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Mortgages for Contractors
Ian Symmonds from Easy Street joins the Mortgage & Protection Podcast to talk all about mortgages for contractors. Whether you’re buying for the first time, moving, investing or remortgaging we’ve got it all covered.Listen below.
Are there specific mortgages for contractors?
It’s not that there are specific mortgages for contractors, but rather that there are lenders with criteria that can be more favourable for contractors. For example, some lenders may look at your daily rate rather than the salary and dividends or profits from your limited company. This can significantly increase the maximum mortgage amount made available to you.
Ultimately the lender’s mortgage product is the same for contractors as it would be for employees or the self-employed. It’s the criteria and affordability calculations that tend to be the key differences.
Ultimately the lender’s mortgage product is the same for contractors as it would be for employees or the self-employed. It’s the criteria and affordability calculations that tend to be the key differences.
Which lenders offer mortgages to contractors?
I can’t really name specific lenders or rates because these change all the time. But the lenders with favourable criteria for contractors range from prime high street lenders through to specialist lenders, who may consider things like low credit scores or adverse credit.
In between the two, there are niche banks and building societies, so the range of lenders is similar to that for any other borrower. It’s really a case of knowing where to look for the most suitable deals.
In between the two, there are niche banks and building societies, so the range of lenders is similar to that for any other borrower. It’s really a case of knowing where to look for the most suitable deals.
How do contractors get a mortgage?
The process for a contractor is the same as anybody else. They make an application to a lender, which involves a credit check, they provide the documents required and the application is then subject to underwriting and a survey.
The process is the same, but what’s important is that contractors make sure they get the most suitable mortgage for their circumstances.
The process is the same, but what’s important is that contractors make sure they get the most suitable mortgage for their circumstances.
What about contractors who have poor credit or a gap in employment?
If you’re a contractor who’s had a gap in employment, It’s not impossible to get a mortgage but it may be more of a challenge depending on the length of the gap, how many you’ve had in a certain amount of time, and the reason for the gaps. Your contract history can also be important.
In terms of a contractor with bad credit, again this is potentially possible, but will depend on what the issues are. The best thing to do is to get a copy of your full credit report, then speak to a specialist adviser for recommendations about your options.
In terms of a contractor with bad credit, again this is potentially possible, but will depend on what the issues are. The best thing to do is to get a copy of your full credit report, then speak to a specialist adviser for recommendations about your options.
What is the minimum deposit required for a contractor mortgage?
At the moment, the minimum deposit required is five percent. But if you’ve got a 10% or 15% deposit you would have access to more options and potentially better rates and fees.
A key point to consider here is that with a five percent deposit, lenders will generally have a maximum loan amount, which will affect the maximum purchase price. This criteria will vary from lender to lender, so it’s best to do some research or, ideally, speak with a specialist mortgage adviser to explore your options. That’s particularly the case if you’ve got a lower deposit.
A key point to consider here is that with a five percent deposit, lenders will generally have a maximum loan amount, which will affect the maximum purchase price. This criteria will vary from lender to lender, so it’s best to do some research or, ideally, speak with a specialist mortgage adviser to explore your options. That’s particularly the case if you’ve got a lower deposit.
How much can contractors borrow on a mortgage?
This can vary widely, depending on the individual circumstances and the lender. Here’s an example: say you’re a contractor on a daily rate of say £500. You’ve got a limited company and you’ve been paying yourself £50,000 pounds per annum in salary and dividends for the last three years.
A lender who treats you as self-employed would potentially use your salary and dividends as £50,000 in calculating affordability. But a second lender may have special criteria for contractors, where they multiply your daily rate by five to get a weekly amount and then annualise it.
In this example, basing the income on 46 weeks (to allow for annual leave), would actually give you an income of £115,000 – more than double that of the previous lender.
Of course the most important thing is only to make sure that you can afford the mortgage both now and in the future, but you can see the massive difference that lender selection could make to a contractor looking for a mortgage.
A lender who treats you as self-employed would potentially use your salary and dividends as £50,000 in calculating affordability. But a second lender may have special criteria for contractors, where they multiply your daily rate by five to get a weekly amount and then annualise it.
In this example, basing the income on 46 weeks (to allow for annual leave), would actually give you an income of £115,000 – more than double that of the previous lender.
Of course the most important thing is only to make sure that you can afford the mortgage both now and in the future, but you can see the massive difference that lender selection could make to a contractor looking for a mortgage.
How does a Buy to Let contractor mortgage work?
A Buy to Let contractor mortgage is essentially the same as for anybody else. Lenders tend to be more interested in the potential rental income of a property rather than a person’s personal disposable income.
