Getting a mortgage as a contractor is a little different than getting one as an employee, and often a little more complex. Let’s take a look at the process.
Being a contract worker has its benefits, but it’s not the clearest type of employment to work with when applying for a mortgage. This is partly because the definition of a contractor can vary from lender to lender.
Thankfully, by working with the right lender and preparing the right paperwork, it’s easy to get a contractor mortgage. Here’s all you need to know about securing a mortgage as a contractor.
What is a contractor?
You’re considered a contractor if:
- You’re self-employed as a sole trader or owner of a limited company
- You’re employed but working with a company on a fixed or short-term contract
- Your rate of pay has been agreed for the length of the contract
- You’re self employed and working through one main company (usually tradespeople)
Agency workers or people on zero-hour contracts also often count as contractors.
The key point is that you’re working on one contract at a time. If you’re self-employed and working with several clients at once, you’re more likely to be considered a freelancer.
Some lenders will consider applications from any type of contractor, but others might only consider specific types of contractors. A specialist mortgage broker can help you find a lender that will consider your type of employment.
Can I get a mortgage as a contractor?
Yes, you can absolutely get a mortgage as a contractor – you just have to jump through a few more hoops.
The first hoop to jump through is your affordability. Salaried people only have to show three months’ worth of statements, but lenders ask for a bit more from contractors – often two to three years of accounts. This is because the nature of contract work – the fact that there are end dates to your contracts – makes you a little riskier in the eyes of the lender, so they need extra proof that you would be able to meet your mortgage repayments.
The type of mortgage you can get and how easy it’ll be to secure will boil down to what type of contractor you are and which lender you’re considering.
How to prove your income as a contractor
The first step to reassuring lenders that you can meet your repayments is proving your income. Here are the best ways to do it:
- Two or three years of accounts. Especially if done by a chartered accountant – lenders like this!
- Self-assessment tax calculations, plus your tax year overview for each of those years.
If you’re the owner of a limited company, you might also be asked for evidence of your dividend payments. You may also be asked for proof of upcoming contracts if your current one is coming to an end.
If you don’t have two or three years of accounts to offer because you’ve not been trading for that long, don’t panic. There are lenders who will consider applicants with less than a year’s worth of accounts and your mortgage broker can find them for you.
And if you don’t have any accounts at all, but you have secured a 12-month contract, you might be able to find a client who will consider your application by calculating your projected earnings based on this contract.
What documents do I need to provide for a contract mortgage?
The next hoop to jump through to secure a mortgage as a contractor is the extra documentation you’ll be asked for. Aside from the usual proof of ID, proof of address and three months of utility bills, make sure you can provide the following:
- A copy of your current contract
The lender will need to see the terms, fees, end date, and scope for renewal.
- A copy of your CV
This is to demonstrate your recent employment history and experience in your field of work.
- Three to six months of bank statements
This is to prove you are in fact earning what your contract says you are.
You’ll then also need to show your outgoings – how much you spend on daily expenses and bills. This will involve things like childcare costs, travel costs, any loan or credit card repayments, and general living expenses.
How much can I borrow as a contractor?
How much you can borrow on a contract mortgage will depend on your individual circumstances. The lender will do an affordability assessment based on the value of the property you want to buy and the information you’ve provided on your income and outgoings. They’ll calculate an average annual income, and then usually let you borrow up to 4.5 times that amount.
How much deposit do I need for a contractor mortgage?
If you’re a contractor with a fairly stable income, you’re seen as low risk and you should be able to secure a residential mortgage with a 10% deposit. There are even lenders who will consider a 5% deposit but be prepared for stricter eligibility requirements for this.
If your contractor income is prone to fluctuation or you have poor credit, you’re likely to need a larger deposit to be considered by lenders. It’s worth remembering that, like with any mortgage, the higher the deposit you can put together, the better deals you open yourself up to.
Tips for getting a contractor mortgage
There are a few things you can do to increase your chances of being approved for a mortgage as a contractor, and they’re all to do with lowering the risk of lending to you.
Putting down a bigger depositThere’s another reason you should consider a bigger deposit if you have the means. Having a larger deposit lowers your loan-to-value (LTV) which reduces your risk in the eyes of the lender.
A good credit scoreHaving a good credit score shows that you’re responsible with your money and have a good track record of borrowing and repaying.
Regular contractsHaving regular contracts without long breaks between them will show a steady, reliable income. Having gaps in your income could be seen as a risk of missing payments and will have impacted your credit score. So try and keep the breaks between contracts to a maximum of eight weeks.
At The Mortgage Hut, we have a team of experts specialised in helping contractors secure mortgages. We’re connected with an array of lenders willing to consider contract workers, whether you have a 5% deposit or a 25% deposit. Get started by speaking to a member of our team who can help you put forward an application that will present you in the best possible light.
FAQs
Can I get a mortgage as a day rate contractor?
Yes, you can. This will depend on your lender as some lenders are happy to calculate an annual income based on your day rate. It’s usually done by multiplying your contract rate by the average number of days you work per week and multiplying this total by the number of weeks you expect to work throughout the year.
Which banks lend to contractors?
There are many banks that lend to contractors, including high street banks. Being a contract worker doesn’t mean you have limited options, you actually have the same options as everyone else. The only difference is that you might have to go through a specialist broker to find them. The Mortgage Hut can help you do that.
Is it hard to get a mortgage as a contractor?
There are a few more things to prove when applying for a mortgage, but there’s no reason it should be any harder to get a mortgage than it is for a salaried person. If you work with a specialist mortgage broker who can help you prepare all the necessary paperwork, you should have no problems in getting a contractor mortgage.
How can I strengthen my position as a contractor?
There are several things you can do to strengthen your position from a potential lender’s perspective. Their stance on lending is always about the potential risk; if you can reduce that risk, you will be a more attractive proposition.Here are a few tips to help you be in with the best chance of securing a favourable contractor mortgage deal:
- Prepare as much evidence of your earnings (bank statements, invoice, tax returns, etc) as possible, up to a maximum of three years.
- Save as much deposit as you can - the higher your deposit, the stronger your application and the better rates you can expect.
- Use checkmyfile or a similar tool to view your credit file and take steps to improve your credit score before applying.
- Ask a broker to find a mortgage provider that specialises in contractor mortgages.