employed.

On the other hand, if your tax is paid by an umbrella company you work under, you may be considered employed in most cases.

The amount that can be borrowed may depend on your daily rate or average annual earnings over a specific period. In addition, the lender will consider the income consistency and the period for which you have been working as a contractor. 

Understanding Mortgages For Contractors

Mortgages are available for individuals in temporary employment and are based on contract rates instead of accounts. Not all lenders offer such mortgages because they prefer borrowers who have permanent employment and view this as more sustainable.

In contrast, contractors may face periods of unemployment with no earnings, which means the risk involved is greater and assessing it is more difficult. That said, there are still a few ways lenders can assess whether a contractor is eligible for a loan. 

For example, a lender may use your lowest yearly income from a specific period to determine eligibility. They may also consider your earnings over your most recent 6 or 12 month period, depending on their criteria requirements. 

How Much Can You Borrow As A Contractor?

Ultimately, the amount you can borrow will depend on the lender, as different lenders use different assessment methods. But in most cases, the following method calculates the amount that can be borrowed.

The weekly days worked are multiplied by your contracted day rate to determine the weekly income. This income is multiplied by 48 weeks to determine the yearly income, which is then multiplied by the lender’s loan-to-income calculation. 

Depending on the lender, you may be able to borrow between three and five times your yearly income. Other factors, such as pre-existing loans and credit scores, are also considered when determining the final mortgage amount. 

Lending Criteria For Contractor Mortgages

Lenders generally consider the following factors as criteria when providing a mortgage for contractors:

• The period for which you’ve been working as a contractor
• Any contracts that have been renewed
• Industry you work in
• Remaining period for existing contracts
• Average income

Applying For A Mortgage As A Fixed-Term Contractor

If you work as a fixed-term contractor, finding a lender willing to provide a loan can sometimes be more difficult. This is especially true for short-term contracts, as lenders prefer applicants with at least 6 to 12 months remaining. 

In such situations, specialist lenders can help you out and may even be able to consider your application if the contract is for less than a year.

However, six months of work history will be required for new contractors, along with information regarding potential future contracts. In most cases, a twelve-month history of contracting is required. Renewal of existing contracts can also help in getting approved. 

Contractor Mortgage When Working With An Umbrella Company

Determining whether you can repay the mortgage can be more difficult for the lender if you have a contract with an umbrella company. But for contractors working with a company for more than 12 months or having their contracts renewed regularly, lenders will look at this more favourably.

The difficulty then lies in finding the right lender, for which it is highly recommended to speak to an advisor who can help guide lenders to view your case most favourably and on the best mortgage product for your circumstances.

Mortgages For Self-Employed And Professional Contractors And Agency Workers

For self-employed contractors, lenders usually require the SA302 statements for the last three years to calculate the average income for the period. Alternatively, if there are major fluctuations in the income during the period, they may consider the lowest annual income for assessment. 

If you are a professional contractor, you may need at least 12 months of continuous contract with a minimum remaining six months.

The current contract should be for at least three months for agency workers, and the lender may also require proof of continuous employment over the past 12 months. 

Additionally, some lenders may need a reference from your employer at the agency you are currently working with. 

Getting A Mortgage As A Subcontractor

Lenders assess subcontractors similarly to contractors, so you need to provide proof of at least 12 months of continuous employment. Other eligibility requirements, such as having a good credit score, will also need to be met. 

Contractors participating in the Construction Industry Scheme (CIS) of the government need not rely on self-assessment or their business accounts to provide evidence to the lender. They can in most cases use their payslips from the scheme stating their gross income for the purpose.     

FAQs

1. How much deposit do you need for a mortgage as a contractor?

Ideally, you should have a deposit of at least 10% for any mortgage. Higher deposits will help reduce the interest rates and increase the amount of lenders willing to offer you a mortgage as a contractor.

Some lenders may be able to offer mortgages for contractors with a smaller deposit so if you don’t have a large deposit, then it’s always worth considering speaking to a mortgage advisor who can assess your options. 

2. What documents are required for getting a mortgage as a contractor?

The following documents may be required when applying for a contractor mortgage:

• SA302 tax calculations
• Evidence of day rate and experience
• Invoices/payslips
• Bank statements

3. Can you get a mortgage as a contractor with bad credit?

If you are a contractor with bad credit looking for a mortgage, consider speaking to an advisor specialising in bad credit mortgages. They can help you locate a lender willing to provide a loan.

4. Can contractors under IR35 get a mortgage?

Lenders may be able to offer mortgages for contractors under IR35, which applies to contractors working under a limited company. 

5. How can a contractor increase their chances of getting a mortgage?

A contractor can consider putting down a larger deposit and providing as much evidence as possible to increase their chances of getting a mortgage. Alternatively, they can take the help of a guarantor or get a joint mortgage. 

Final Thoughts

While getting a mortgage as a contractor may not seem easy, it is certainly possible. You just need to find a suitable lender willing to provide a loan with reasonable rates and conditions.

Besides that, focus on ensuring consistency in work and maximising your contracts. 

This and improving your credit score can significantly increase the chances of getting approved for a mortgage. And if you need help, consider consulting an expert on such matters before applying for a loan.

Your home may be repossessed if you do not keep up repayments on your mortgage.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.