At first glance, the eligibility criteria around mortgages for contractors can seem overwhelming.
Business structure, payment methods, employment terms and all the various ways of assessing contract work income come into play.
Our goal, with this jargon-free guide is to provide a clear explanation of contractor mortgages so you have the best chance of success when the mortgage application is submitted.
- 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 mortgage provider has their own lending 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 the criteria lenders use.
For example, some high street lenders may 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 also 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, it all depends on the mortgage provider. But regardless of whether you are classed as a self-employed or employed contractor, the majority of mortgage lenders require one or several of the following:
- A minimum 12 months track record of contracting. A few mortgage lenders can consider day one contractors with relevant industry experience in a previous employed role.
- The current fixed-term contract to have at least 3 months to run. Some banks and building societies require 6 months.
- Evidence your current contract is being renewed, or that you have a new fixed term 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, though a few mortgage lenders use 8 weeks.
- 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.
Did you know?
If you contract via your limited company and are registered for PAYE, your business can take out insurance to protect you from loss of income, should illness or injury prevent you working. And the best part, it's 100% tax deductible!
