In a growing gig economy, huge proportions of the working population are self-employed, freelancers or contractors – which can make things a little complex when you need to apply for a mortgage.
From a lender’s perspective, it is all about demonstrating a steady, reliable income, so they are not concerned that a variable earnings structure will leave you unable to keep up with your repayments.
Some mortgage providers do not cater well to self-employed contractors, so it makes a big difference if your broker can recommend the most suitable option!
Why Does Being a Contractor Affect My Mortgage Application?
The easiest way to explain lender risk is to compare flexible working with a permanent, contracted employment role.
In the latter, you receive a fixed amount of income every month, have legal protections in the event of sickness or redundancy and can present a lender with an employment contract and payslip history to verify your earnings.
Contractor, as a term, covers a broad range of working patterns, so you might find that a lender requires further information about your business if you classify your profession as any of the following:
- Contracted agency worker
- CIS registered contractor (or sub-contractor)
- Fixed-term or short-term contractor
- Professional contractor – such as an accountant, teacher, medical or legal professional or a locum doctor.
Every lender has a different set of policies and terms to determine your eligibility for a mortgage and will consider the length of time you have been self-employed, your average annual income, and how regular your working patterns are.
How to Apply for a Mortgage as a Contractor
The best way to streamline your mortgage application is to speak to Think Plutus before you make any decisions.
As an independent private broker, we can recommend the most suitable lenders and mortgage products to ensure you have the highest chances of approval.
If you have any other considerations, such as being a first-time buyer or having a relatively short trading history, brokerage support is even more important because there are fewer lenders who are likely to approve your application.
Our services also include help with application preparation and advice on supporting evidence you should include to strengthen your application.
Documents you will need include:
- Self-assessment tax return calculations, or payslips and your most recent P60 depending on how you are employed or contracted.
- Evidence of current contracts showing the remaining term.
- Details of future or ongoing contracts you have lined up for the year ahead.
- Calculations of average income or evidence of your day rate.
This paper trail is significant because it shows the lender that you have an ongoing business and a level of assurance of future income.
Lenders will still require the usual documents such as ID and bank statements, but the more context and information you can provide, the lower the perceived risk to the lender.
Applying for a Mortgage With Different Contract Types
Several working structures are categorised as a contractor, but a lot depends on how you are paid and how you bill clients for your services.
Below we run through some of the common contractor types.
Self-Employed Contractor Mortgages
If you are registered as self-employed with HMRC, you will pay income tax and national insurance directly and may subcontract for one business or several.
This matters in a mortgage application because lenders like to see at least 12 months of work history to determine whether you can keep up with the mortgage repayments.
They will refer to your self-assessment tax returns to calculate your average income for the affordability assessment.
Applicants who have been self-employed for less than one year may be able to secure a mortgage, although much depends on the circumstances.
For example, if you have switched from employment to self-employment with the same company, this may demonstrate stable income.
The longer the trading history, the better because very few lenders will consider a self-employed contractor with a short track record of stable employment.
Mortgages for Fixed-Term Contractors
Long-term contracts are rarely an issue for a mortgage lender because they show that you have ongoing, reliable income, and there is no particular risk that your earnings will change.
However, short-term or fixed-term contracts can be a stumbling block because most mainstream lenders will not consider these applicants.
The key is to ensure you work with a broker to review the terms and nature of your contracts and assess the income and duration of work to determine how this impacts your mortgage.
Mortgage providers prefer applicants with at least six to twelve months left on any current fixed-term contract.
Your application will be treated as an employment mortgage if you are paid through PAYE payroll.
Mortgages for Short-Term Contractors
If you have a short-term renewable contract, some lenders will accept this, provided you have a history of continual work of at least one year.
- Temporary contractors may be categorised as self-employed or employed, varying with different income tax payment methods.
- Agency contractors will need at least three months remaining and proof that they have worked continually for the last year.
- Lenders may consider zero-hours contractors if the applicant works within the public sector, such as supply teachers, NHS bank staff and retained firefighters. You will normally require a record of one year of ongoing work.
These examples are based on typical lender requirements, so it remains important to seek independent advice to ensure you apply for an appropriate mortgage product from a lender who will likely approve your application.