Some lenders have a minimum income requirement, which is usually around £25,000. The rationale behind this is to cover any potential void periods or basic maintenance costs.
But as the minimum income requirement is generally lower than that required for a residential mortgage, it should be more achievable.
Some lenders have a minimum income requirement, which is usually around £25,000. The rationale behind this is to cover any potential void periods or basic maintenance costs.
But as the minimum income requirement is generally lower than that required for a residential mortgage, it should be more achievable.
How is a contractor's income assessed for a mortgage when you're paid a day rate?
This will depend on the lender’s criteria and the person’s contractor status. Different mortgage providers will treat certain contractors as employed, or as self-employed or based on their daily rate. It depends on the individual circumstances and contract types. It’s best to seek specialist advice so that you understand your options.
With regards to being paid a daily rate, there are some lenders that will look at this when calculating affordability – as opposed to the more standard route of payslips for the employed and accounts and tax returns for the self-employed.
What they tend to do is take your daily rate and use it to calculate your annual pre-tax income. There will of course be other considerations such as experience, length of contract and gaps in employment, but this is the basic way that a lender assesses income based on a day rate.
With regards to being paid a daily rate, there are some lenders that will look at this when calculating affordability – as opposed to the more standard route of payslips for the employed and accounts and tax returns for the self-employed.
What they tend to do is take your daily rate and use it to calculate your annual pre-tax income. There will of course be other considerations such as experience, length of contract and gaps in employment, but this is the basic way that a lender assesses income based on a day rate.
How do you strengthen your mortgage application as a contractor?
Get the basics right – which really applies to all borrowers. Check your bank statements to make sure they show you’ve got more coming in than you’ve got going out. Avoid using your overdraft, whether it’s an agreed facility or not. Get a copy of your credit report and see whether any work is required there, and avoid taking out new credit if you can.
Ensure that any existing credit agreements are up to date and, if you’re in a position to, pay some of it off. Make sure you’ve got all your documentation in order.
For contractors, I’d say try and avoid gaps in employment if possible if you’re close to renewal. If you’re thinking of taking a new contract or nearing the end of an existing one, it might be worth speaking to a specialist broker at that point for advice.
Ensure that any existing credit agreements are up to date and, if you’re in a position to, pay some of it off. Make sure you’ve got all your documentation in order.
For contractors, I’d say try and avoid gaps in employment if possible if you’re close to renewal. If you’re thinking of taking a new contract or nearing the end of an existing one, it might be worth speaking to a specialist broker at that point for advice.
How is mortgage affordability assessed for a contractor who has a limited company?
Usually a lender will look at your salary plus dividends, or possibly your salary plus business profits. There are a number of important considerations here, such as how long the company has traded, and whether it’s better to look at the latest year’s accounts or an average over the last two or three years. Are your dividends enough to borrow your target amount, or do we need to look at profits? If it’s profits is that pre-tax or post-tax?
There’s so much to think about here. So to get the best results, seek specialist advice from somebody who really understands the self-employed mortgage and the contractor mortgage space.
There’s so much to think about here. So to get the best results, seek specialist advice from somebody who really understands the self-employed mortgage and the contractor mortgage space.
What about contractors buying with another person?
If a contractor buys with another person, they are each underwritten individually. So if you have a person who’s employed buying with a contractor, the employed person will be assessed using their payslips and P60, whereas the contractor will be assessed using the ways that we’ve already discussed.
It could be that by having two incomes, you could borrow more. But it’s best to seek advice in the first instance so you know exactly what your options are.
It could be that by having two incomes, you could borrow more. But it’s best to seek advice in the first instance so you know exactly what your options are.
What documents does a contractor need?
Standard documents that you will need include identification: that means passport and driving licence and proof of address via a bank statement, credit card statement or council tax bill. You will also need personal bank statements, usually the last three months’ as a minimum. You will potentially need business bank statements as well, where applicable. You will also need proof of deposit if you are buying a property.
For contractors, gather three to 12 months’ pay statements if you’re under an umbrella company or in the construction industry. If you are self-employed you will need company accounts and tax returns.
Make sure you have a copy of your current contract and perhaps a copy of your previous contract. The lender may want to see if it’s been renewed or check for any gaps. Depending on the lender you may need a copy of your CV as well.
For contractors, gather three to 12 months’ pay statements if you’re under an umbrella company or in the construction industry. If you are self-employed you will need company accounts and tax returns.
Make sure you have a copy of your current contract and perhaps a copy of your previous contract. The lender may want to see if it’s been renewed or check for any gaps. Depending on the lender you may need a copy of your CV as well.
