Getting a Mortgage as a Contractor – Everything You Need to Know
In this guide, our team of experts at The Mortgage Heroes discuss everything a contractor needs to know in regard to securing a mortgage.
What is a Contractor Mortgage?
Contractor mortgages are a type of mortgage aimed at contract workers. They can be suitable for both self-employed and fixed-term contractors, as well as zero-hour contract workers and umbrella company employees.
Who Can Get a UK Contractor Mortgage?
The requirements you need to meet in order to be classed as a contractor will vary from lender to lender. However, as long as you’re based in the UK and are either self-employed working through one company or are employed working on a fixed/short term contract, you’ll generally qualify as a contract worker.
Most lenders will require self-employed contractors and sub-contractors to have at least 12 months’ worth of working history to consider them for a mortgage.
However, there are some that will accept 6 months. Some will even consider you if you have only just started or are about to start as a contractor providing that you have a track record within the same field under an employed status. These deals are generally based on day rate calculations.
Fixed & Short-Term Contractor Mortgages
Contractors on a fixed or short-term deal tend to find it easier to secure a mortgage. Those who have been trading for longer will be best positioned, especially if your contract has been renewed at least once. If your deal has never been renewed you can still get a mortgage, only the number of willing lenders is likely to be smaller.
Umbrella Contractor Mortgages
Contractors working through an umbrella company typically find it more difficult and complex than others to get a mortgage. The vast majority of high street lenders don’t accept these types of contractors due to the fact that their income is harder to assess and because they can’t grasp how sustainable the income is.
There are, however, some lenders willing to cater for contractors of this nature, which is why having access to the whole market with a mortgage broker can be beneficial.
Zero-Hour Contractor Mortgages
Workers on zero-hour contracts can find it harder to prove their regular income to a lender because they are not guaranteed a minimum number of hours each week. This means that many high street lenders will turn them away because they are deemed too high risk.
It is possible to find a suitable lender; you’ll just need to have access to the whole of the mortgage market to have the widest choice of options.
Agency Workers Contractor Mortgages
Agency workers are considered as low risk to mortgage lenders because, under the Agency Workers Regulations, they enjoy a lot of the same rights as those in permanent employment. So, provided you have more than 12 months of experience working in this capacity, you shouldn’t have too much difficulty finding a willing lender.
IT & Professional Contractor Mortgages
Professional contractors, such as those working in accounting, sometimes find that lenders will offer them a home loan based on contract rate, regardless of how long they’ve been in the role.
IT contractors are generally treated the same as other contract workers, however specialist advice from a professional mortgage broker may be needed as some lenders are unable to understand the stringent needs of somebody employed in this capacity.
How Much Can I Borrow for a Contractor Mortgage?
How much you can borrow for a contractor mortgage will depend on your specific situation and the lender (some lenders are more generous than others).
Once you apply for a mortgage the lender will conduct an affordability assessment to work out how much to lend you. The assessment will inspect the type of income you have, how much you generally earn, what your expenses are and how secure your income is.
How Do Lenders Assess a Contractor’s Income?
For those who have been working as a contractor for a long time, lenders will probably look at your income over recent years to get an idea of your average income. They will then use this figure to determine how much you can afford to repay each month.
However, if your earnings have changed significantly from year to year, they are likely to take the most recent (or lowest) year as an indication of your earning capacity.
Contractor Mortgages Day Rate
Some lenders may be willing to calculate your annual income based on your day rate, which can be particularly helpful if you only recently left full-time employment and thus don’t have an established record. You will, however, need to prove that you’ll succeed as a contractor with evidence such as previous experience and qualifications.
Lenders will take your daily rate and multiply it by the number of days you normally work per week. They’ll then multiply this out to the full year to work out your annual income.
Contractor Mortgage Advice & Tips
To help maximise the chances of securing your contractor mortgage, here we’ve listed some of our top tips.
Speak to Experts
It’s advised contractors looking for a mortgage utilise the knowledge and experience of a mortgage broker that specialises in contractors, like The Mortgage Heroes, for example. With access to the mortgage market and specially negotiated rates through our network Quilter Financial Planning Limited, these brokers have the best chance of getting you the right mortgage.
Ensure Your Contract Paperwork is Updated
Make sure the details on all your contracts are correctly recorded. Lenders will inevitably be interested in your contract rate and duration as they’ll use it as evidence of your income and long-term prospects as a borrower.
It’s also worthwhile checking and improving your credit score before applying.
Avoid Long Breaks Between Contracts
It’s important to note that lenders look at consistency as well as income which is why you should try to avoid any breaks between contracts. Mortgage lenders don’t like risk so any lengthy gaps between contracts will count against you.
Aim for a High Deposit
Those who are able to put down a deposit of 10% or higher will have the best chance of approval. The interest rates will also decrease the more you put down.
Make Sure Your Mortgage is Affordable
Take into consideration your financial commitments and outgoings and be realistic about what you can pay each month. Remember that interest rates may fluctuate so although you might be able to afford repayments at 2.5%, will you be able to if they rise?
Contractor Mortgage Broker Specialist
If you’re looking to get a contractor mortgage in the UK, it is strongly recommended you speak to a mortgage broker specialising in contractor mortgages. High street lenders are unlikely to understand the intricacies associated with contractors and will therefore either offer you extortionate rates or reject you completely. With access to the mortgage market, however, professional mortgage brokers have contact with the best lenders to ensure you find one right for you and your needs.
For professional help in securing your mortgage as a contractor, please don’t hesitate to get in touch with the team at The Mortgage Heroes today. We’re a leading mortgage broker in the UK helping contractors nationwide find a mortgage and the right cover.