Mortgages for Contractors Working for an Umbrella Company
Contractors who work for agencies (usually set up as an umbrella company) will need to provide three months of payslips, bank statements, and a copy of their last P60.
However, the application may be a little complex because lenders and their underwriters need to verify whether your income is sustainable to make an offer.
Some lenders will not lend to any agency contractor, regardless of your proof of ongoing income, but this is not the case across the board.
If you have worked on a contract for an umbrella company for a year or more or have a history of contract renewals, you have a much better chance of approval.
Professional Contractor Mortgages
Self-employed professionals, often working in law, IT, accountancy, teaching or medicine, may also find a mortgage application challenging.
Lender rules vary considerably – some will always be happy to lend to an accredited professional, even if they are self-employed without an extensive work history. Others may be less inclined to lend.
How Much Can a Contractor Borrow on a Mortgage Agreement?
Lenders always differ and use varying calculation methods to determine your affordability.
Specialist self-employed mortgage providers will usually use this approach:
- Weekly income = your contractual day rate x days worked per week.
- Annual income = weekly income x 46 weeks (to account for holidays and time off).
- Maximum mortgage = annual income x between three and five.
Some mortgage lenders will offer up to three times your average annual earnings, whereas others will offer a higher income multiple, which may change depending on the length of your work history.
Lenders will also assess other factors such as your credit score, monthly outgoings, existing debts and whether you have evidence of past contracts being renewed.
Deposit Requirements for a Contractor Mortgage Applicant
The minimum deposit you will usually need for a mortgage as a contractor is 10%.
Lower deposit values might be acceptable but generally mean the interest rates are far from competitive.
If you can increase your down payment, you will get a better mortgage offer with more attractive rates.
Mortgage support programmes such as the mortgage guarantee scheme may make it easier to secure a mortgage with a lower deposit.
Still, checking whether the repayments will be manageable long-term is necessary.
Which UK Lenders Offer Mortgages for Contractors?
The most suitable lender will, in part, depend on the nature of your contracted work.
For example, one high street bank excludes all agency work from affordability assessments, while another lender does not lend to applicants on short-term renewable contracts.
Although terms can and do change, we have listed some of the current lending restrictions you may find from well-known UK lenders.
- Lender A only accepts fixed-term contractors with at least two years of work history in the same field or who have been contracted to the same business for at least one year, with six months or more remaining on the agreement.
- Lender B only lends to sub-contractors with 12 months of continuous service within the same contract. They require proof of further work offers if the applicant earns £75,000 a year or less.
- Lender C will consider zero-hours contractors if they have a year of work history with the same business or others in the same sector.
This snapshot demonstrates why your mortgage lender selection is so vital – there are countless lenders, but there may be only two or three who can meet your requirements.
Applying directly to a lender without verifying their policies means you increase the likelihood of being rejected on any of the strict criteria.
You may also limit your opportunities to secure a more competitive mortgage rate.
As a broker specialising in self-employed mortgages, Think Plutus can advise on the right lenders – and which you should disregard.
How Does Bad Credit Affect a Contractor’s Mortgage Application?
Adverse credit history is always a challenge with any mortgage, potentially more so for a self-employed contractor.
In many cases, there are ways to improve your credit score, add explanatory context to your application, or direct your mortgage to a lender with more flexible policies when considering an applicant with previous credit issues.
Credit reports also expire after six years, so waiting until a previous record has been removed may be beneficial if this fits your requirements.
Think Plutus can recommend a range of adverse credit mortgages depending on your circumstances and property purchase plans.
Common Reasons for Contractors to be Rejected for a Mortgage
Being declined a mortgage can be frustrating and upsetting, but there is no reason you cannot reapply to a more suited lender with a very different outcome.
You may have been turned down for many reasons, and most depend on the lender’s risk assessment.
It may also be that your lender has refused your application simply because it has not been structured correctly or lacks sufficient evidence and supporting information to pass through an affordability and eligibility check.
If you would like help understanding the reason for a mortgage rejection or identifying ways you can improve your application, please get in touch.
Our friendly, experienced team can assess your application, determine the reason for the rejection, and ensure your next choice of lender is more likely to offer approval.