Contractor Mortgages explained.
Find out how you can improve your chances of getting a mortgage to buy a home as a contractor or freelancer, as well as how banks will assess your application.
Being a contractor can offer you flexibility and independence, but also uncertainty – and sometimes that can make borrowing difficult, especially for large purchases like when buying a home. But as the number of freelancers and independent contractors in the UK climbs, so does the number of mortgage lenders willing to consider you – nowadays many mortgage lenders could be willing to lend to you, even if your income fluctuates.
This article tells you exactly how lenders will assess your mortgage application, and discusses what steps you can take to improve your chances of getting approved.
How much can contractors borrow on a mortgage?
When you apply for a contractor mortgage, the mortgage provider will first work out how much to lend you – known as an affordability assessment. It will look at how much you generally earn, what your expenses are and how secure your income is.
As a contractor, you will usually need to show evidence of your earnings history for at least the past six months, though some lenders may expect to see two to three years of accounts. Due to this, applying for a mortgage early in your contractor career can be more difficult, though you may still have options and it’s definitely worth speaking to us.
How is a contractor’s income assessed for a mortgage?
If you have been working as a contractor for a long time, lenders will often average out the income you’ve earned over recent years to estimate your average income. They will then use this average to work out how much you can afford to repay each month.
If you are a contractor, there are two different ways your income can be assessed; either using your day rate or by taking your salary, dividends and/or net profit, depending on how your business is set up. They may take an average of these earnings, however, a mortgage lender is not likely to use this approach if your earnings have changed dramatically from year to year. In these cases, they may take the most recent year, or the lowest, as an indication of your earning capacity. This may mean you can borrow a smaller sum than you would otherwise have expected.
How can I get a mortgage on a ‘day rate’?
Some lenders may be willing to calculate your annual income on the basis of your day rate, though many require you to have a 12-month contract for this to be an option.
In this case, lenders will take your daily rate and multiply it by the number of days you generally work per week, then multiply that out to the full year. Be aware that lenders will also want to factor in any holidays and gaps between contracts, so most will assume you only work 46 and 48 weeks per year.
Do you have an example of a Day Rate Mortgage Calculation?
If your day rate is £400 and you generally work four days per week, your estimated annual income would be around £76,800.
£400 x 4 days = £1,600 per week
£1,600 x 48 weeks = £76,800
This approach can be especially helpful if you only recently left full-time employment and do not have an established track record. In this situation, lenders will want to see evidence that you’re likely to succeed as a contractor, including previous experience and qualifications in your field, signed agreements and an existing network.
How can I strengthen my mortgage application as a contractor?
Offering a larger deposit – and so borrowing a smaller amount – is one way to improve your chances of success. The less risk a bank takes in lending to you, the more favourably they will view your application.
Lenders will also look for signs of long-term security. If you can produce an ongoing agreement with an employer, or evidence of past agreements that are likely to be renewed, this may make your application more appealing to lenders.
While taking breaks between stints may be one of the perks of contracting, minimise time off in the lead-up to buying a home – lenders may be wary if they see you out of work for more than eight weeks in a 12 month period.
In addition, consider how good your credit score currently is and whether you need to work on improving it before submitting a mortgage application. This may be even more significant for contractors, as lenders will look for evidence of good financial management when your income is not guaranteed.
You’ll also need to show evidence of your expenses and operating costs – the more information you provide, the better the lender can understand your financial situation and feel confident lending to you.
How is mortgage affordability assessed if I’m set up as a limited company?
If you’re set up as a limited company, lenders are likely to apply different lending criteria to your application.
As a company, many mortgage lenders will only consider your salary and dividends as your income – not your total earnings. If you’re taking a low salary but your company is profitable, it might help to find a mortgage lender that offers specialist underwriting, and is willing to look at your full book of accounts.
When providing bank statements and financial information, you should also distinguish between money held by you and money held by the company. Funds set aside to pay company tax, VAT or income tax will not count towards your personal assets.
There are lenders that will assess on day rate, even if they’re set up as a limited company, which helps them borrow more.
Can I get a contractors mortgage with my wife or partner?
If you’re a contractor planning to buy with a spouse or partner, mortgage providers may in fact be more willing to lend – especially if your spouse or partner has full-time employment. While variations in your income levels may be less important if you’re buying with someone else, you’ll still need to show a consistent earnings pattern.
What lenders offer contractor mortgages?
If your income is fairly consistent and you’ve been employed for a long time period, some high street banks might be open to approving your application – even if you’re a freelancer or contractor.
There are now a large number of specialist lenders offer mortgage deals tailored to contractors, including some that cater to specific professions.
If you’re a contractor or freelancer, it can be valuable to speak to a mortgage broker. They can help you find a lender that accepts mortgages from people in your situation and help you to navigate the application process.
Can I make a mortgage application and safeguard my credit score?
Because contractors tend to fall outside of many lenders’ criteria, it’s possible that your mortgage application may be turned down. If you’re rejected, don’t despair – you may have more luck with a specialist lender.
In the first instance though, try to avoid making applications if you’re unsure of your chances of success. A declined application will be recorded on your credit history, and make it harder to be accepted in future.
Do you have Contractor mortgage application checklist?
Yes we do! You can put yourself in the best possible position for success by following these steps:
- Bring as much evidence as possible of your earnings over recent years, including bank statements, invoices and other accounts
- If you’re a limited company, bring your full business accounts and balance books
- Provide evidence of your current and previous contracts, as well as qualifications and previous experience
- Improve your credit score before applying
- Offer a higher deposit
- Consider a joint mortgage