• Mortgages for Contractors: Everything You Need to Know

    Written By Rana Last Updated On May 30, 2024

    Mortgages for contractors can be more complex than traditional mortgages. Still, with the right information and guidance, contractors can secure the right mortgage to purchase a house or save money on their remortgages. 

    In this article, you’ll learn the following about mortgages for contractors:

    • Basic understanding of mortgages for contractors 
    • Different types of contractors 
    • Common mortgage challenges for contractors
    • Documents required to prove income by contractors 
    • Best lenders for contractors

    Let’s dive in.

    What are contractor mortgages?

    In the UK, contractor mortgages are specifically tailored for individuals who work on a self-employed basis or through their own limited companies. These mortgages recognise the unique income structure and employment status of contractors.

    Therefore, lenders who offer mortgages for contractors underwrite mortgage applications for contractors based on their unique income structure.

    Although not all lenders accept income solely based on the contract value, those that do often base their lending decisions on either the day rate or the annual value of the contract. 

    They typically offer uniform products regardless of the varied income structures of their applicants. These products are often available to all customers who meet their lending criteria, irrespective of their income source.

    Different types of contractors 

    Here is the list of common types of contractors in the UK: 

    Fixed-term employees: Individuals employed under a fixed-term contract specifying a start and end date for their employment.

    Interim managers/consultants: Experienced professionals hired on a temporary basis to fill a specific role or address a particular need within an organisation.

    Agency contracts: Workers are employed by an agency and assigned to different clients or projects as needed.

    Zero-hour workers: Similar to zero-hour contracts, zero-hour workers have no guaranteed minimum hours of work but are typically on the employer’s payroll and are entitled to certain employment rights.

    Locum workers: Healthcare professionals, such as doctors or nurses, who work temporarily or freelance to cover staff shortages or provide specialised services.

    Contracted-out services: Workers contracted by businesses or organisations to provide specific services or expertise, such as IT contractors or marketing consultants.

    Gig economy workers: Individuals who work freelance or self-employed for companies or platforms providing services such as ride-sharing, food delivery, or online marketplaces.

    CIS contracts: Workers in the construction industry who operate under the Construction Industry Scheme (CIS) are considered contractors. They may work as subcontractors for larger construction firms or directly for clients, and their payments are subject to deductions for tax and National Insurance contributions under the CIS.

    Common mortgage challenges for contractors

    Getting a mortgage as a contractor in the UK presents unique hurdles that differ from those faced by traditional employees.

    Here are the common challenges contractors face when getting a mortgage, in addition to the standard mortgage requirements faced by everyone:

    Proof of income: Unlike salaried employees who have regular payslips, contractors may struggle to provide traditional proof of income, such as tax returns or accounts, especially if they are newly self-employed.

    Day rate vs. annual Income from SA302s: Most contractors prefer to calculate their mortgage affordability based on day rate x 5 x 46/48 weeks, which improves their affordability substantially. However, not all lenders calculate affordability using this annual income method. 

    Contract length: Lenders may require contractors to have contracts extending for a certain duration, typically 12 to 24 months or more, to demonstrate income stability and affordability.

    Irregular income: Contractors often have variable income streams, which can make it challenging to demonstrate a consistent ability to repay a mortgage.

    Limited company structure: Contractors operating through their own limited companies may face additional challenges from some lenders, who may assess the financial health of the company as well as the contractor’s personal income, which often reduces the mortgage amount they can borrow compared to their contract value. 

    Complex documentation: Contractors may need additional documentation to support their mortgage application, such as copies of contracts, invoices, bank statements, CVs and accounts for their limited company.

    Limited employment history: Some lenders may have specific criteria regarding the length and stability of employment history, which could limit the options available to contractors with limited employment history. 

    Foreign currency contracts: Most lenders only accept pound sterling (£) contracts and do not lend where contracts are in other currencies. 

    Not all lenders lend to contractors: While there are specialist lenders who cater to contractors, finding them and understanding their criteria can be challenging without the assistance of a mortgage broker.

    Navigating these challenges often requires careful planning, preparation, and possibly the assistance of specialist mortgage brokers who understand the unique needs of contractors.

    Documents required to prove income by contractors 

    For day rate contractors who are working on a single contract, lenders usually need the following to assess your annual income for mortgage affordability. 

    • Your latest contract
    • 3 Months’ bank statements
    • Payslips/Invoices 
    • Your CV may be required as well to assess your contracting history

    Contractors can be classed as self-employed in certain circumstances, and therefore, documents to prove income will differ. 

    Also, proof of income requirements for the CIS contractors, zero hour contractors and fixed-term contractors are different from the day rate contractors. 

    Best lenders for contractors 

    There are several lenders who provide mortgages to contractors.

    However, to obtain a mortgage from a particular lender, you’ll have to tick many other boxes as well. For example: 

    • Residency 
    • Affordability 
    • Credit score 
    • Acceptable property etc

    Therefore, it is best to speak to your mortgage broker for tailored advice and recommendations on the best lender for you. 

    How to get a mortgage as a contractor

    In my opinion it is best to speak to a mortgage broker with whole of the market access, who can advice you the best lender after getting to know your requirements. 

    Contractor mortgages FAQs

    Can contractors get a mortgage?

    Yes, contractors can indeed get a mortgage. While it may present some challenges compared to traditional employees, many lenders in the UK do offer mortgages to contractors. However, contractors may need additional documentation to support their mortgage application. Working with specialist mortgage brokers who understand the needs of contractors can also facilitate the process of obtaining a mortgage. While it may require some extra effort, contractors can access mortgage options to buy a home.

    Can I do buy-to-let as a contractor?

    Being a contractor does not stop you from getting a BTL mortgage as long as you fulfil all other lending requirements for a BTL mortgage. 

    Can I get a contractor mortgage with bad credit?

    Depending on the type of bad credit, there are lenders who can consider lending to a contractor with bad credit. 

    How much mortgage can I borrow as a contractor?

    It varies depending on the lender and your personal circumstances such as your age, mortgage term, number of dependents and financial commitments. It is best to speak with your mortgage broker to assess your affordability correctly.  

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