If you work as a contractor, getting a mortgage may seem difficult. There are a few more factors to take into account, but it is most certainly feasible.
In this guide
Contractors are working in greater numbers than ever before. And, why not? It can provide you with the freedom and flexibility to choose your own clients and projects while yet allowing you to devote plenty of time to hobbies and personal responsibilities. You can also make some significant money!
On the other hand, it can introduce uncertainty. Banks may view you as a higher risk due to the irregularity of your income. This can make it more difficult to obtain a mortgage, but it is not impossible!
This Guide contains everything you need to secure a mortgage as a contractor. We’ll go over what you need to know, how to enhance your chances, which lenders to use, and more.
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Can I get a mortgage as a contractor?
Yes, you can acquire a mortgage as a contractor! However, it can be more difficult at times than for someone in a more traditional job.
We think contractors are wonderful. However, not all mortgage lenders agree. They will not take the time to grasp your income. They may even tell you it’s not possible, when it is. That’s because most mortgage lenders prefer persons with steady paychecks from their regular jobs. We do not believe that is fair.
Our Mortgage Experts have extensive expertise getting mortgages for contractors. Make an enquiry to learn more about your possibilities.
Am I classified as a contractor?
Companies frequently hire contractors when they require someone with specialised expertise or to fill a specific position for a set length of time. They are not formally employed by the company for which they work. They do, however, sign a contract with the company that stipulates the tasks they will perform over a set length of time. This means that contractors are not considered workers and hence do not receive employee benefits. However, they can compensate by charging the business significantly greater costs.
What do I need to do to apply for a mortgage as a contractor?
When applying for a mortgage as a contractor, lenders will consider the same requirements as employees. This includes your age, income, and credit score. Lenders may also ask you the following questions to make sure you can afford your monthly payments:
Which type of contractor are you
How long have you been contracting?
Have any past contracts been renewed, or not?
How much experience do you have, and how long have you worked in your field?
How long do you have to remain on your current contract?
How will my income be assessed as a contractor?
As a contractor, your income will be treated differently than an employee’s. But there’s nothing to worry about.
Some lenders will compute your annual income using the day rate you charge. If you’ve recently left employment to work as a contractor, this can be really beneficial, but they may require supporting documentation. This could include your qualifications, proof of previous employment, and any signed contracts. It’s a good idea to prepare these in advance!
Most lenders will calculate your annual income using your day rate, accounting for holidays and other breaks in your employment. They normally presume you work 46-48 weeks each year. This can occasionally work to your advantage, but not always. Especially if you’ve been working as a contractor for a while.
As a result, it may be prudent to consult with a lender who evaluates your income by taking the average of the last two or three years’ earnings. Lenders use this method to calculate how much you can afford to repay each month by adding your earnings from the previous two or three years and dividing by the number of years.
For example, if you made £30,000 one year and £35,000 the following, your two-year average earnings would be £32,500. It’s worth noting that if your earnings have drastically increased or decreased year after year, lenders are unlikely to examine you in this way.
In other situations, lenders may use your lowest-earning year or most recent year as an indicator of how much you make. That’s why it’s better to work with a flexible lender who understands your specific position.
How much can I borrow as a contractor?
As a contractor, determining how much you may borrow might be overwhelming. Your income may change from month to month. However, this does not necessarily matter. Often, the amount you can borrow will not differ significantly from what a full-time employed applicant can borrow.
Lenders will generally do an affordability check to see how much they can lend you. As a contractor, this is at least three times what you earn every year. However, some mortgage lenders may allow you to borrow up to four and a half times your income.
To achieve the greatest results, you’ll need to show lenders proof of your wages for at least the previous six months. However, they can request two or three years’ worth. This can be difficult if you’ve recently started working as a contractor, but you still have choices.
Specialist mortgage brokers can assist you in finding a contractor-friendly lender to get you accepted for a mortgage depending on the conditions of your current contract or day-rate.
Mortgage lenders may also consider additional affordability factors such as your deposit amount, any previous financial obligations (including debt repayments and fixed outgoings), and your credit history. They apply this criteria to both employed and freelancing applicants.
What deposit will I need as a contractor?
The amount of deposit required will vary depending on your specific situation and different mortgage companies. However, keep in mind that the more money you put down as a deposit, the more of the home you’ll own right away, and the cheaper your mortgage will be.
