Working as an independent contractor offers you flexibility and higher rates of pay but it can sometimes create issues if you need to apply for a mortgage.
High street lenders can struggle to fully understand your employment status and how you get paid. Your accountant keeps your declared income low for tax purposes, but this does not impress mortgage lenders.
Despite the challenges, there are many lenders that do understand how contractor finances work. They are able to accept different types of contractor employment status and sources of income.
Thousands of mortgages are successfully provided to contractors each and every year. In this guide we will explain how they work, the eligibility criteria and how to get the best advice.
What is a contractor mortgage?
A contractor mortgage is not really a type of mortgage product.
Contractors should be eligible for any mortgage that a fully employed person could get.
However, the lenders that do offer mortgages to contractors understand your style of employment, how you get paid and are willing to offer loans on this basis.
Regardless of your industry there is usually a mortgage lender who’s able to help.
There is more income flexibility in the eligibility criteria when compared to a standard mortgage. This acknowledges the lack of a fixed salary and the variable nature of contractor income.
The usual types of mortgages will be accessible: first time buyer mortgage, home mover, remortgage, debt consolidation, buy to let and holiday let.
What is a contractor? (according to the lenders)
It might seem obvious to you, but when is a contractor not a contractor?
An increasing number of people now work on a non-standard or flexible basis where a permanent employed job is replaced by self-employment, freelance work or contractor basis.
We will see below that lenders have their own individual lists of eligibility criteria. They can also have slightly differing opinions on what it means to be a contractor.
This is important to know, as it will affect which lender to approach.
A contractor will usually be:
- self-employed
- working with a company on a fixed term contract
- earning a fixed rate of pay
If you are self-employed but working with a few different clients at the same time, then you’re probably a freelancer.
Companies will use contractors if they need a specific role filled for a certain period of time. Contractors are not ’employed’ by the company in the same way that an employee would be.
Instead a contract is used to outline the work needed, the rate of pay and the duration.
Eligibility criteria
Each lender will have some basic eligibility criteria to meet:
Contracting experience
Lenders prefer to see that you have worked in the same occupation for the last six to twelve months.
Employment gaps
The fewer the better. Anything beyond 6 weeks in a year could start to limit your options.
Remaining contract term
Lenders will want to check your contract and ideally this should have at least six months to go.
Renewable contracts
Having a renewable contract will give lenders some confidence. Even better if you can show that it has previously been renewed.
Your profession
Contracting used to be dominated by IT specialists but is now much more widespread. Certain careers are preferred by lenders; IT, teaching or medical for example.
Income
You need to be able to prove your income. This could be from business accounts, SA302, self-assessment, payslips etc. Some lenders look for a minimum income, based on your profession.
Affordability
The new mortgage payments must be affordable for you. Even if your day rate is used to calculate the loan size, if you have other large credit commitments (credit cards etc) the lender may deem the new mortgage to be unaffordable.
Mortgage term
The mortgage should finish before age 80-90. If it goes beyond age 65 then this is considered borrowing into retirement and you will be asked about your working plans during this period.
Age
The borrowers need to be aged between 21 and 75.
Deposit
5%-10% minimum deposit. As with any mortgage, the higher the better. The type of property could also increase the deposit needed if the lender deems it a higher risk.
Credit status
You should have a good credit score with no major problems on your credit report. Options are available even if you’ve had a few credit blips.
It’s all about balance
It’s wise to remember that the lender does not have to give you any money!
They need to be convinced that you are a reliable borrower, with a reliable income. When they look at a new mortgage application they are assessing the risk of the potential borrowers and the property in question.
So if you approach a lender with barely a 5% deposit, not much proof of income, a bit of bad credit, a sporadic employment history and a property that they’re not too keen on. They’ll probably say no.
If you’re not sure about your situation then reach out to a mortgage broker for some guidance. They can look at your situation, including your credit history, and give an opinion on getting a new mortgage.
What the lenders say about contractors ########
Unacceptable Properties
Single brick (single skin) construction
Clydesdale Bank accept contracts that fall within IR35 rules. Clydesdale Bank also accept contract income received via a payroll services (umbrella) company.
Single skin/ half brick thick walls
Single skin/half brick thick walls are only acceptable in older properties where the walls are within single storey structures and contain non-habitable rooms.
