Getting a mortgage as a contractor isn’t as straightforward as for payroll employees. However, it’s not impossible – and as an experienced contractor mortgage broker, we’re here to walk you through the process and make sure your journey to a mortgage is smooth and stress-free.
Contractors are historically misunderstood by the mortgage sector. There’s a common belief that you’ll need to supply three years’ accounts, for example. That might be true if you go direct to a high street lender – but not necessarily the case if you use a contractor mortgage broker. We know which lenders are more flexible with their lending criteria for contractors and can help you access deals that aren’t available through high street lenders.
More than that, we can help you choose the best income assessment method for your needs. Whether that’s limited company accounts, contract rates, or umbrella company payslips and whether you operate inside or outside IR35. We can even help you use these same methods to apply for a contractor buy to let property, too.
It’s entirely possible to get a mortgage as a contractor with a 10% deposit, less than a year’s contracting history, or irregular income due to breaks in-between contracts. You just need to use an independent contractor mortgage broker (like us!) to help you find the suitable lenders that accept your particular circumstances and structure your mortgage application the right way that ensures a successful outcome.
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Essentially, this is a mortgage secured based on your contract rate, typically your daily rate.
Yes, your income could also be assessed based on your limited company accounts, your tax returns or umbrella payslips, but by using your contract rate, we normally get a higher mortgage amount than by using the other methods.
Read on for further information or contact us for a free initial assessment of your options and see how much you could borrow.
Securing a mortgage as a contractor can be a tricky business, as lenders and customers are historically ill-informed about contractor mortgages.
The common perception of contractor mortgages is that they come with lots of conditions and hurdles to overcome before getting them. While this is undoubtedly true in certain circumstances, in most cases, all we need is your signed contract as proof of income.
For many contractor-friendly lenders, applicants only need to supply some form of identification, bank statements and a copy of their contract to obtain approval, making the process fairly stress free for all involved.
Nonetheless, the criteria vary from lender to lender, so a whole of market expert advice will help make sure that you get the best contractor mortgage deal.
Contractors often find that when they speak to a bank or building society, the lender’s advisor asks them for 3 years limited company accounts or 2 years of contracting history. It doesn’t have to be this way.
Even a few years ago, there were only a handful of lenders who had specific contractor mortgage criteria. Everyone else just assessed contractors based on their self-employed lending criteria. This situation, however, has drastically changed during the last few years, as more lenders introduced contractor lending criteria and there are now dozens of lenders to choose from.
Yet, if you are thinking of going directly to a bank, you may find it hard to get your mortgage approved based on your contract’s daily rate. On the other hand, we offer independent contractor mortgage advice and can even negotiate criteria exceptions from both high-street and non-high street lenders in certain situations.
An often-overlooked fact is that contractors stand more of a chance of securing their desired mortgage than anyone else.
This is because lenders can assess your contractor income based on your contractor daily rate, your limited company accounts or umbrella company payslips. This ultimately gives you more mortgage options and flexibility in securing the best mortgage deal.
Based on the contract rate
This option is what sets contractors apart. Lenders with contractor lending criteria would use the annualised hourly or daily rate as a basis for calculating how much contractors can borrow. For example:
- hourly rate x 37.5 hours per week x 46 or 48 weeks or
- daily rate x 5 days x 46 or 48 weeks
These calculations may be personalised based on the hours or days worked per week, but they also allow for holidays, short breaks between contracts and even the break around Christmas.
Some lenders would use a slightly different income calculation, so we check your maximum borrowing based on each lender’s specific criteria.
Based on Ltd company director income
Most contractors work through their limited company, so lenders can assess your maximum mortgage based on a combination of salary + dividends or profit + salary. This option is available to any limited company director, not just contractors.
Based on umbrella company payslips
Alternatively, if you get paid through an umbrella company and receive payslips with tax and national insurance deductions, then lenders will normally assess your income just like an employee’s salary, i.e. based on the payslips.
Applying our experience and knowledge, we check which income calculation method gives the required mortgage amount, so we can recommend the best mortgage deals to you. What’s more, we have the expertise to structure your application as appropriate to secure the best mortgage based on your contractor income.
