Contractor Mortgages - An Essential Guide

Learn about eligibility criteria for contractors, maximum borrowing amounts, and more. Save time and potentially thousands of pounds.

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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 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, an IT contractor who receives income into a Limited company, and pays their own income tax and national insurance, will normally be considered self-employed.  One possible exception, is where the contractor is on a high daily rate, typically £500 a day or more.

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, mortgage providers will typically want to see:

  • A minimum 12 months history of contracting.
  • Your current contract has at least 3 months to run, or is a minimum 3 months in duration.  Some lenders will 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 lenders require evidence you've already been able to renew 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 n the same line of work/industry. Some lenders require 3 years.

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How much can a contractor borrow?

Currently, many mortgage providers are prepared to lend to contractors at 4.5 x single or joint income.

To assess your income, they'll usually work off your gross annual revenue.  The formula they use is often 46 weeks x 5 days x day rate. A few lenders will use 48 weeks (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.

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.

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.

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

They'll also look at your other outgoings for:

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

Finally, all mortgage providers must 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). However, many in the mortgage industry consider that level too onerous, and the Bank of England is currently consulting about lowering the threshold.

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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."

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?

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 1695 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.