Are you a self-employed contractor wondering if your employment contract will impact the mortgage options available to you? Well, the good news is most mortgage lenders offer mortgages to contractors, however, there are important factors to take into account, and each lender will have varying criteria.
Certain specialist mortgage lenders assess affordability for contractors based on gross contract value, not just self-employed earnings, leading to more favourable results. Factors like contract length, level of experience, tax status, future contracts and credit history can affect your eligibility.
In this guide, we will discuss everything you need to consider when trying to find a contractor mortgage.
Working with a specialist broker can really help you find the best deals for your circumstances. At Strive Mortgages, we specialise in helping secure mortgages for contractors and have successfully placed hundreds of applications for applicants. To arrange a callback, please get in touch.
What is a contractor mortgage?
A contractor mortgage is a type of loan for an applicant who is not permanently employed. They may be employed on fixed-term contracts, working through an umbrella company, as a sole trader or through their own limited company.
There are no mortgages designed specifically for contractors, so when we talk about a ‘contractor mortgage,’ we refer to the criteria of specialist mortgage lenders who understand the nuances of applying for a mortgage as a self-employed contractor. The good news is most mortgage lenders will consider lending to contractors. However, the way they assess your income is different and can dramatically impact the amount you can borrow.
How is income assessed?
For a standard mortgage, affordability is assessed on net income to ensure the applicant can comfortably make the mortgage payments. When it comes to a contractor mortgage, there are two main ways lenders assess the applicant: either as self-employed or as a PAYE employee. This varies depending on several factors, including employment status, how income tax is paid and the lender’s eligibility criteria.
Using a specialist lender that treats you as employed and accepts the gross annual income before expenses are deducted can make a huge positive impact on your mortgage application. This is because most businesses are set up to be as tax-efficient as possible and offset allowable expenses to reduce their tax liability. This means you may pay less income tax. However, deductible expenses reduce your net profit and, in turn, the amount you can borrow for a mortgage.
Gross Contract Value Mortgages
This is where a mortgage lender applies the method of using your gross income from your latest contract.
For example, an applicant working five days a week on a day rate of £400 per day would be calculated as follows.
- £400 x 5 days per week x 52 weeks of the year = £104,000.
Some lenders may deduct 4 weeks’ holiday and base their calculations on 48 weeks.
Self Employed Mortgages
A self-employed mortgage applicant is usually subject to more stringent criteria than a PAYE employee.
Lenders require proof of regular income and usually take an average of the applicant’s income over the past two or three years. This is either the total salary and dividend payments taken, the business’s net profits, or in some cases, retained profits.
In the scenario above, an applicant with annualised earnings of £104,000 might opt to receive a lower combination of salary and dividends for tax efficiency, e.g. below £50,000 to stay within the higher-rate tax threshold. While some lenders may only consider the personal drawings of £50,000 for affordability, specialist lenders using gross contract value can lend significantly more.
For example, with a 5x income multiple, one lender might offer £520,000 via gross contract value, while another using self-employed earnings offers only £250,000 – more than double!
Does the length of the contract matter?
Yes, the length of the contract does play a part in determining which lenders will consider your application. Some lenders have a minimum requirement of a 6-month contract, while others have no minimum requirement.
There may be less focus on the length of the contract length for certain applicants with a proven track record in their field or for those in certain professions.
Some lenders do not impose contract length requirements for applicants who earn a certain income level, such as Halifax, which has no minimum contract length requirements for IT contractors earning £500 a day or more.
How much can I borrow?
This depends on several factors, including the mortgage company’s criteria, your income, the loan-to-value percentage and your credit rating. Most lenders generally offer around 4.5- 5 times income, although this varies significantly, and the lender’s assessment of your income is equally as important as the income multiples applied.
A typical assessment for a contract value-based applicant may look like this:
- day rate x days worked x 52 weeks (+ 4 weeks for holiday) x income multiplier.
- £400/day x 5 days x 52 weeks = £104,000 x 5 = £520,000
How can I improve my chances of getting a mortgage?
There are several ways to improve your chances of securing a mortgage as a contractor. Here are a few.
Contract length: Applying when you have a reasonable period left on your contract can improve your mortgage eligibility. Six months remaining is ideal but not essential.
Future contracts lined up: Having contracts lined up for future work is beneficial, particularly if your current contract is short-term.
Deposit: Having a larger deposit can broaden your choices and potentially unlock lower interest rates.
Record keeping: Keeping tax affairs in order and ensuring all tax and National Insurance contributions are up to date will reduce the likelihood of encountering issues with your application.
Credit score: A good credit rating is important as there are fewer lenders that will accept both contracting income and adverse credit issues.
Work with a specialist mortgage broker: Working with a mortgage broker specialising in mortgages for contract workers will significantly increase your likelihood of success. The team at Strive Mortgages works with a wide range of mortgage providers that offer favourable deals to self-employed mortgage applicants. We can help you save valuable time by presenting the options available to you.
What mortgage rates can I get?
The mortgage deals available to contractors are the same as anyone else; it’s the lending criteria that differ. Therefore, as long as you meet the lender’s eligibility criteria, you will have access to the same mortgage interest rates.
What documents do I need?
The documents required depend on whether you’re applying for a self-employed mortgage or a contractor mortgage and whether you’re a sole trader or a company director.
Here are some of the documents you may need to provide:
- Proof of ID and address
- 3 months bank statements
- Current contract
- Previous contracts
- CV evidencing your employment history
- Proof of deposit
For applicants treated as self-employed:
- 2 years of company accounts (if you’re the director of a limited company)
- 2 years of tax calculations and corresponding tax year overview
- Latest 2 years’ self-assessment tax return
- 3 months business bank statements
Get in touch with Strive to find a contractor mortgage today
Working with a mortgage broker that specialises in contractor mortgages can help you to navigate the criteria of specialist lenders and give you the best chance of success with your application.
Strive Mortgages is a team of highly experienced mortgage brokers, and we have arranged hundreds of self-employed contractor mortgages. We would love to hear from you if you’re thinking about getting a mortgage.
Frequently asked questions about getting a mortgage as a self-employed contractor
Yes, buy-to-let mortgages are available to contractors looking to purchase an investment property. Most mortgage providers require a minimum £25,000 net income.
Some buy-to-let lenders use the applicant’s average income from their self-employed earnings, while other lenders treat them as an employee. Some do not require proof of income at all.
Yes, it’s possible for umbrella company contractors to get a mortgage. There are several mainstream lenders and specialist lenders offering mortgages to self-employed people employed within an umbrella company framework.
While it will certainly pose more of a challenge, it’s certainly possible to get a mortgage with bad credit. However, it does reduce the pool of lenders and will likely result in higher interest rates.