Contractor Mortgages Explained

While there are a number of benefits to being a contract worker, many worry that their employment status will prevent them from getting a mortgage.

Since the definition of a ‘contractor’ varies from lender to lender, it stands to reason that it can be more difficult, not to mention frustrating, finding relevant, helpful mortgage advice.

Fortunately, we’re on hand to help. This guide covers how being a contractor impacts your mortgage options, typical lender requirements, and useful know-how depending on where you are in your contractor career.

What is a contractor mortgage?

A contractor mortgage is a type of home loan designed specifically for those without permanent employment.

The term ‘contractor’ covers a number of different job types in a wide range of industries. Generally speaking, you will be classed as a contractor in the eyes of mortgage provider if either of the following applies:

• You’re employed but working on a fixed or short-term contract.
• You’re a self-employed person that works through one main company (usually tradespeople).
• You’re self-employed as a sole trader or owner of a limited company.

Some mortgage providers are happy to consider applications from anyone, whereas some may only be willing to lend to specific types of contractors, and others not at all.

If you’re a contract worker, working with a broker is always advisable because they can use their extensive market knowledge to identify the most competitive rates from those lenders most likely to consider you based on your individual circumstances.

Can contractors get mortgages in the UK?

It’s very possible to secure a mortgage in the UK as a contractor, but the options you have available and the most appropriate lenders to approach will be dependent on the nature of your current employment situation.

A contractor can refer to various employment types, including self-employed individuals, fixed-term contractors, umbrella company recruits, zero-hour employees, agency workers and ‘professional’ contractors.

The advice you get will vary depending on what category you fall into, so get in touch to speak to a broker who will take the time to understand your specific circumstances and provide you with practical next-step advice.

How do you buy a house if you’re a contractor?

While some lenders may be more cautious about authorising contractor mortgages due to the associated risk, there are plenty of providers out there who will be happy to consider your application.

For those that are, the process is much the same as it would be for any other mortgage; lenders will assess your application against their eligibility criteria to see if you meet their requirements with regards to income, deposit, credit rating, age, and any other factors they might consider.

For a contractor mortgage, lenders are also likely to take the following into account before reaching a decisions as to your eligibility:

• What type of contractor you are.
• How long you’ve been a contractor for.
• How your income has fluctuated over time.
• Whether you’ve had contracts renewed before.
• How long you have left on your current contract.

How is income assessed on a contractor mortgage?

Affordability assessments can be a slightly more complex process for contract workers because there are a number of additional variables to consider. This is especially true if your earnings fluctuate significantly.

Mortgage providers will ask for evidence of your income over time, and average this out so they’re left with a rough idea of how much you can realistically afford to repay each month.

When working out your average income, most mortgage providers ask for evidence of your earnings for the previous six to 12 months - although some expect two to three years’. This could be problematic if you’re applying for a mortgage early in your contractor career - but there are still options.

If you’ve only been trading for a short period of time, you can ask a broker to only recommend mortgage providers who are happy to accept applicants with less than a year or 18 months’ worth of accounts.

There are also lenders that will arrange a mortgage without any accounts at all. For example, if you’ve only just started out but have secured a 12-month contract with a client, some lenders may be willing to calculate your projected earnings based on this figure. Again, you can ask a broker which lenders are best placed to approach.

How much mortgage can a contractor get?

Once they’ve calculated your average annual income, many mortgage providers use income multiples as a starting point on which to base their lending. The majority will allow you to borrow a multiple of 3.5 - 4.5x your yearly earnings, subject to additional affordability checks.

For example, a contractor taking home an average of £62,000 per annum may be eligible for a £248,000 mortgage from a 4x income multiple lender. But some lenders are more generous than others, and that same applicant could be offered £310,000 from a lender offering 5x income mortgages.

The table below illustrates how much a contractor earning £62,000 a year may be able to borrow depending on different income multiple lending caps:

How much deposit is needed for a contractor mortgage?

For low-risk contract workers, a 10% deposit should be sufficient for a mortgage on a residential property. There are also a number of 5% deposit options you may be eligible for, although many of these lenders have strict eligibility requirements.

If your income fluctuates significantly or you pose any other additional risk (e.g. you have poor credit or want to buy a non-standard construction property), mortgage providers may only consider you if you have a higher deposit, which can help counterbalance the added risk.

No matter the applicant, the higher your deposit the more favourably you’ll be looked at by lenders, and the better rates you’re likely to be offered. You will also own more equity from the start, meaning you’ll probably pay less interest in the long-run.

What other factors can affect my contractor mortgage eligibility?

Aside from the usual eligibility requirements, for contractors specifically one of the most significant factors determining mortgage eligibility is how long you have been trading for and how long is remaining on your current contract.

There are also other variables which can impact which rates you will be offered, what products are most suitable, and whether or not lenders are willing to offer you a deal at all, including:

Your credit history

As contractors are often considered higher risk applicants, getting a mortgage when you have a history of adverse can be difficult - but not necessarily impossible.

Many people are under the impression that a ‘poor’, or even ‘fair’ credit score will prevent them from getting a mortgage, but usually lenders are far more interested in the type of bad credit, the circumstances surrounding it, and how long ago it occurred, than the score itself.

Even if your credit file isn’t perfect, if you have an otherwise strong application, there are likely to be options for you. Our brokers have access to specialist bad credit lenders, and can point you in the direction of those most likely to lend to someone in your position.

Mortgage type

The criteria surrounding interest-only mortgages has tightened, so it can be more tricky to find a willing lender if you already pose a higher risk.

That being said, provided you meet the eligibility criteria and have a plan for repaying the debt in place at the end of the term, there’s no reason you shouldn’t be considered for an interest-only mortgage as a contractor.

