Contractor Mortgages - The Essential Guide

Learn about eligibility criteria for contractors, how your income is assessed for affordability and much more.

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Graham Cox - Founder & Cemap Mortgage Advisor |
Graham Cox
Director & CeMAP Mortgage Advisor

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?

Mortgage lenders will consider a borrower a contractor if they meet both these criteria:

  1. They are not permanently employed
  2. 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.

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How much can a contractor borrow?

Currently, many mortgage providers are prepared to lend to contractors at a loan-to-income ratio of 4.5 x single or joint income.

But it's important to treat the 4.5 multiplier as a guideline only. Every lender uses it's own formula to calculate how much they're prepared to lend. Your income is only one factor.

Ongoing financial commitments will also come into play, along with other criteria such as loan-to-value, location, whether it's a joint or single application etc.

Income is assessed usiong your gross annual revenue, which is typically calculated as 46 weeks x 5 days a week x day rate.

A few lenders allow 48 weeks or 240 days a year). Where the contract restricts to less than 230 or 240 days a year, lenders will use the lower figure.

So, an IT contractor, paid £500 a day, working 4 days a week, would have a gross income of £92,000 (46 x 4 x 500). Subject to affordability assessment, that would potentially allow them to borrow up to £414,000 (4.5 x £92,000).

In fact, for a high earner like our example above, it may be possible to borrow at a higher multiple of 5 or even 5.5 x income, even where income is received in a foreign currency from an overseas employer.

One thing to note: where our IT contractor is considered self-employed because he has a Limited company and pays his own tax, some lenders will still use the above income formula, rather than work off salary and dividends, as is normally the case.

I'm on a zero-hours contract, can I get a mortgage?

Yes, in certain circumstances.  A small number of lenders will consider zero-hours contract mortgage applications.

It's common for mortgage providers to require borrower's to have been employed on the contract for a minimum of 12 months or at least in the same industry for a year. How they verify your income varies from lender to lender. Some will want to see your last 12 months bank statements, others will work off your latest payslip(s) and P60.

Other lenders will accept ZHC income but only where it's not the applicants primary income.  For example, they may want to see proof of a higher income from your pension or second job.

What's the maximum available loan-to-value?

The good news is 95% LTV contractor mortgage deals are possible, subject to qualification.  As ever, the larger your deposit size, the better the mortgage rate you are likely to be offered.  

You'll likely find the very best deals are available to borrowers with a 40% deposit, with the next best rates at 25%.

Leasehold properties are generally considered inferior security for the loan, so will often only lend up to 75-85% on a flat, but 90-95% on a house purchase.

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How do lenders assess affordability for contractors?

Nowadays, a full assessment is made of the borrower's ability to service the mortgage payments of the deal they are applying for.

Long gone are the days where a lender could approve a deal, based solely on the applicant's income. Instead, lenders are now required to assess all your circumstances in the round.

Assessing committed expenditure

Mortgage underwriter's have to consider a range of factors, not just your earnings. Chief amongst these, are your outgoings, especially any committed expenditures.

To ensure you won't be overstretched, any ongoing credit commitments, such as credit card debts, car finance, and unsecured loans, are scrutinised thoroughly.

Accounting for family-related financial commitments

Building societies, banks and other providers must also assess any family related ongoing financial commitments, such as spousal support or child maintenance.  

They also consider whether you have any financial dependents (children or elderly relatives), and if so, how many.

On the positive side, some lenders will allow child benefit payments as income.

Other expenditure items

They'll also look at your other outgoings for:

  • utility bills
  • food
  • mobile phones
  • transport
  • entertainment and dining out
  • insurance premiums

Changing the mortgage market affordability test

Until recently, all mortgage providers were obligated to run a 'stress test' of your ability to afford the monthly mortgage payment, should interest rates rise, to 3% above the lender's Standard Variable Rate (SVR).

This test was brought in as part of the Mortgage Market Review of 2014 in response to the global financial crisis.

However, after consultation with lenders and other stakeholders in the mortgage industry, the Bank of England decided to scrap the requirement as of August 1st 2022

However, loan-to-income (LTI) caps remain in place, which mean only 15% of a lenders loan book can be at a multiple of more than 4.5 x earnings. This will hopefully sure there's no return to the days of irresponsible lending.

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"Brilliant from start to finish. Graham managed to find a main high street lender who offered a brilliant rate. Would highly recommend."

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Can I get a mortgage if I have bad credit?

Yes. It just comes down to how recent and severe the adverse credit is.

Bear in mind that having a poor credit score will limit the range of lenders willing to consider you. And unless the adverse credit is very mild, you may pay a higher mortgage interest rate as well.

Thankfully, SEMH have access to specialist lenders who, under the right conditions, are happy to consider contractor mortgage applications even if the borrower has very bad credit, such as ex-bankruptcy or a settled IVA.

What proof of income will I need?

Documentation varies by lender, the type of contractor you are, and whether you are treated as self-employed or employed for income verification purposes.

For contractors who are directors of a Limited company, lenders usually want to see:

  • Your past two years SA302 Tax Calculations documents (if you've been contracting through your company that long)
  • HMRC Tax Year Overview (TYO) docs for the corresponding years.
  • Your contract.
  • Full HMRC submitted, limited company accounts and/or a signed Accountants certificate for up to 3 years.
  • Business bank statements for at least the past 3 months.

For contractors on payroll or working through an umbrella company:

  • Your P60 and SA302s for the past 2 or 3 years if you have that many.
  • The latest 3 months consecutive payslips/invoices along and bank statements for the corresponding period.
  • The employment contract, either between the employer and the contractor or the umbrella company and contractor.
  • If you submit your self-assessment tax return yourself, you can download the SA302 and Tax Year Overview documents from the HMRC online portal. The SA302 evidences your earnings for the tax year and is verified by the corresponding Tax Year Overview (TYO) document.

For a complete list of the documents required by lenders, visit our mortgage document guide here.

Getting a contractor mortgage quote

Speaking with an independent advisor at SEMH can save you time and hassle finding a contractor mortgage. We can quickly source the most suitable deal from an extensive panel of mainstream, and contractor-friendly niche lenders. Call 0117 205 0655 or take our 90 second quiz here to get a free quote.

Graham Cox

About the author

Graham Cox is the founder of Self Employed Mortgage Hub, the trading name of Hub FS Limited. Based just north of Bristol, SEMH is an independent, whole of market broker and a true specialist in self employed mortgages, helping business owners across the UK find great mortgage deals.

Graham's market commentary and analyis is regularly quoted in the national press and media, including The Guardian, Telegraph, Financial Times, and BBC Bristol.