How can a mortgage broker help?
Although there are lenders that have specialist contractor criteria, it doesn’t mean that they treat all contractors as equal. For example, under the term ‘contractor’ you could have daily rate contractors, those working under an umbrella company, people in the construction industry or fixed term contractors.
Lenders may treat each of these scenarios completely differently so just make sure you look at the whole of the market. We provide specialist advice to get the mortgage right for you.
Lenders may treat each of these scenarios completely differently so just make sure you look at the whole of the market. We provide specialist advice to get the mortgage right for you.
Contractor Mortgage Bad Credit
Can I get a Contractor mortgage with bad credit?
As contract workers, the thought of finding a mortgage can be daunting, you will need to provide additional paperwork in order to prove your income. If you find yourself with bad credit too you might be wondering if you have a chance of getting a mortgage, the good news is that you can still access mortgage products with bad credit as a Contractor.
More and more lenders are becoming more open and flexible towards Contractors and understanding their position. As a Contractor with bad credit, you should try to improve your credit score as much as you can before approaching a lender. Bad credit scores could lead to higher rates or charging more interest as you are deemed a high-risk borrower.
It is possible to get a mortgage with a poor credit rating and credit issues; however, it is best to have been a Contractor for at least 12 months before approaching a lender with adverse credit. This is so you can provide proof of income and tax paid on these incomes too.
More and more lenders are becoming more open and flexible towards Contractors and understanding their position. As a Contractor with bad credit, you should try to improve your credit score as much as you can before approaching a lender. Bad credit scores could lead to higher rates or charging more interest as you are deemed a high-risk borrower.
It is possible to get a mortgage with a poor credit rating and credit issues; however, it is best to have been a Contractor for at least 12 months before approaching a lender with adverse credit. This is so you can provide proof of income and tax paid on these incomes too.
Why is the deposit amount critical if I have bad credit?
Bad credit could make it slightly more difficult to get a mortgage, however, if you can provide larger deposit lenders are likely to be more flexible. The average deposit is around 10% of the property purchase price, so if you provide a bigger deposit than this then lenders might see less risk.
A mortgage is a big responsibility and you are borrowing a large amount of money, the more money you can put forward to begin with – the better.
A mortgage is a big responsibility and you are borrowing a large amount of money, the more money you can put forward to begin with – the better.
What if I am declined for a Contractor mortgage?
Just because one lender says no doesn’t mean another wouldn’t take you on for a mortgage; you need to ensure you are approaching the correct types of lenders who understand your employment and listen to your credit situation.
You should speak to a Mortgage Broker at Easy Street and see what your options are; they are able to help advise you on the next steps and which lenders you could approach. Lenders will still want to know you can afford the repayments on your mortgage especially if your credit file has marks on too.
You should speak to a Mortgage Broker at Easy Street and see what your options are; they are able to help advise you on the next steps and which lenders you could approach. Lenders will still want to know you can afford the repayments on your mortgage especially if your credit file has marks on too.
How could I improve my chances of getting a Contractor mortgage with bad credit?
There are a number of things you could do to improve your chances of getting accepted for a mortgage. You should begin with sorting out the debts you already owe. You will need to pay them back so it is best to get these on some type of a payment plan in order to boost your credit. Make sure you do not miss repayments and you are aware of when and how much needs to be paid.
As mentioned before, you should try and save up for a bigger deposit. This could mean you get slightly lower rates than someone else with bad credit and only a 10% mortgage deposit. You are trying to show the lender that you can afford the mortgage loan so the bigger the deposit you can provide the more likely they might be to accept your application.
You should check your credit report is accurate and make sure your details are up to date on the Electoral Register. If you see something that doesn’t look right you should contact any of the credit companies you have found your score on, such as Experian, and ask them to amend your credit report.
Make sure you have all the documentation you need alongside your application before approaching a lender, this will include your Tax Overviews and Tax Calculations from HMRC.
You should approach a Mortgage Broker and use them to help you approach specialist lenders to explain your situation. If you apply for mortgages and keep on getting declined, this could also have a negative effect on your credit score too.
As mentioned before, you should try and save up for a bigger deposit. This could mean you get slightly lower rates than someone else with bad credit and only a 10% mortgage deposit. You are trying to show the lender that you can afford the mortgage loan so the bigger the deposit you can provide the more likely they might be to accept your application.
You should check your credit report is accurate and make sure your details are up to date on the Electoral Register. If you see something that doesn’t look right you should contact any of the credit companies you have found your score on, such as Experian, and ask them to amend your credit report.