Any single skin wall structure above single storey is normally unacceptable.
Where a customer’s income comes from a contract and they are not employed on a permanent basis they are classed as a contractor. This will include individuals who are self-employed and pay their own tax, those who are employed via an umbrella company who deduct their tax and people who are essentially employed but on a fixed/short term contract e.g. 12 months.
Contractors can be treated as self-employed or employed for income verification purposes.
We treat anyone who undertakes a contract to perform labour or service or who provide materials, and who earns under £75,000 a year, as self-employed. (as per sole trader, partnership and limited companies).
For self-employed contractors who earn more than £75,000 per year, we’ll calculate their income as their average weekly contract income multiplied by 46.
This is where a job is only for a set period, although the contract may be renewed or extended.
Applicants must have been employed on a fixed term contract basis for a minimum of 12 months. If they have not, they must have at least 24 months remaining on their current contract. The gaps between contracts in the past 12 months can total no more than 12 weeks.
Construction of brickwork
Single skin brickwork is only acceptable for garages and porches provided they are single storey, or a small proportion of the habitable area subject to valuer’s guidance.
A property of standard construction will typically meet the following criteria and are appropriate for mortgage lending
Walls – Solid (min 230mm) or cavity (min 280mm), built in brick, natural stone, reconstituted stone, concrete block, cob or flint.
Income assessments
‘How’ your income as an independent contractor will be assessed depends on the lender doing the assessment.
This is why it’s really important for contractors to use a specialist broker. They will be able to identify the best lenders based on your setup and experience.
This not only saves time but will prevent you going from one lender to the next, and potentially damaging your credit score in the process.
Specialist brokers can speak directly to the lenders. With most contractor mortgages being processed manually, the intervention of a broker can have a very positive effect.
Day rate
Many contractors will be happy to use their day rate for the purposes of calculating their mortgage income.
This is a gross (before tax) figure which will be higher than your self-assessment income figure.
If you’ve recently left employment then this can be helpful, but expect them to ask for additional evidence to support the figures.
This could include relevant qualifications and experience, signed contracts and bank statements.
The lender will use your day rate to work out an annual earnings figure. Often this uses 46-48 weeks in the year, to take account of holiday and sickness.
Self-assessment income
Another option could be to use your self-assessment income, or what your accounts show. This would be the usual process for a standard self-employed mortgage.
Depending on your setup this could provide a higher mortgage calculation. This is often the case for company directors and companies with retained profits.
When using this option lenders will generally use your average self-employed earnings over the last 2-3 years.
How much can you borrow?
It’s standard practise for lenders to take a borrowers annual income and then apply a multiple to get to a maximum mortgage figure:
For example: £50,000pa earnings (gross) x 4.5 = £225,000 mortgage
For employees, the calculation would use the gross earnings shown on a P60 and for the self-employed, they would use the trading accounts or SA302 figures. In both cases this is before income tax.
As a self-employed contractor, your accountant will be looking to maximise the tax efficiency of your finances. So you pay less tax.
This is excellent, of course. But it does not help when getting a mortgage.
Your mortgage broker will want to use your gross day rate rather than your accounts or self-assessment figures. This will give a much larger mortgage amount.
But for this to happen they need to work with a lender who understands contractors and their earnings structure. A contractor-friendly lender will be happy to use an annualised day rate over 46-48 weeks of the year, to determine the mortgage they could lend.
Below you will find our Contractor Mortgage Calculator. This calculator is designed to give contractors a rough guide to how much they could potentially borrow. Just put in your day rate and the average days you would work each week.
If you want to see how much a certain mortgage would cost each month, you’ll need our Mortgage Repayment Calculator.
Contractor Mortgage Calculator
This simple mortgage calculator will quickly work out how much you could borrow as a contractor.
Contractor Mortgage Calculator
This simple mortgage calculator will quickly work out how much you could borrow as a contractor.
Deposits
Most lenders will need a 10% mortgage deposit for a residential mortgage, this applies to employed, self-employed and contractors.
For lenders, the minimum deposit represents a percentage of the purchase price, not an amount of money.
For example; 10% of the purchase price.
This obviously means that the cash deposit amount for a purchase price of £500,000 will be larger than one costing £300,000.
You shouldn’t have to pay a higher deposit just because you are a contractor.
