Contractors seeking a mortgage
When you work as a contractor, you have the luxury of flexibility, but you may also find that stability can be a problem. Even if you are very secure with your finances, it may be a challenge to prove it to lenders. This is why it can be difficult to secure mortgages for contractors.
There are various definitions for a contractor. For this reason, there are different ways lenders will assess mortgages for contractors. Some lenders will view fluctuations in your income as a red flag, but this is not true of all of them. In fact, the number of lenders offering mortgages to contractors are steadily increasing. This is due to the fact that working as a contractor is becoming a popular alternative to conventional employment.
It is possible to secure a mortgage if you are a:
- Self-employed contractor (whether recent or established)
- Agency worker on contract
- CIS contractor
- Fixed-term contractor with demonstrable history
- Professional contractor (accountant, teacher, legal/medical professional)
- Contractor of umbrella companies
Some lenders will even consider your application if you’ve been a contractor in the UK for less than a year. Each case is unique, and at Think Plutus we aim to be as helpful as possible. If you still have questions after reading this page, our advisers are just a phone call away.
Mortgages for self-employed contractors
To be a self-employed contractor, you must be registered with HMRC as self-employed. Contractors generally pay their own income tax and national insurance. A self-employed contractor will often subcontract for one or more companies. If this is your status, it has implications if you are trying to obtain a mortgage.
If you’re a self-employed contractor, lenders will need to see your work history for a period of at least 12 months. They will use this information to determine your affordability, using the income declared in your self-assessment as a guide.
What if you’ve recently become self-employed?
If you have less than 12 months’ employment history, it may still be possible to get a mortgage. One example would be if you’ve recently switched from being employed by a company to being self-employed, but you are still doing work for the same company. Some lenders may view this as sufficient stability to approve a mortgage, as you lack of self-employed history is explained. There are other situations where lenders may approve mortgages for contractors with less than 1 year of history.
Contractors with a minimum of 12 months’ history will have a wider choice of lenders and deals. If you have less than 6 months of history, it may still be possible to be approved, but there will only be a handful of lenders at your disposal. Every case is assessed individually, so the input of an experienced adviser with specialist knowledge can be a valuable resource. For example, if you are a freelancer with no contracts (or just a few), your application will need to be prepared in just the right way.
Mortgages for contractors on a fixed-term contract
If you’re self-employed and working on a fixed or short-term contract, it may be difficult to get a mortgage. Many high street lenders will not consider applicants who are on fixed-term contracts, particularly if that fixed term is a short one. You will likely need to approach a more specialist lender, and there are still some competitive rates to be found.
A contract with a fixed term gives lenders insight into what the contract involves in terms of income and duration. Even a contract for 12 months may still be considered by the right specialist lender. However, new contractors will probably be required to have a minimum of 6 months’ history, and to demonstrate a pipeline of work for the future. Contract renewals can be a good way to mitigate any concerns a lender might have.
Mortgages for contractors in an umbrella company
If you work as a contractor through an umbrella company, your mortgage application will be a little more complex. It can be difficult for lenders and underwriters to adequately establish the sustainability of your income. For this reason, you will find that certain lenders will decline your application altogether, no matter how much evidence you present of the sustainability of your income. Of course, this will only happen if you don’t approach the right lender.
If you’ve been working on a contract with an umbrella company for 12+ months, or have a solid history of contract renewal, it shouldn’t be too difficult to get a mortgage. Having said that, you may find it difficult if you go it alone, because you will not have full insight into which lenders will be most open to your particular application.
It’s a common misconception that contractors who work through an agency will not qualify for a mortgage. This simply isn’t true. It will be somewhat more difficult, but there are lenders that are known to approve mortgage applications under these circumstances.
Mortgages for professional contractors
Self-employed professionals who work in fields like medicine, law, accountancy, IT and teaching will have their own challenges when applying for a mortgage. There are various lenders who will consider this type of contractor even without a solid working history. This is due to the specialist skills that these types of professionals have, which will be in-demand amongst employers.
How much are contractors likely to get as a mortgage?
Different lenders have different ways of calculating the affordability of contractors. This means the amount offered will vary. Many specialist lenders will assess your affordability in the following way:
- Weekly income = your contracted day rate x the number of days you work per week
- Annual income = weekly income x 48 weeks
- Maximum mortgage amount = annual income x 3, 4 or 5
Some lenders will only offer 3x your annual income, while others will lend 4-5x. They will consider other things, such as how long you’ve been working as a contractor. They may also assess whether contracts have been renewed, your overall credit score, your monthly expenditure and any other loans you have, secured or unsecured. This is why there isn’t a one-size-fits-all answer.
What kind of deposit is needed for mortgages for contractors
In most cases, a minimum deposit of 10% is recommended for contractors seeking a mortgage. Anything less than this, and the rates begin to look quite unappealing. Generally speaking, the bigger the deposit, the better the deal – rates are usually cheaper with larger deposits.
With the aid of Help to Buy or similar schemes, it may be possible to get a mortgage with only a 5% deposit. Be sure to calculate your mortgage to determine whether payments will be sustainable through the full period of your mortgage term.
Contractors who have been declined
It’s easy to feel disheartened when you are declined for a mortgage. As a contractor, it can make you feel like you don’t have a chance. The reality is that certain lenders are a better suit to different types of work.
Common reasons mortgages for contractors are declined
The approach of lenders is often restricted because contracting work is so indeterminate. Mortgage assessments are always based on risk, so if you are unable to satisfy their desire for low-risk borrowers, they will decline your application.
Contractors often find themselves being rejected when they approach lenders directly, because they don’t present their application brilliantly. Your application also needs to be placed with the right lender. If you don’t present your application correctly, and it is presented to the wrong lender, your risk of being declined is high.
Broker with experience obtaining mortgages for contractors can assist with the preparation of your application. They can find the most suitable lenders from the full mortgage market, meaning your chances of obtaining a good deal and being successful with your application are increased.
Mortgages for contractors with poor credit
If you are a contractor with an adverse credit history, you face a challenge in trying to obtain a mortgage. It is highly recommended that you speak to an expert adviser with experience in this type of mortgage application.
We are often contacted by people who think their credit file is unsalvageable, when I reality their credit wouldn’t rule them out of approval. If you had credit issues 2+ years ago and have made all payments on time since, your recent financial stability will be acknowledged by some lenders. Think Plutus specialise in mortgages with bad credit, so get in touch and we can start moving you in the right direction.
If you’ve been declined
Don’t give up just because you’ve had a mortgage application declined. Lenders can be approached in different ways and the specialist advisers at Think Plutus can help you get it right.
The first step is to establish why your mortgage application was declined – this will help you understand areas for improvement. If you’re in a hurry to purchase a house, you can have a mortgage adviser speak to the relevant estate agent on your behalf. This can help reduce the risk of losing out on the property you want.
Think Plutus can go through your application with you to make it as strong as possible and ensure it is placed with the right lender. To successfully secure mortgages for contractors with the best possible rates, Think Plutus.