When we speak to contractors, many are unsure about the mortgage options available to them, how much they can borrow, and how long they need to have been contracting for.
This guide answers those questions, and many more. You'll also come away with a much better understanding of the current mortgage market for contract workers.
- What's the definition of a contractor for mortgage purposes?
- Will I be considered self-employed or employed by mortgage lenders?
- How long do I need to be a contractor for?
- How much can a contractor borrow?
- I'm on a zero-hours contract, can I get a mortgage?
- What's the maximum available loan-to-value?
- How do lenders assess affordability for contractors?
- Can I get a mortgage if I have bad credit?
- What proof of income will I need?
- Getting a contractor mortgage quote
What's the definition of a contractor for mortgage purposes?
Mortgage lenders will consider a borrower a contractor if they meet both these criteria:
- They are not permanently employed
- Their income comes from a fixed-term or temporary contract, usually, but not always, from one employer at a time.
Will I be considered self-employed or employed for mortgage purposes?
It depends. For income verification purposes, a lender can treat a contract worker as self-employed or employed, depending upon circumstances.
Each lender has their own criteria for which employment status they apply.
One common example, is someone working as a sub-contractor under the Construction Industry Scheme (CIS), and who has income tax and NI deducted at source by an Umbrella company. Even though they are a sole trader, they may well be treated as a PAYE employee for lending purposes.
On the other hand, a contractor who receives income into a Limited company, (a.k.a personal services company) and pays their own income tax and national insurance, may be treated as self-employed or employed for affordability, depending on circumstances.
For example, some lenders will consider a contractor as employed once they reach a certain day-rate threshold, typically £500 a day or higher. IT contractors can sometimes be considered on an employed basis regardless of their day-rate.
Of course, it's important to consider the IR35 off-payroll working rules in relation to any contract work you undertake for a client.
How long do I need to be a contractor for?
Again, every lender is different. But regardless of whether you are classed as a self-employed or employed contractor, the majority of mortgage providers require:
- A minimum 12 months history of contracting. A few can consider day one contractors with relevant industry experience.
- Your current contract has at least 3 months to run, or is a minimum 3 months in duration. Some lenders require 6 months.
- Evidence your current contract is being renewed, or that you have a new contract lined up.
- If your current contract has less than 3-6 months to run. Some mortgage providers require evidence you've already renewed your contract at least once.
- Less than 6 weeks gap between contracts in the past year.
- A track record of at least 2 years service in the same line of work/industry. This doesn't necessarily need to be in a contracting role.