Contractor Mortgages Explained

Learn about mortgage eligibility criteria for contractors, including income assessment and how to borrow more using your day rate.

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Graham Cox - Founder & Cemap Mortgage Advisor |
Graham Cox
CeMAP Mortgage & CPSP Specialist Finance Advisor

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?

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 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 circumstances.

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 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:

  • A minimum 12 months track record of contracting. A few mortgage lenders can consider day one contractors with relevant industry experience.
  • 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.

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How much can a contractor borrow?

How much you can borrow as a contractor depends on your income level.

A loan-to-income (LTI) ratio of 4.5 x single or joint income is common, but higher earners (approx £75,000 p.a or more) may be able to borrow at a higher LTI of 5 or even 5.5 times income.

Every mortgage lender has to assess a range of factors and uses it's own formula to calculate the amount you can borrow.

How much you earn is just 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.

The bank or building society will assess your gross annual revenue, which is typically calculated as 46 weeks x the number of days a week you work x your daily rate.

A few lenders allow 48 weeks or 240 days a year and one or two will use the full 52 weeks gross income.

As an example. an IT contractor, on a contract rate of£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.

If you'd like advice on your potential borrowing amount, or would simply like a quote, speak to a contractor mortgage broker at SEMH today. You can arrange a free 15 minute consultation here.

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 but many won't due to the higher risk.

It's common for mortgage providers to require borrower's to have been employed on the contract for a minimum of 1 year 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 for contractors is it's possible to get a mortgage loan at 95% LTV subject to qualification.  But as ever, the larger your deposit size, the better the mortgage rate you are likely to be offered.  

The best mortgage deals are available to borrowers with a 40% deposit, with the next best rates at 25%.

Book a call back and save your most valuable business asset...time.

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

Tracy Boyle - Google Business Review
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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

To get a mortgage as a contractor, the lender's underwriters 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 and potentially other benefits 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
  • tuition or private school fees

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 high street 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 ensure there's no return to the days of irresponsible lending.

Book a call back and save your most valuable business asset...time.

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

Tracy Boyle - Google Business Review
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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?

The proof of income 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 any mortgage application, all lenders require proof of ID and address to be provided. And for contractors who are limited company directors, lenders usually want to see:

  • Your contract which must show your contract rate. Some lenders also want to see the date the contract ends clearly stated.
  • Your personal and limited company business bank statements for the past 3 months.

For contractors on payroll or working through an umbrella company:

  • The latest 3 months consecutive payslips and personal bank statements for the corresponding period.
  • The employment contract, either between the employer and the contractor or the umbrella company and contractor.

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

Getting a contractor mortgage quote

Speaking to an independent contractor mortgage broker 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 - MLIBF CeMAP Mortgage Adviser & Director of Hub FS Ltd

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 get great mortgage and protection deals.

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