Lenders often have a minimum income requirement for buy to let mortgages, which is typically around £20k-£30k.
When applying for a buy to let mortgage, contractors have the same advantage of being able to use different income assessment methods the way they do for residential mortgages.
Though lenders will primarily use the rental income to calculate how much buy to let mortgage you can get, your personal situation will also be assessed.
For example, the rental stress test may be based on whether you are a basic or higher rate tax-payer. In this case, it may come handy, if you only draw salary + dividends within the basic rate tax threshold.
Still, sometimes the rent is not enough by itself to achieve the required mortgage amount. If so, some lenders allow for earned income to be used to secure a higher mortgage amount and contractors can either use their limited company income or the contractor daily rate as income.
Building on our experience, we offer specialist contractor mortgage advice, including buy to let mortgages for contractors.
Contractors often find that they have a significant amount accumulated in their limited company. If you are considering your investment options, buy to let could be one of them.
Most lenders would prefer (or even require) that the limited company you use for purchasing and holding a buy to let property is specifically set up for dealing with investment properties. Having said this, some lenders accept the same limited company that you use for your normal (non-property related) business.
In addition, as a director of the Ltd company, lenders will ask for a personal guarantee from you, so your income will be important just as it is for a mortgage in your name.
Having a bad credit history can make it more difficult or even jeopardise your plans to get a mortgage. However, there are specialist lenders who accept contractors with poor credit history and even assess your income based on your contract rate. Their mortgage lending criteria allow for defaults, CCJs or even missed mortgage payments, but be prepared for higher interest rates than what you could get without past or current credit issues.
As we’ve already discussed above, you are at an advantage as a contractor, as lenders can assess your income in several different ways.
Likewise, as a first-time buyer, you can choose from several purchasing schemes and even enjoy a reduced stamp duty liability. You could even buy a buy to let property as a first-time buyer contractor, there are lenders who would accept you.
Combining the two (being a contractor and a first-time buyer) means the world is your oyster and lenders will be happy to have you as a customer. Subject to terms and conditions, of course, which is why we are here to help you to get the best mortgage deal.
- Less than a year of contracting history
- 5-10% deposit
- Less than a month remaining on the current contract
- A few months break between contracts within the last year
- An offset facility
If you buy a house, then building insurance will be mandatory to ensure that in case the structure is damaged (e.g. by fire, flood or movement), the insurance will cover at least the mortgage amount.
Nothing else is compulsory, but of course, it makes sense to cover costly unexpected events.
Contents insurance can pay for replacing your personal belongings if someone burgles your home, there is fire, you accidentally drop your new flat screen TV…and the list goes on.
If you’re planning to rent out your property then you should consider getting landlord insurance. Landlord insurance protects you as a landlord from risks associated with your rental property. It usually includes buildings and contents insurance, but can also include rental-property specific covers such as protection against loss of rent, and tenant default. It can also cover legal fees and compensation for damage or injury to the tenant due to the property.
Life insurance is a one-off payment if you were to die during the mortgage term, so the insurance can settle your mortgage. This would allow your family to stay in the property without worrying about mortgage payments at an already stressful time.
Critical illness cover
Critical illness cover would give you a lump-sum if you had a serious illness like cancer, heart attack or stroke as well as dozens of other conditions. This payment may or may not settle the mortgage, but it can help pay for treatment, let you take time off work while recovering or alter your home, if necessary.
Because you are self-employed, you wouldn’t have insurance through work, so it makes sense to look at your options. With a classic example, you are the hen laying the golden eggs, so if you fall ill, there may be no one to provide for you and your family.
Out of the options available, perhaps income protection is the most important one for self-employed people. It is designed to give you a monthly income for some time in case you can’t work due to an accident or illness for a long time. This covers mental health issues as well.
Of course, all the insurances come with terms and conditions, optional features and your medical history can influence your options.
To find the right insurance cover that fits within your budget, speak to our team today. We can compare the whole market, find the most suitable cover and apply on your behalf free of charge.
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