Getting a mortgage as an independent contractor can be tricky – but it’s not impossible. You just need to bring some extra paperwork to the table to prove you can afford it.
In this guide, we’ll explain everything you need to know about contractor mortgages.
First, what is a contractor in the eyes of a lender?
Mortgage lenders will usually consider you a contractor if:
- You’re self-employed
- You’re working with a company on a short or fixed term contract
- Your rate of pay has been agreed for the length of the contract
You may also count as a contractor if you’re an agency worker or on a zero-hours contract. The main thing is you’re taking on one contract at a time.
On the other hand, a lender will probably class you as a freelancer if you’re self-employed and working with several clients at the same time. Even though you’d have multiple streams of income in this scenario, some lenders may view a freelance portfolio as less reliable than a single, longer-term contract.
Can I get a mortgage as a contractor?
Yes! Being a contractor won’t stop you from getting a mortgage loan. However, the application process can be a little more complicated.
For starters, there’s more pressure to prove your income than if you were in a permanent position with a company. Some lenders want to see two to three years of accounts to make sure you can afford your mortgage repayments. Compare that to salaried employees, who can often get a mortgage based on their last three months of payslips.
Meanwhile, some high street lenders can be spooked by the fact that your contract has an end date. Although you might earn more than your full-time counterparts, if your contract only runs for 3, 6, or 12 months, the lender will want to know what happens to your income when your project finishes.
Now, you might not be worried. You know that your client is happy and will probably renew your contract. You’re also sure that you’ve got a solid track record in your field, and you could pick up another job if you had to.
Unfortunately, your self-confidence isn’t usually enough for mortgage lenders. They see this “insecure” approach to employment as high risk. They’re less likely to offer you an attractive mortgage deal when they follow their strict affordability assessment (more on that below).
But don’t lose hope. Getting a mortgage when you’re self-employed comes down to working with the right lender and proving that you can afford the repayments. If you can do that, you should have access to the same deals and rates as everyone else.
Here’s what you’ll need to prove your income as a contractor:
- Self-assessment (SA302) tax calculations, plus your tax year overview, for each of the last two or three years.
- Two or more years of accounts. Lenders like it when a chartered accountant has prepared your accounts because it lets them know they’re accurate. It may cost a bit extra to have this done, but it can be well worth it.
If you’re contracting through your own limited company, lenders might ask for evidence of dividend payments too. And they’ll sometimes ask for proof of upcoming work, depending on how long your current contract has left to run.
Armed with this information, lenders usually work out your average profit over the past few years. Once they have this figure, they can see whether you’ll be able to make your monthly mortgage repayments.
Can I get a mortgage if I’m paid a day rate?
Yes, depending on the lender. Some specialist lenders will calculate your yearly income based on your day rate rather than your profit.
They do this by multiplying your contract rate by the average number of days you work a week, then multiplying the total by the number of weeks you expect to work throughout the year.
A mortgage broker (like Habito) can help you find a lender who’ll accept your day rate as proof of income.
What else do I need to show lenders for a contractor mortgage?
Because it’s harder to prove your annual income as a contractor, there’s a bit more prep involved when you make your mortgage application. In addition to your tax returns and accounts, you’ll need to supply:
- A copy of your current contract: This is to show the lender the terms of your contract, including earnings, end date, and scope for renewal. If your contract only has a few weeks to run, it may be better to wait until it’s renewed before you go ahead with the application.
- A copy of your CV: This demonstrates your recent work history and experience in your field.
- Three to six months of bank statements: This is to prove that you’re earning what your contract says you are.
Plus, like any applicant, contractor or not, you’ll also need:
- Proof of ID (like your passport or driving licence)
- Proof of address (like a council tax bill)
- Utility bills from the past three months
Here’s a list of everything you’ll need in more detail.
And that’s not all...
Most lenders will also want to know how much you spend on bills and living expenses. That’s because they want to be certain you can afford to make your mortgage payments on top of your other outgoings. You’ll be asked about things like:
- Childcare costs
- Travel costs
- Credit or store card repayments
- Loan repayments
- General living expenses (spending on clothes, groceries, going out, holidays)
Here’s everything you need to know before applying for a mortgage.
How much can I borrow if I’m a contractor?
There’s no simple answer here because your circumstances are unique.
When you apply for a mortgage as a contractor, the lender will carry out something called an affordability assessment based on the value of the property you want to buy and your monthly income and expenses. This helps them figure out if they’re happy to lend you money, how much they’re willing to lend, and at what interest rate.
Getting a mortgage when you’re a contractor: a few tips for success
Like any other mortgage application, having a good credit score and a healthy deposit will go a long way towards improving your chances of getting a mortgage when you’re a contractor.
- Lenders don’t like risk. They don’t tend to lend huge sums of money to people they consider a higher risk to lend to, unless they can be sure they’ll be repaid on time and in full. A strong credit score helps to show that you’re responsible when it comes to borrowing and repaying money.
Need some help with your credit rating? Here’s everything you need to know to improve your credit score.
- Having a bigger deposit also reduces the risk in the lender’s eyes. This is thanks to something called your loan-to-value (LTV). Your LTV is the size of your mortgage as a percentage of the total property value.
For example, if you want to buy a house worth £150k and you have a 5% deposit, your LTV is 95%. If you have a 10% deposit, your LTV is 90%, and so on. The lower your LTV, the lower the interest rates (and the lower the monthly repayments).
- Finally, mortgage providers want to see regular, reliable income. Gaps in employment could result in missed payments, which, in turn, could dent your credit score. So if you’re applying for a mortgage as a contractor, it’s best not to have too long a break between contracts – ideally, no more than eight weeks from any 12 month period.
Looking for a contractor mortgage? Habito can help
Searching for the right mortgage while contracting can be tough. That’s why it makes sense to work with a broker who understands the contractor mortgage process inside and out.
As a “whole of market” broker, we can help you find the best deals and exclusive offers from contractor-friendly lenders.
Or, if you’d rather go through the mortgage process once (and never again), our innovative Habito One mortgage has been built with contractors like you in mind. We just need one year of accounts, and you can enjoy an interest rate fixed for the full term. Learn more here.