Contractor Mortgages
Contract work provides you with flexibility, but an aspect that many don’t anticipate is that it can present hurdles when it comes to securing a mortgage. Even if you’re financially stable, demonstrating consistent and reliable income to lenders poses challenges due to fluctuating earnings. Consequently, obtaining a mortgage as a contractor isn't always straightforward.
In this guide we’ll clarify all the details surrounding contractor mortgages, offering you a comprehensive insight so that you can come to an informed decision. We’ll go over:
Can I get a mortgage as a contractor?
Absolutely, securing a mortgage as a contractor is very possible. In fact, contractor mortgages have become increasingly accessible, as many lenders have adapted their criteria to accommodate the growing number of individuals now choosing this employment route.
However, it's important to note that the application process can be more rigorous, with a relatively higher rate of rejections. Despite entailing a potentially higher net income compared to what you’d get from a traditional salary arrangement, lenders exercise marked caution when assessing fluctuating incomes.
What type of contract work do lenders accept?
Contractor classifications vary based on billing methods and payment structures, each affecting how lenders assess mortgage eligibility. Here's a breakdown:
1. Self-employed contractors: Typically, lenders require one tax year's income for qualification, though many mandate three years' worth of SA302s.
2. Fixed-term contractors: Mainstream lenders often seek 6-12 months remaining on fixed contracts. If income is taxed at source, you're considered an employee.
3. Temporary contracts: Classification (self-employed or employed) depends on tax payment method. For umbrella company workers, recent P60, 3 months' payslips, and bank statements are required.
4. Short-term contractors: Some lenders accept short contracts (e.g., 3-6 months) if the total work duration exceeds twelve months. Proof of future contracts strengthens your case.
5. Zero-hours contracts: Lenders require a professional track record, usually a year of consistent work in the field.
6. Agency Workers: Typically, a three-month contract with twelve months of continuous employment is sought. An employer's reference might be necessary.
7. Limited Company: Your application is evaluated based on salaries and dividends from the company. One year's accounts are typically necessary for eligibility.
How much can I borrow as a contractor?
The outcome will vary based on your contractor classification, income level, and the methodology employed by your lender. Some lenders calculate mortgage offers based on the borrower's average income over 2-3 years, while others may use the lowest income figure from that period.
For contractors receiving pay-as-you-earn (PAYE) income, lenders commonly consider their basic salary alongside any bonuses and commissions earned. The lender will then apply an income multiple to determine the maximum loan amount, this generally being between 3-5 times.
On the other hand, self-employed contractors' borrowing capacity is often calculated based on their day rate. Lenders calculate this by multiplying the day rate by the number of days worked per week and then by 48. Subsequently, to ascertain the maximum mortgage eligibility, lenders similarly apply an income multiple ranging between 3-5 times.
You can use our self-employed mortgage calculator to get an idea of how much you could borrow up to today.
Will I need a bigger deposit as a contractor?
While being a contractor doesn't always require a larger mortgage deposit, having a substantial upfront payment improves your chances of securing deals with lower interest rates. Moreover, accumulating a sizable deposit works to mitigate any perceived disadvantages of contractor status in lenders’ eyes.
Can I get a mortgage as a contractor inside IR35?
Getting a mortgage as an IR35 contractor is possible, but your choices might be limited as not all mortgage providers have established criteria for IR35 contractors. Owing to legislative changes and complex company setups, certain umbrella contractors and individuals on fixed-term agreements have faced challenges meeting affordability criteria with many lenders. Having said this, some lenders do consider applicants within IR35.
Can I get a contractor mortgage as a first-time buyer?
Obtaining a mortgage as a first-time buyer can present additional challenges, but it's definitely achievable. There are strategies you can employ to enhance your prospects, including maximising your deposit savings, ensuring a good credit score, and compiling extensive evidence of your earnings as a contractor.
If you want to see how your credit record stands before you apply, you can use our free credit check tool (£14.99 per month after the free 30-day trial). Using it will help you to seek out any possible mistakes or fraudulent activity on your financial profile, so that you can deal with such problems as soon as possible. The trial and subscription can be cancelled at any time.
Can I take out a contractor mortgage with another person?
If you're a contractor purchasing a property jointly with someone who is employed and has been for many years, lenders may view their stable income more favourably, ultimately improving your chances of securing the loan.
In joint mortgage applications, both your and your partner's earnings will be considered. And so, prioritising the employed individual as the first-named borrower on the mortgage might heighten the application's prospects. A viable alternative to this would be to have a guarantor support you.
Can contractors get a buy-to-let mortgage?
Perhaps surprisingly, the nature of your income may matter less if you’re a contractor opting for a buy-to-let mortgage. Reason being, that these mortgages are usually evaluated based on the anticipated rental income of the property, as opposed to your individual earnings.
Be sure to use our buy-to-let mortgage calculator to find out how much you could borrow up to.
How to get a mortgage as a contractor
Securing a contractor mortgage hinges on lenders' verification of your ability to repay the loan, and you can enhance your chances of success by minimising employment gaps, demonstrating consistency, planning contract renewals, and gathering employment evidence. Afterwards, we highly recommend consulting with a specialist mortgage broker who has experience in contractor mortgages.
At The Mortgage Genie, our team of contractor mortgage specialists will guide you through the application process from beginning to end, assisting you in organising the necessary documents, including proof of income and SA302 statements.
Additionally, we’ll help to optimise your credit reports to address any inaccuracies that could impede your application. Our expertise extends to identifying lenders favourably disposed towards contractors, ensuring you get the best possible rates for your mortgage. Contact us today at 01915809890 to get started.
This information is a guide only and should not be relied on as a recommendation or advice that any particular mortgage is suitable for you. All mortgages are subject to the applicant(s) meeting the eligibility criteria of the specific lender. You should make an appointment to receive mortgage advice which will based on your needs and circumstances.