Make sure you have all the documentation you need alongside your application before approaching a lender, this will include your Tax Overviews and Tax Calculations from HMRC.
You should approach a Mortgage Broker and use them to help you approach specialist lenders to explain your situation. If you apply for mortgages and keep on getting declined, this could also have a negative effect on your credit score too.
Contractor Mortgage Umbrella
What is an Umbrella Mortgage?
The term ‘Umbrella Mortgage’ does not refer to a specific type of mortgage product, however, where Mortgage Lenders will consider income from applicants operating through an Umbrella Company for some of their products, it may be referred to as such, or even an Umbrella Company Mortgage.
Can I get a Mortgage with an Umbrella Company?
Contractors who work through an Umbrella Company can certainly obtain a mortgage. Unlike other contractors, however, you will be classed as employed, not Self-Employed by Mortgage Lenders, due to your salary processing. That being said, it’s still more likely to be specialist lenders who may offer you a mortgage deal.
Mortgage Brokers such as ourselves may be helpful in guiding you towards those lenders who are more able to provide lending options to Umbrella Company employees.
Mortgage Brokers such as ourselves may be helpful in guiding you towards those lenders who are more able to provide lending options to Umbrella Company employees.
What are Limited Company or Umbrella Company Contractor Mortgage Options?
If you are a Limited Company Director, whilst you are considered as an employee of your own company by HMRC, Mortgage Lenders will consider you to be Self-Employed and therefore this is how your mortgage application will be assessed.
Although, arguably, applicants who are employed may benefit from a simpler application process, owning a Limited Company is typically more tax efficient, resulting in a higher overall annual income. As the majority of lenders tend to use your annual salary and dividends in their calculation, this may provide the opportunity to borrow a larger amount.
If you are an Umbrella Company employee, lenders treat your application as they would a PAYE applicant. You should bear in mind, however, that lenders typically will exclusively use the figures your Umbrella Company payslips when calculating your mortgage.
This reduces the administrative burden in terms of what you need to provide as proof of income, however, it could be a hindrance to certain payment structures. For example, where the Umbrella Company pays you a statutory rate as salary and commission or bonus payments do not appear on your payslip, you may not have access to the level of lending that is a true representation of your income.
Although, arguably, applicants who are employed may benefit from a simpler application process, owning a Limited Company is typically more tax efficient, resulting in a higher overall annual income. As the majority of lenders tend to use your annual salary and dividends in their calculation, this may provide the opportunity to borrow a larger amount.
If you are an Umbrella Company employee, lenders treat your application as they would a PAYE applicant. You should bear in mind, however, that lenders typically will exclusively use the figures your Umbrella Company payslips when calculating your mortgage.
This reduces the administrative burden in terms of what you need to provide as proof of income, however, it could be a hindrance to certain payment structures. For example, where the Umbrella Company pays you a statutory rate as salary and commission or bonus payments do not appear on your payslip, you may not have access to the level of lending that is a true representation of your income.
Are Umbrella Companies Affected by IR35?
As your income is treated like a PAYE employee under an Umbrella Company, you are not affected by IR35. Tax and national insurance contributions will already have been taken from your gross income, meaning you are not liable.
How do you Prove Income?
Your Umbrella Company payslips will be required as proof of income to secure a mortgage. At least three months worth of payslips, usually including the most recent three, is typical. Aside from payslips, three months worth of bank statements are also often required by the lender. Their goal is to ensure that you can afford the repayments on your mortgage, so they will take note of outgoings, as well as your income.
If you are contracting as a Limited Company Director, you would need to supply the same proof as other Self-Employed applicants. This may vary slightly between lenders, but standard requirements are your accounts and HMRC tax calculations for the previous two to three years. Although you are potentially a higher earner, this additional level of proof that you need to supply when you apply for a mortgage is to help the lender mitigate some of the risk involved in your probably fluctuating income.
If you are contracting as a Limited Company Director, you would need to supply the same proof as other Self-Employed applicants. This may vary slightly between lenders, but standard requirements are your accounts and HMRC tax calculations for the previous two to three years. Although you are potentially a higher earner, this additional level of proof that you need to supply when you apply for a mortgage is to help the lender mitigate some of the risk involved in your probably fluctuating income.
What is the importance of specialist Contractor Mortgage Advisers?
Those Mortgage Advisers who specialise in offering contractor-friendly mortgages are most likely to understand the complex nature of your employment, which is instrumental in being able to find a lender who will make efficient use of your income.