How old you are

Many mortgage providers have lending age caps in place to mitigate the risk posed by young or old borrowers.

As a general rule, many lenders impose upper age restrictions for taking out a new mortgage (usually 55 - 60), and another for paying them off (typically 70 - 75), which can impact term length eligibility.

For contractor mortgages specifically, some lenders may also have minimum age requirements. For example, if you’re on a fixed- or short-term contract you may be considered a higher risk applicant and only be eligible for a mortgage if you’re age 25 or over.

But there are a number of mortgage providers who don’t impose lending caps, so if you fall outside of the age parameters and are concerned it could impact your application, speak to a broker and ask to be referred to a specialist lender.

Common myths about contractor mortgages

Don’t believe everything you hear… there are plenty of myths floating about surrounding contractor mortgages, and we’ve done our best to bust some of the most common:

Myth 1: As a contractor you will be charged higher interest rates

In most cases, contractors will be able to access the same mortgage rates as everyone else. Lenders may charge higher rates for various reasons, but being a contractor is unlikely to be one of them.

Furthermore, you may well be able to earn more as a contractor than a permanent employee, and put forward a larger deposit. This could mean that the loan-to-value (LTV) ratio is lower, potentially resulting in more competitive interest rates.

Credit rating is another factor that can affect the interest rates available. Many contractors have strong credit ratings due to a combination of higher earnings and a good history of previous credit usage. Having a good credit rating, regardless as to your employment status, may also give you access to more attractive interest rates.

Myth 2: Contractors need years of accounts to get a mortgage

It is true that some lenders provide better options for contractor mortgages than others. However, there are many providers who are sympathetic to mortgage applications from contractors and won’t insist on at least three years of accounts being available.

There are also lenders on the market that will arrange a mortgage without any accounts at all, instead basing an agreement on a contract itself.

Our brokers have excellent knowledge as to which lenders will be most appropriate and the qualifying criteria. They can work with you to ensure that your application is made to the most appropriate lender for your personal financial position and needs.

Myth 3: Contractors need to save larger deposits

You may have heard that contractors will be asked to put down much larger deposits than permanently employed applicants. Some contractors are under the impression that they will need as much as a 40%, or even 50% deposit in order to be able to qualify.

The reality is that, when it comes to deposit requirements, mortgages offered to contractors are offered on the same basis as mortgages for those permanently employed.

If a mortgage deal requires a 5% deposit for an applicant that is permanently employed, it will only require a 5% deposit for a contractor making an application for the same mortgage deal.

Of course, the larger the deposit you have, the more likely it is that you will have access to better deals as the LTV ratio is lower, but this applies to all applicants.

Myth 4: Contractors are considered higher risk

Many lenders are open to accepting applications from contractors, and those that do understand that contractors are no higher risk than permanently employed staff.

If you have a good credit rating and meet the deposit and affordability requirements, you are likely to be considered a ‘normal’ or even low risk applicant.

If you don’t have a good credit rating, you may be considered a higher risk, but this will be as a result of your credit status rather than your employment terms.

Myth 5: Applications for contractor mortgages take much longer to be approved

If you fulfil the required criteria, there is no reason why your contractor mortgage should take any longer to be approved than it would for anyone else.

That being said, there will be additional paperwork involved in the process if you’re a contractor - and this is where woring with a broker can save you a great deal of time.

Ask a broker: how can I get a mortgage as a contract employee?

For first-time buyers especially, the prospect of applying for a contractor mortgage can seem quite daunting, but if you go about it the right way it can be a relatively straightforward, hassle-free process.

Having a specialist contract mortgage broker on-side from the offset can be invaluable; not only can they help you get your paperwork in order, they are also best equipped to navigate you through the complexities and challenges faced by contractors in a way mainstream mortgage providers cannot.

And with extensive market knowledge and access, our advisors can scour the thousands of products available to them and handpick the most competitive deals suited to people in your position, with your individual circumstances front of mind.

If you’re keen to get the ball rolling, or you have additional questions you’d like answering, why not get in touch for a free no obligation chat? Give us a call on 02380 980304 or submit an online enquiry.

Contractor mortgage FAQs

We’ve compiled some of the most common mortgage questions we receive from contractors to assist you in your journey to homeownership.

Can I get a contractor mortgage as a limited company borrower?

Yes it’s possible, but if you want to borrow based on your limited company’s dividends or profits, rather than the annual salary you pay yourself, you’ll need to find a specialist lender.

Will I be able to get a joint contract mortgage without a permanent job?

Yes, and depending on the lender you approach, having a second applicant in full-time employment could strengthen your borrowing position.

That being said, you will still need to evidence a reliable pattern of earnings - having an additional person on the terms can only go so far, and you’ll need to be able to demonstrate your combined affordability.

Which banks lend to contractors?

A large number of lenders offer contract-based underwriting, including mainstream banks such as Halifax (who were the first to enable contractors to get a mortgage based on their contract rate), Clydesdale, Metro, Kensington and Virgin Money, as well as Nationwide and Leeds building societies.

If you’re a contractor, you needn’t worry that your options are going to be limited because of your job - there are just as many mortgage products and competitive deals available to you as there are for other applicants.

The only difference is that many banks insist contractors apply through specialist brokers rather than approaching them directly. This is so you’re directed to a trained advisor with specialist knowledge in this niche sector. 

Is it hard to get a mortgage as a contractor?

While it can be slightly more complex when it comes to calculating your income and affordability, provided your paperwork is in order and you meet the eligibility criteria, there’s no reason it should be hard to get a mortgage as a contractor.

Working with a specialist broker not only simplifies the process, they can also point you in the direction of providers most willing to lend, advise you on next steps, and answer any questions you have along the way.

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.