Being able to put down a sizeable deposit has a few advantages:
If you have a deposit of 15%, or more, then it’s likely that you will have more lenders to consider when compared to having just a 10% deposit.
Deposits affect the loan to value (LTV). A higher deposit results in a lower LTV. So you may be able to secure a lower interest rate by having a larger deposit.
A bigger deposit means that you borrow less, and so the monthly mortgage repayments will be lower and more affordable.
Some lenders may ask for a larger deposit because of the property you are buying.
Different types of houses, and how they are built, can pose a higher risk to lenders. While some will decline these properties, others will consider them, but demand a higher cash deposit to offset the extra risk.
Some examples of these could be: non-standard construction, concrete houses or a flat above a shop.
It can be hard to secure a mortgage on these types of property, so it may be necessary to seek out a specialist property mortgage.
You will find more useful information in our Guide To Deposits.
Contract types
As a contractor, you can have several contract types, each tailored to different working conditions and preferences:
- Fixed-Term Contract: You work for a specific period with a defined start and end date, usually for projects with a set duration.
- Project-Based Contract: This focuses on completing a particular project, not just working for a fixed time.
- Retainer Contract: You receive a regular fee, often monthly, to be available for work or to provide continuous services.
- Freelance Contract: You have the flexibility to take on tasks or jobs for various clients, possibly at the same time.
- Zero Hours Contract: Here, there’s no guarantee of regular work; you work only when needed.
- Consulting Contract: If you’re an expert in a field, you use this contract to provide advice and solutions to client problems.
- Agency Contract: An agency finds you short-term work placements with different clients.
- IR35 Compliant Contract: In the UK, this ensures you pay similar taxes and National Insurance as regular employees, in line with IR35 tax legislation.
- Umbrella Company Contract: You become an employee of an umbrella company that manages your contracts and handles the administrative and payroll tasks.
- Self-Employed Contract: More general, this is where you operate as your own business, taking on work directly from clients.
Each contract type has its own impact on aspects like job security, benefits, and how your income is viewed by mortgage lenders, allowing you to choose based on your work style, industry, and personal needs.
It is worth remembering that contracting is more common in some industries than others. If you work in a field where most people work on contract terms, it is likely to be more acceptable to a lender.
Ask your accountant to explain which one would be best for you, and why.
CONTACT A CIS MORTGAGE EXPERT
If you wish to see how a CIS mortgage can help, we can put you in touch with a fully qualified whole of market mortgage broker.
Umbrella companies
As a contractor or consultant, one of the first issues you’ll encounter is the method of payment. Since you won’t directly be on a client’s payroll, it’s essential to establish separate arrangements for receiving your earnings.
The primary choices are having your own Limited company, operating as a self-employed individual, or working under an Umbrella company.
An umbrella company in the UK is a third-party firm that contractors can use to simplify their invoicing and tax arrangements.
When a contractor joins an umbrella company, they become its employee. The umbrella company then deals with the client, invoices for the work done, and pays the contractor a salary, from which PAYE taxes and National Insurance are already deducted.
This setup reduces the contractor’s paperwork and ensures compliance with HMRC.
It’s handy for those who prefer not to handle business administration tasks or for short-term contract work, although it may result in slightly lower take-home pay compared to being self-employed or running a personal limited company.
A contractor might choose to work through an umbrella company because it makes things easier and more straightforward.
With an umbrella company, the contractor doesn’t have to worry about a lot of the paperwork and administrative tasks involved in running their own business, like invoicing and managing taxes. This is because the umbrella company handles all of that, including making sure that taxes and National Insurance are correctly paid.
It’s a good option for those who don’t want the hassle of setting up and managing their own company, especially if they are working on short-term contracts or are new to contracting. Plus, working through an umbrella company can provide some employee benefits like holiday pay, which wouldn’t be available to them if they were self-employed.
When applying for a mortgage as a contractor using an umbrella company, it’s important to know that lenders have different methods for assessing your income and contracts.
While some may focus on the current contract’s total value, others might base their decision on your payslips. It’s important that your contract is fully signed by all involved parties and that the pay you’ve received matches what the contract states.
Lenders often require a minimum period of work under the contract, which can vary from 6 months to 12 months. Even if you’re on your first contract, having a background in the same industry can open up additional mortgage options for you.