Here at Easy Street, we are experienced in assisting a wide variety of mortgage applicants, so whether you trade as Limited Company Director or contract through an Umbrella Company contractors, our brokers know where to look to find a competitive deal that suits your circumstances. Our panel of lenders is made up of both high street and independent lenders, offering more scope for an appropriate mortgage option.
Our goal is to save you the time of contacting multiple lenders independently using the latest technology to assess your circumstances and match you with those lenders who are most likely to help you. This could reduce the chance of you approaching lenders who don’t understand the value of your income, and are therefore unable to help you.
Your home may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.
Here at Easy Street, we are experienced in assisting a wide variety of mortgage applicants, so whether you trade as Limited Company Director or contract through an Umbrella Company contractors, our brokers know where to look to find a competitive deal that suits your circumstances. Our panel of lenders is made up of both high street and independent lenders, offering more scope for an appropriate mortgage option.
Our goal is to save you the time of contacting multiple lenders independently using the latest technology to assess your circumstances and match you with those lenders who are most likely to help you. This could reduce the chance of you approaching lenders who don’t understand the value of your income, and are therefore unable to help you.
Your home may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.
First-Time Buyer Contractor Mortgage
Whilst Contractors often earn more than their PAYE counterparts, it may be more difficult to get a mortgage as a Contractor as your income will be perceived as less stable.
An increased number of UK Mortgage Lenders are beginning to offer mortgages to Contract workers, meaning there are more options available now than in previous years.
It’s important to find a Mortgage Lender who will consider your specific form of income, and as a First Time Buyer and a contractor, there are a number of important factors to consider before buying your first home.
Whilst most of these recommendations apply to mortgage applicants generally, in your circumstances, they could be essential in enabling you to secure a mortgage.
- Keep your credit file clean
- Register yourself on the electoral register
- Keep your bank accounts in order
- Get your deposit ready
- Budget all expenses
- Speak to your accountant about SA302s and Tax overviews
- Have a decision in principle or agreement in principle in hand
- Select a trusted solicitor
- Plan your survey
- Plan your move
How do I find the most appropriate mortgage?
A Mortgage Broker may be able help you to find the most appropriate mortgage for your circumstances. They have access to a wide variety of lenders and this allows them to look at many lender criterias against your circumstances at a glance. This means that you would not have to contact each individual lender in order to find mortgage criteria that matches your circumstances.
Using a Mortgage Broker may therefore improve your experience by saving you the time required to contact multiple lenders and offering experienced mortgage advice, which could help you to make a more informed choice.
Using a Mortgage Broker may therefore improve your experience by saving you the time required to contact multiple lenders and offering experienced mortgage advice, which could help you to make a more informed choice.
How will new contractors be assessed?
The way that your income is assessed will depend on both the length of time you’ve been contracting or working in your current industry overall, as well as how you are paid. It’s fairly common for lenders to request evidence of your experience within your industry. This may include a CV, qualifications or evidence of past contracts.
Income is assessed differently by different lenders depending on their own criteria, and also depending on how you are paid. For example:
A contractor working through their own limited liability company
If you’re trading as a Limited Company Director, there are a number of ways that you may be assessed. Some lenders will accept your daily rate, which will be annualised to provide a salary. Another common method is to look at your salary and dividends over a defined period of time, to determine an average annual income. Finally, there are certain lenders who will look at your total income as a limited company alongside your salary.
A contractor working as a Fixed Term contractor (PAYE)
If you work as a Fixed Term Contractor through an umbrella company, your income is likely to be assessed based on your payslip information, much like a traditional PAYE applicant, however, given the short term nature of your contract, lenders will be more cautious and are likely to need additional proof of ongoing availability of work beyond your current Fixed Term Contract.
What documentation will I need?
This is another area where the requirements will vary depending upon your income type. The following types of documentation are likely to be required in most cases:
- Contracts and agreements
- Tax documents
- Signed business accounts
- CV
- Bank statements
- Personal ID and address information
What deposit will I need?
There is no definitive deposit amount that is relevant to Contractors, however, the larger the deposit amount that you are able to offer, the more likely you will be to secure a mortgage. Deposits are used to mitigate some of the risk involved with lending you a large sum of money, and therefore the less stable your mortgage application, the more deposit lenders are likely to require.
How much will I be able to borrow?
egardless of your income type, Mortgage Lenders will carry out an affordability assessment, which will help them to determine how much they are comfortable lending to you.
Your proof of income will be used to consider the amount and stability of your income, which will be weighed against your current outgoings and whatever the repayments on your mortgage would be, to ensure you will be able to afford to repay your mortgage in the long term.
The following are the methods used by lenders to assess the income for contractors:
- Day Rate Assessment
- Company Accounts
- Self-Assessments
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