Working as a contractor offers flexibility but it can be difficult when applying for a mortgage. Although you may be financially secure, proving your income to lenders isn’t always easy. This is because your income is likely to be varied which is why mortgages for contractors can be difficult.
Many factors will affect how much a mortgage lender is prepared to lend you to buy your home. There’s no one rule that governs all banks and building societies. Not all lenders are contractor friendly, either. Even if they are, you won’t always find an amenable adviser in branch.
Can I get a mortgage as a contractor?
It’s certainly possible to get a mortgage as a contractor. That being said, your employment will need to be structured in one of the following ways:
- Self-employed
- Sub-contracting
- Agency workers
- You have a fixed term with a history of other contracts
- Working with umbrella companies
- In a professional field (accountant, medical, legal, teacher)
There are also lenders that may consider approving you, even if you’ve been a contractor in the UK for just six months.
What is a contractor mortgage?
A contractor mortgage is for those who don’t have permanent employment. This doesn’t mean to say that contractors don’t have work all year round, but without full-time employment, lenders may decline suitable applicants. This is because lenders prefer applicants to have long-term fixed employment contracts.
Contractors tend to have varied income structures and may even have gaps in their income history. That being said, lenders do have their own unique assessments for assessing contractors.
How much can contractors borrow for a mortgage?
Lenders each use different methods to assess the affordability of contractors. The amount you can borrow will vary depending on the lender you’ve applied with. Nonetheless, lenders will usually assess affordability by using one of the following calculations:
- 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 daily rate was £250 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 three times your annual income. Others may lend up to four or five times your annual income. In this case, your maximum mortgage amount based on four times 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 contracting. Further assessments will be made on whether your contracts have been renewed. Your credit score, monthly outgoings and any other loans you may have will also be taken into consideration.
A contractor mortgage is for those who don’t have permanent employment. This doesn’t mean to say that contractors don’t have work all year round, but without full-time employment, lenders may decline suitable applicants. This is because lenders prefer applicants to have long-term fixed employment contracts.
Contractors tend to have varied income structures and may even have gaps in their income history. That being said, lenders do have their own unique assessments for assessing contractors.
What are the lending criteria for contractors?
Lenders will assess the following factors as criteria for a mortgage:
- The length of time you’ve been contracting for
- Whether you’ve had contracts renewed
- The industry in which you’re working
- The length of time remaining on your current contracts
- Your average income from contractual work
What if I’ve recently become self-employed?
If you don’t quite have one year’s history, it may still be possible to qualify for a mortgage. For instance, if you’ve been employed by a company but have recently become self-employed, you can use income from your previous role to document your earnings. Furthermore, you may be 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, it’s likely you’ll 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.
As each and every case is individually assessed, it’s always best to consult an experienced advisor who specialises in this field. For instance, you may be a freelancer with little or no contract history. As a result, your application will need to be prepared accordingly.
Applying for a mortgage on a fixed-term contract
Getting a mortgage may not be easy if you’re working on a fixed-term or a short-term contract. High street lenders rarely consider applicants that are on fixed-term contracts. This is especially true if your 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 gives lenders an insight into the duration and income involved with your contract. Even if you only have a contract for one year, specialist lenders may still say yes.
If you’re a new contractor, it’s likely that you’ll be required to have at least six months of history with a pipeline of future work. Renewing previous contracts also shows lenders that your income and employment are sustainable for a mortgage.
What if I have a contract with an umbrella company?
If you’re 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 your income is sustainable. 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.
Can I get a mortgage if I work through an agency?
A common misconception is that contractors who work through agencies will be unable to get a mortgage. This is untrue. Although it can be difficult, there are lenders that have approved mortgages under these circumstances.
How much deposit will I need as a contractor?
As a rule of thumb, it’s always advised to have at least a 10% deposit for a mortgage. The reason is, that anything less and the rates can be higher than average. It may be possible for very high earners to be offered a 5% deposit rate (95% LTV).
How much your borrowing will cost you (your mortgage “rate”) is determined primarily by your LTV, the strength of your earnings record, and how long you’re prepared to commit to a fixed interest rate.
Generally, the more deposit you can put down the better. This is because rates tend to be cheaper with larger mortgage deposits.
Declined a mortgage as a contractor
Applicants that have been declined tend to give up and often believe getting a mortgage isn’t possible. Depending on the nature of your work, certain lenders will be better suited than others.
Reasons lenders may decline you
The reason lenders use a restricted approach is that 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 directly, as the application isn’t presented in the best possible way. If your application hasn’t been placed with the right lender or presented correctly then lenders will be quick to say no.
Many freelancers or contract consultants who complete traditional mortgage lender’s affordability assessment end up being categorised as “high risk,” which best-case will mean you’ll be charged a higher percentage rate.
If you complete a full mortgage application and it’s turned down it will be noted on your credit file and will adversely affect your credit score (another good reason to use a broker experienced in sourcing mortgages for contractors).
Some high street lenders such as Halifax, Nationwide and HSBC do offer contractor mortgages. What’s surprising is that they don’t advertise them widely – often their own front-desk staff aren’t aware of their availability.
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. They will be aware of the deals available from high-street lenders, as well as the more than 200 specialist lenders, most of which can only be accessed via brokers
What should you do if you’ve been declined?
Applicants that have been declined tend to give up and often believe getting a mortgage isn’t possible. Depending on the nature of your work, certain lenders will be better suited than others.
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.
We can go through your application and make sure it’s strong enough and with a suitable lender.
Not only should an advisor be able to secure you a mortgage, but they should be able to secure the best possible rates available.
I’m a contractor with bad credit
As a contractor, it’s difficult to get a mortgage with bad credit. We would recommend you speak to one of our advisors as we specialises in mortgages with credit problems.
Homebuyers often assume they’ll 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 since been on time, then lenders may take your recent financial stability into consideration.
All of our advisors specialise in mortgages that involve adverse credit, as well as mortgages for contractors. Simply make an enquiry to get started.
Contact us on 0330 135 8047
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