By working with an experienced broker you can avoid the common error of lenders mistaking you for an employee, and not a contractor.
Which employment option is best?
The answer to that question is beyond the scope of this guide.
To decide which option is best you should discuss your plans with your accountant, before you commit to a new work contract.
In terms of the mortgage, just leave it with your broker. They will look at your situation, whether you are self-employed or use an umbrella company etc, and then work out the best way to get the mortgage you need.
Remember that your broker is not just there to find you a mortgage. They will discuss and negotiate with the lender on your behalf and then submit all of the relevant paperwork and background information.
Mortgage options
The basic mortgage options will be available to you but will depend on the lender.
Repayment method
You will need to decide what repayment method is best for you, this is how you want to pay the mortgage back. Most people will choose a repayment mortgage.
Interest rates
Interest rate deals will either be variable, which can change, or fixed, which don’t change. Most people prefer to take a fixed interest rate for 2-5 years.
Mortgage term
The mortgage term is the number of years that your mortgage is set up for. When applying for a mortgage the lender asks you how many years you want it for. If you have a repayment mortgage, changing the mortgage term will affect the monthly payments; the longer the term the lower your repayments.
Average Mortgage Payments
Explore the average repayments for a UK mortgage: Understand what homeowners across the country are paying and how property types and location can affect your mortgage outlay.
Top tips
As early in the process as possible find an independent mortgage broker that is experienced with contractors. Brokers aren’t just there to find you a mortgage. Given enough warning they will be able to make suggestions, get your finances in order and prepare you for when you need to apply for a mortgage.
Allow the lender to see that you have consistent and reliable work patterns, without too many breaks or gaps.
It will give lenders confidence to see that you have future contracts lined up, or existing ones that are going to be renewed.
You may not need to give it all to a lender. Make sure you have 12 months worth of bank statements, accounts, tax correspondence, payslips etc.
Your mortgage adviser will be able to help with this. It’s important to know that your credit profile is in good shape and that there is nothing showing that will cause a lender to dig deeper. You can check your credit file here.
Lenders will ask for copies of your bank statements, so they will be able to see the takeaways, online shopping and streaming services you pay for. It will help your application if these can be trimmed back a bit. Maxed out credit cards and payday loans are a no, no.
A higher deposit from you means a lower level of risk for the lender. This makes them happy and you will lower your monthly repayments.
Having the most recent set of accounts ready will help you. So don’t delay, send everything off to your accountant asap after the end of the tax year in April.
Where possible, plan at least six months in advance. This gives you, and your broker, time to get everything shipshape.
You will find more useful information in our article: “How to get mortgage ready“
How a broker can help
Getting a mortgage as a contractor can be a tough slog.
The first hurdle is finding the lenders that accept contractors. Then finding the ones that lend to your industry. And then finding the ones that understand how you get paid and are happy to work with your contract rates.
By working with an independent mortgage broker, they will already know the lenders that could be suitable for you.
Respect Mortgages can match you with an expert in this area for free.
A specialist broker will be aware of the styles of contract and ‘self-employment’. They can help whether your income comes from a limited company, umbrella company or self-employment.
Perhaps more importantly, they will have access to a lender’s underwriters, and will be able to discuss your case directly with them.
FREQUENTLY ASKED QUESTIONS
Are joint mortgages available?
With a joint mortgage both of your incomes are taken into account. So if the other person has a reliable and provable income then this can only strengthen your chances.
Can you have a guarantor?
Possibly. If your income doesn’t quite stretch to the size of mortgage that you need then maybe bringing in a guarantor could help.
Do contractors pay higher interest?
No. You won’t be charged a higher rate or be penalised for being a contractor.
Are accounts needed?
Accounts are not always needed but if available they should be used to back up your income position.
What options are available for CIS workers?
CIS construction workers should be able to take advantage of a CIS Mortgage. This uses the CIS payslip as proof of gross income.
What about self cert mortgages?
Self-cert mortgages were popular among contractors, as no proof of income was needed. They are no longer available after a tightening of the mortgage regulations.
Are buy to let mortgages available?
Yes, most mortgage types are available, just as long as you meet the lending criteria.
What about bad credit?
Options are available if you have experienced bad credit. This needs to be considered alongside your overall financial situation.
