Contractor Mortgages
26/05/2022
(Last Updated: 21/04/2023)
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8 min read
Key Takeaways
- Self-employment has increased in recent years, resulting in greater availability of specialist contractor mortgage products.
- Specialist mortgages take contractors' unique work patterns into account as well as other ways contract work differs from other forms of self employment.
- High street lenders are typically less likely to grant contractors regular mortgages because they look at their modest salary and dividends, rather than considering the tens of £1000s of retained profit in the business, which demonstrates that a contractor can more than afford a mortgage amount they are trying to secure.
- Your approval is considered differently from a normal mortgage. Don't assume you'll get a less favourable interest rate as a contractor.
- The longer you have been trading as a contractor, the easier it will be to get your mortgage application approved.
- Follow our top tips to help your chances of success.
Contractor vs. Self-employed vs. Freelancer?
These terms might be regarded as almost interchangeable, however, for the purposes of this article, we use the term contractor to mean a type of professional self-employment where:
- contracts are likely to be longer term (for example 12 months);
- most often, the person involved has established a limited company for payroll, administrative and taxation purposes; and
- there is no ambiguity about the person being self-employed rather than an employee.
Freelance work tends to be regarded as shorter term, less niche/professional and those carrying it out quite often use what's termed an 'umbrella company' to outsource their payroll, administration and taxation matters.
Both contractors and freelancers come under the broader banner of being self-employed, however getting a mortgage as a contractor works differently from self-employed mortgages; this is explained below.
This article examines:
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Looking for a Specialist Contractor-Friendly Mortgage?
This kind of mortgage requires specialist underwriters and much fewer lenders offer this product. Let our specialist independent mortgage brokers locate the right mortgage for your needs.
- You may not need to have been a contractor very long (even as little as 6 months); and
- Mortgage can be calculated on your contract rate and not your income and dividends (if applicable).
Access to whole of the market – Available Outside of Work Hours – No need for face-to-face meeting with mortgage advisor Terms Apply
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Who are contractors?
As stated above, contractors are a particular grouping within those who are self-employed and are normally regarded as niche/professional, working for reasonably long contracts for clients (months rather than days or hours) and most often arrange their employment affairs by establishing a limited company.
Technically, any self-employed person who works in the manner described might be regarded as a contractor (or call themselves one) but frequently, these workers are from these sectors (this isn't an exhaustive list):
- IT programmers, systems managers, systems administrators and other IT professionals
- Business Analysts
- Engineers
- Telecom consultants
- Management consultants
- Operational risk managers
- Change managers
- Marketing consultants
- Accountants
- Actuaries
- Architects
- Surveyors
- Oil and gas contractors
- Doctors and medical professionals
- Teachers, in particular supply teachers
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Can I get a mortgage with only 1 year of self employment?
Getting a mortgage when self-employed as a sole trader is frequently more challenging than getting one as an employee, because remuneration can be inconsistent and you can find yourself out of work for long periods. This can undermine your lender's confidence in your ability to make regular mortgage repayments, especially within the first 12 months of trading.
It becomes much easier to get a self-employed mortgage after about 3 years, with SA302 accounts to prove it, as lenders can see you have a demonstrable trading history.
Beware
Do not apply for a standard mortgage as a self-employed person, unless you have good reason to think it is still suitable for you. The likelihood is that your application will be denied. Each failed credit application worsens your credit rating, at least for a period, regarding any further applications you make.
Mortgages tailored for contractors are constructed to tackle each of these issues in turn.
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How much can I borrow as a contractor?
Most high street lenders won't have a product for you. Use a specialist mortgage broker to research the specialist underwriters and lenders' products which will best suit your needs.
- Specialist underwriters use your contract rate and your demonstrable retained profit as the basis of your application, instead of calculating your mortgageability based on your salary and dividend drawings.
- The underwriters also take into account the contract/s itself/themselves: if it's clear that you'll be offered a contract on a rolling basis that will stand in your favour and past agreements can also be examined for evidence of continuing employment.
- Your CV can also be factored in: if it's clear that you have specialist skills, which clients and employers have engaged you for previously, this will help your application.
- If you have set up a limited company, you have established an extra layer of credibility in the eyes of a lender because of the costs involved and the requirements, such as auditing and to file accounts annually with Companies House subject to financial penalty.
Contractor rate mortgage affordability calculation example
Let's say your contract terms stated you would be paid £500 per day and you would be working 5 days per week.
So, your weekly wage would be £2,500.
This would then normally be multiplied by 46 or 48 weeks - the calculation works in holidays taken - so let's say 46 weeks, which makes your yearly gross wage 46 x £2,500 = £115,000.
The lender applies its multiple to this figure, perhaps 4 (like a normal residential mortgage), which gives you a possible maximum mortgage of £460,000.
- You'll generally only be considered if you can present a deposit of at least 10% of the value of the property you're buying and sometimes as high as 25%, depending on your circumstances/individual application.
- You'll have to produce, in the normal way, proof of ID and address and at least 3 months' bank statements.
- Your credit rating and history will be examined.
Affordability vs Tax efficiency
One of the biggest perks of self-employment is the opportunity to reduce the tax you have to pay - and you'll do this largely by deducting your business expenses from your gross taxable income. The trouble here is that standard mortgages, classically those granted by high street lenders - including self-employed mortgages - use your income (pay and any dividends) to calculate how large a mortgage you can get. If you're minimising these measures to lower your tax bill, you're also lowering your mortgage potential.
However you structure your self-employment, whether you've invested in setting up a limited company or are purely operating as a sole trader, you'll have plenty of paperwork and you'll most likely have to produce this when applying for a standard mortgage.
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How can you best help your mortgage application?
You should:
have at least 6 months' earning history
although this isn't essential.have at least a 10% deposit
ensure your contract is up-to-date
when you apply and have evidence of past contracts that have been or are likely to be renewed.avoid lengthy breaks between contracts
particularly more than 8 weeks in the last 12 months prior to application.investigate mortgages which allow for additional payments
be realistic about estimating the size of your repayments
have evidence of your expenses and operating costs
approach a specialist independent mortgage broker
as high street lenders often don't cater for this kind of mortgage.consider buying with another person
; buying with someone else who is a full time employee can help.take the normal precautions that you would when thinking of applying for any mortgage
: get a copy of your credit score and history, get any mistakes corrected, put off applying if your credit score is poor, ensure you're on the electoral register etc.
Frequently Asked Questions
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Written by:
Andrew Boast
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Reviewed by:
Caragh Bailey
Caragh is an excellent writer in her own right as well as an accomplished copy editor for both fiction and non-fiction books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey and mortgage related articles.
