Contractor Mortgages For Limited Company Directors

Our simple mortgage guide for contractors who get paid into their limited company.

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

Many limited company contractors are quite understandably, left feeling confused regarding how mortgage lenders will assess their income.

This updated 2024 mortgage guide aims to dispel that confusion.

We'll explore the different ways banks and building societies treat contractor income for mortgage affordability.

You'll also discover how long you need to be contracting before applying and the many other criteria surrounding mortgages for limited company contractors.

What is a limited company contractor?

A limited company contractor is defined as a company director employed on a fixed, short-term or non-permanent contract who receives their income into a limited company.

Sometimes referred to as a Personal Service Company (PSC), contracting as a director of a Limited company is a tax-efficient business structure for solo IT and other contractors. It also provides greater credibility to prospective employers.

Of course, unlike an umbrella contractor, it also means you're responsible for submitting company accounts, paying corporation tax and abiding by the legal requirements and obligations of being a company director.

Can I use my day rate instead of dividends or net profit?

Yes, depending on your contracting history, and income level, it may be possible to use your day rate rather than salary and dividends or salary and share of net profit.

Eligibility criteria around the use of day rate vary from lender to lender.

For example, some only allow the contractor's day-rate to be used where a minimum income threshold is met. Others require a minimum amount of contracting experience, usually at least 12 months.

Being assessed as employed for income verification

Other eligibility criteria may apply. If met, the applicant can then be treated as employed for income verification purposes and the day-rate used.

Otherwise, the lender's self-employed mortgage criteria applies and either salary and dividends or salary and net profit is used.

Calculating a limited company contractor's income

For a couple of reasons, calculating income from the contractor's day rate (sometimes referred to as contractor-based underwriting) is generally preferable.

  1. It usually allows the applicant to borrow more.
  2. There's usually no requirement to provide one or more year's Limited company accounts or personal tax calculations/SA302s.

How is income assessed using day-rate earnings?

To calculate a gross contract value (GCV), a.k.a annualised gross income figure, most lenders use this formula:

Contractor day rate x 5 days a week x 46 weeks a year. Or, more simply, day-rate x 230 days a year.

A few lenders use 48 weeks or 240 days a year, allowing you to potentially borrow more.

Of course, if your contract states you are contracted to work fewer days per week, then the calculation will be amended accordingly.

Where the number of days or hours worked aren't stated on the contract, the role is assumed to be full-time, 5 days a week, as long as the income showing in the business bank statements evidences this.

If the contract states an hourly rate, some lenders will multiply it by eight hours, others seven. Then the daily figure is multiplied by 5 days and either 46 or 48 weeks.

Assessing income with GCV or latest months's revenue

Some lenders use the lower of the Gross Contract Value or the annualised income amount based off your latest month's business bank account income.

This is an important point to consider, as it can materially affect your maximum borrowing amount if you've worked less than you normally would in the latest month.

To calculate your annualised income from the latest month's business bank statements the formula is:

latest month's revenue x 12, divided by 52 and then multiplied by 46.

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How much can I borrow as a limited company contractor?

How much you can borrow depends on several factors including:

  • Your income. Either assessed on an employed (day-rate) or self-employed basis.
  • Any ongoing credit commitments you have.
  • Other financial commitments you pay such as spousal support, education fees, financial dependents etc.
  • The loan-to-value (LTV)

Regardless of how the borrower's income is calculated, the loan-to-income ratio (LTI) is usually a multiple of 4.5 x income.

For example, with a day rate of £500 and LTI of 4.5, a contract worker could potentially borrow £517,500 (500 x 5 x 46 x 4.5). This assumes there are no deductions for credit cards, unsecured loans, car finance, child maintenance etc.

Higher earners (typically £75,000 or above) may be able to borrow at a higher multiple of 5 - 5.5 x income, depending on the lender.

What are the eligibilty criteria?

The eligibility criteria for limited company mortgages vary from lender to lender, but common criteria includes:

  • a year or more contracting experience to access the widest choice of lenders and products. Some lenders accept less than a year's experience where you have a couple of year's employment in the same role or industry.
  • No more than six weeks break between contracts
  • To be treated as employed for income verification lenders usually specify a minimum day-rate, often around £500 a day.
  • A requirement for the contract to have 6 months or more to run. Where it doesn't, a letter from the employer confirming the contract will be renewed.
  • Some lenders require the contract to have been renewed at least once.
  • The contractor needs to be 100% shareholder in the limited company. Or own 100% of the shares with spouse/partner.

Exceptions do apply. For example, some lenders consider applicants who've only been contracting 3-6 months.

And one major lender allows IT contractors to be considered employed on any income.

Are there any mortgage lenders who accept brand new contractors?

Yes, one or two consider brand-new day-oneday one contractors, though they'll usually require two or more years of employment in a similar or relevant industry role.

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Getting a limited company contractor quote

The next step to getting a mortgage quote is to get started here and speak to an adviser.  Or if you prefer, call us on 0117 205 0655. There's no call center. You'll speak directly with an adviser.

SEMH regularly help limited company contractors get an excellent mortgage deal, often with high street lenders. We can even assist if contract and pay is denominated in a foreign currency.

Once we've spoken with you , we'll advise if the case is proceedable. Then, if you're happy to continue, we can get the ball rolling and find you the best pound-for-pound mortgage deal for your circumstances.

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.