Author: Elliott Culley - Director & Mortgage Adviser of Switch Mortgage Finance
What is a contractor mortgage?
A contractor mortgage is offered by mortgage lenders to individuals who are not on permanent contracts with employer and in most scenarios are on day rate contracts. These mortgages are offered by contractor friendly mortgage lenders, who understand how your income works and will be wanting to offer you a stress free lending process.
Can I get a mortgage if I work as a contractor?
Yes it is certainly possible to obtain a mortgage as a contractor. Mortgage lenders will assess how long you have been a contractor, your experience in the sector, how you pay your tax (self employed or through an umbrella company) and the day rate of your contract.
Is it harder to get a mortgage as a contractor?
No, it is not hard to get a mortgage as a contractor, provided you approach the right mortgage lender for your circumstances. Depending on your current circumstances you may find it more difficult than others, but that’s where a mortgage expert can assist. Some lenders are not contractor friendly so you will want to avoid these companies.
Some lenders can offer you a bigger mortgages than others and some will make the process far less complicated than it needs to be. Depending on your
How long do you have to be a contractor to get a mortgage?
Most lenders will require at least 12 months contracting history before they will offer you a mortgage. However there are lenders that will consider you as a day one contractor, provided you have previous experience in the sector you are contracting in under an employed or self-employed status. It is possible to put forward a case to some lenders with just 6 months experience, but this will be via referral to the mortgage lender.
How long do I need left on my contract for mortgage lenders?
Most mortgage lenders will require 3 months remaining on your contract. If less than this then lenders will ask to see a renewal. There are a couple of lenders that will consider just one month left without needing to see a contract renewal letter.
Contractor mortgage with 1 year accounts
Getting a mortgage as a self employed contractor with 1 years accounts can be difficult if you don’t know which lenders to approach.
However there are lenders that will lend to you even if you are a contractor with 1 years accounts. You will have more options if you have previous experience in an employed role, or if you are in a professional role. Depending on how far you are into your second year you may be able to provide a projection of the 2nd years figures, with some lenders allowing this.
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What documents do contractors need for mortgage?
The documents required for a contractor mortgage will vary depending on how you are paid. If you are self employed and complete your own tax returns a lot of lenders will require your last 2 years tax calculations and tax year overviews.
If you are paid through an umbrella company, that handles the tax for you, then the documentation requirements will be different. A copy of your contract and payslips will be required.
Self-employed contractor mortgage
If you are contractor who is self employed and paying your own tax then you may have found it more difficult to obtain the mortgage you require. If paying your own tax some lenders will require 2 years tax calculations and tax year overviews. This can cause a number of issues for you, including the fact you may not have been self employed contracting for 2 years and you may have earned much more in your latest year than the previous year.
Mortgage lenders who treat self employed contractors this way usually offer smaller mortgage amounts than lenders who can use the day rate contract. Therefore it possible that you will be able to increase your borrowing capacity by using a contract friendly mortgage lender.
Limited company contractors
If you are a limited company contractor, then it is possible to obtain a mortgage using the day rate contract value instead of the accounts. To do this you would need to be 100% shareholder, 100% across both applicants if a joint application.
Mortgages for umbrella company employees
If you are a contractor being paid through an umbrella company you will either be a day rate contractor or a CIS contractor. Most lenders will take the value of the day rate along with evidence via payslips. If you are CIS then most lenders will look at using an average of your payslips over a period of 3, 6 or 12 months.
Some lenders will treat you as self employed, despite being provided with payslips. So you need to be careful and make sure you approach the right lenders for your circumstances.
CIS contractor mortgage
If you are on the HMRC’s Construction Industry Scheme you may have been struggling to find a mortgage lender that will consider you or you might have found the loan amount you could borrow below what you had hoped.
If you are a CIS contractor, you will find the majority of mortgage lenders treat you as a self employed individual. However there are lenders that will treat you differently provided your tax is deducted at source and you have worked in the industry for at least 6 months. It can be a much easier process than you may think to obtain a mortgage as a CIS contractor, you just need to know where to go.
How much can I borrow on a contractor mortgage?
How much you can borrow as a contractor does vary from mortgage lender to mortgage lender. Some lenders will offer you a larger mortgage than others. Provided you are working 5 days a week most lenders will follow a simple calculation of day rate x 5 x 46 weeks. You can however get lenders that will use 48 weeks and therefore offer you larger mortgage.
Contractor mortgage borrowing example
An individual was currently on a day rate contract of £250 per day. His previous contract had been for £200 per day and they paid their own tax. The previous two years self employed income was Year 1: £34,000 and Year 2: £42,000. They have no dependents, are the sole applicant with no credit commitments.
Mortgage Lender 1 (treat as self employed): £171,000
Mortgage Lender 2 (day rate X 5 days X 46 weeks): £258,750
Mortgage Lender 3 (day rate X 5 days X 48 weeks): £270,000
*the above is based on a particular set of circumstances on a long overall term of 30 years. Your personal circumstances will determine your borrowing capacity and the above is just to demonstrate as a guide only.
As can be seen by the table contractor friendly mortgage lenders can offer much larger mortgage amounts. In this example if the individual had been treated as self employed it meant taking an average over the last two years, which includes a year where they were earning less. Therefore its certainly worth doing your research to make sure you get the correct mortgage for you.
What level of deposit will I need?
Some lenders will offer you a mortgage with a 5% deposit. If you are looking at purchasing a flat or a new build then most lenders will require a 10-20% deposit. The more deposit you have the lower the interest rate will be.
Can I get a contractor mortgage with bad credit?
Yes it is certainly possible to get a contractor mortgage even with bad credit. It will depend on the severity of the bad credit and also how recent the adverse was. Depending on your circumstances you may be restricted to requiring a larger deposit.
Why Switch Mortgage Finance?
Whether purchasing or remortgaging, you’ll want access to the best products on the market. We have a proven track record of helping clients with contractor income and will be able to assist you with your mortgage needs.
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