Mortgage lenders use their own criteria to determine how risky it would be to lend money to you. However, the situation for contractors is similar to that of full-time employees. For a normal home mortgage, most lenders will want at least a 10% deposit.
The amount you can borrow is determined not only by your loan-to-value ratio, but also by your earnings history and how long you wish to commit to a fixed-interest rate. You may be able to borrow more if you commit to a lengthier fixed interest rate because the lender will be confident in your ability to return a predetermined monthly amount on a regular basis.
Can I get a mortgage on a zero hours contract?
More people than ever before work on zero-hour or casual contracts. These are contracts in which the company does not guarantee the contractor any hours of work. This may make acquiring a mortgage more complicated. But it is surely not impossible.
Most mortgage lenders, particularly high-street banks, expect contractors to work full-time hours. They want an assurance that you will have a consistent stream of revenue to cover your monthly payments. However, this perception is evolving. With the rise of zero-hour contracts, there are now more lenders than ever who specialise in this area, including specialist zero-hour contract mortgages. This implies that with the correct approach, your prospects of acquiring a mortgage are better than they have ever been.
Showing lenders that you are a ‘low risk’ borrower is an important aspect of getting any mortgage. We know this is difficult as a zero-hour contractor, but here are some tips:
Offer a larger deposit: A larger deposit implies less risk.
Show them your entire employment history. You may have worked for the same company or sector for several years. This can show lenders that your job is secure and expected to continue.
Show lenders your earnings: Just because you’re on a zero-hour contract doesn’t mean you’re not making decent money. You might also have some savings in the bank. This is your chance to demonstrate to lenders that you are a responsible saver who can afford to repay the loan.
Can I get a joint mortgage as a contractor?
Being a contractor should not prevent you from obtaining a shared mortgage. But knowing what to look for can help speed up the process.
If you’re a contractor seeking for a combined mortgage, lenders might be more ready to lend if your partner, family member, or friend works full-time. Changes in your income level are less crucial if you’re buying alongside someone else, but you must still demonstrate some stability in your earnings. If you are unable to do so, you can still seek a guarantor mortgage.
For guarantor mortgages, you can ask a parent or family member to guarantee your mortgage against their own house. This means that your chances of being approved for a mortgage will increase. You could be able to borrow more than you would on your own and perhaps qualify for cheaper interest rates. Discover more about guarantor mortgages in our guide, Guarantor Mortgages Explained.
How can I boost my chances of getting a mortgage as a contractor?
Obtaining a mortgage as a contractor can be more difficult than if you were hired. But it is still conceivable.Here are some simple strategies to boost your chances of getting accepted:
Offer a greater deposit to reduce risk for lenders.
Before submitting an application, assess your credit score to determine if it needs improvement.
Gather as much information as possible to demonstrate your earnings in the last few years. This should include your invoices, bank statements, and other accounts.
Consider obtaining a combined mortgage or utilising a guarantor.
If you are the Director of a Limited Company, you must provide your full business accounts and balance books.
Provide documentation for your current and previous contracts, as well as qualifications and experience.
Try to limit your time off in the lead-up to purchasing a home. If you have been out of a job for more than eight weeks in a 12-month period, lenders may consider it a red signal.
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What is a contractor mortgage and how does it differ from a traditional mortgage?
A contractor mortgage is intended for self-employed people who work on a contractual basis. Unlike normal mortgages, which may require traditional employment evidence, contractor mortgages use your contract income to determine loan eligibility.
How do lenders evaluate contractors' eligibility for a mortgage?
Lenders often evaluate contractors based on contract rate, contract term, and industry experience. They may want a history of contracts, evidence of revenue, and information about the nature of your business. Each lender's requirements may differ, so it's critical to engage with someone who understands contractor-specific factors.
How does the IR35 regulation affect contractor mortgages?
The IR35 Act, which is intended to deter tax evasion, can alter how lenders evaluate contractor mortgages. Lenders may look into your job status under IR35 to establish the stability of your income. It is critical to understand how IR35 applies to your contracting arrangement and to effectively convey this with prospective lenders.
What documentation is required for remortgaging?
Proof of income, bank statements, mortgage details, identity documents, and property information are commonly necessary documents. Having these ready can make the remortgaging process go more smoothly.
