If you are a contractor on a daily rate there are many mortgage options to consider. Our guide will help you with the options available
The Ultimate Guide to the Best Mortgage Deals for Contractors
As specialist mortgage brokers for contractors, our dedicated team are dealing with the best mortgage lenders for contractors on a daily basis. We understand the issues, questions and criteria lenders rely on to approve a contractor mortgage application. This guide will hopefully go some way in clarifying the details you need to understand to ensure a successful application.
Contracting work is common in several industries. An independent contractor works for companies or businesses as needed, under the terms of an agreed contract.
Mortgage lenders generally classify Contractors under one of the following descriptions and treat them differently in regard to how they view their income and what proof of income they will accept in their mortgage underwriting process:
- Daily Rate Contractor – Daily rate in excess of £220 per day
- Daily Rate Contractor – Daily rate less than £220 per day
- Fixed Term Contractor
- CIS Contractor
Once a contract is nearing its end date it one tends to start discussing new contract terms with the existing company, or a new one, to ensure there is little or no break between income sources.
For mortgage purposes, there needs to be no more than a week gap between a contract, and no more than 8 weeks total in a year otherwise this makes obtaining a mortgage that much more difficult. Your income must be in sterling, subject to UK tax and your experience in the industry needs to be in the UK.
Contracting work can make applying for a home loan quite challenging. This article tells you everything you need to know on this topic.
The 4 types of Contractor Mortgage deals
The Daily Rate Contractor – In excess of £220 per day
Where you are a day rate contractor earning in excess of £220 per day lenders will assess your income based on this daily rate. Most lenders will use the following calculation to assess the annual income they will use in their affordability calculations:
Daily rate X number of days a week worked X 46 weeks per year
So, if you were on £220 per day this would equal:
£220 x 5 x 46 = £50,600 (The income used by the mortgage lender)
- With this type of contract, no accounts or tax returns will be needed.
- Invoices and corresponding bank statements will be required.
- No umbrella companies accepted
- You would need to have at least 2 years’ experience in that specific job role, not specifically contracting.
- If you have less than 2 years’ experience lender may require your daily rate to be in excess of £325 per day
Actual Case Study:
Anna was a previous client and sold her house in London to relocate, with her partner Mark to Scotland. Mark had a relationship with a major High Street Bank, so they went there first.
Mark had only started work as an IT contractor in the previous 4 weeks and was earning £675 per day. Mark had 4 years in his previous employed role in the same line of work and 12 years in the industry.
They were finally declined a mortgage, after dragging them through a 2-week ordeal stating that they could help, as this bank do not accept contract workers as they classify them as self-employed and required 2 years accounts which obviously couldn’t be produced.
They approached one of our specialist advisers at The Mortgage Broker Ltd and we had a mortgage offered for them within 5 weeks and completed within 8 weeks from time of application.
Is it always that easy?
However, if you were employed for 2 years as above, but prior to starting your new career as a contractor you decide to take 3 months off for some well-deserved rest and recuperation – Once your holiday period has ended, you secure a new 3-month contract at £350 per day and work until the contract finishes.
If at the end of this 3 months’ contract, you decide to take another few weeks off (because you deserve it and why not, this is the lifestyle of working hard, earning good money and receiving the flexibility and free time that you desired) Obtaining a mortgage in this scenario will prove much harder and near impossible as lenders do not like such large gaps in your contracting history.
Daily Rate Contractor – Less than £220 per day
On this basis of this type of contract, lenders will NOT lend to you based on your daily rate and will looking to use the income from your Ltd company accounts / tax returns to assess affordability and your borrowing capacity.
You will need to have been registered as self employed for at least 14 months (ready to have at least one year’s accounts and tax returns finalised) and with this you would only have a limited selection of lenders to choose from. However, with 2 years accounts / tax returns there will be a much larger choice of lenders and mortgage deals to choose from.
Once lenders have the proof of income as described above, they will use their normal underwriting criteria to assess how much you can borrow.
Fixed term contractor
This is a contract where you are paid a salary and your tax and NI is deducted at source, these contracts generally run for a period of 3 – 6 months.
Lenders will want you to have previous experience in the industry you are now contracting in. Having two years’ experience in a role and being offered your very first 3- or 6-month contract (within the same type of industry / role) a mortgage would / should be possible albeit from a small selection of lenders and this would be available up to 95% loan to value.
Lenders don’t like large gaps in between contracts, you may get away with a 6-week gap in a 12-month period but try to limit this where possible for the sake of securing a new mortgage. There are of course exceptions to every rule and some lenders may consider something outside of this scenario if they have good reasons to lend – Such as proof that you were on long term sick or other exceptional circumstances.
There would be a much larger selection of Contractor mortgage deals available to you if you have 12- or 24-months contractor experience.
Can CIS contractors get a loan?
The Construction Industry Scheme (CIS) requires you to fill in a self-assessment tax return while working for a construction firm as the tax deducted at source is not always the full amount. Many such contractors have trouble trying to find a lender who will grant them the home loan they need to buy their own property. Oftentimes, the lender works out how much they are willing to lend on your net profit rather than your day rate or total income.
You may, however, find you have fewer options to choose from than someone in a regular job. Experience in the job would be needed, no accounts would be requested, invoices and contract term would be the main requirements.
I just started contracting one month ago – can I get a mortgage?
Potentially yes, although this would depend on the job role, your experience in the industry, contract day rate amongst other things. Most lenders will need to see the last six months’ worth of income. If you have only been contracting for a month, this does not provide ample proof of stability. The longer you work in this manner for, the better the odds are of being accepted for a home loan – and the more options you could choose from too.
I have a limited company but no accounts, but I have a contract
Proof that you are on a contract is a good start. However, while limited company directors can apply for mortgages, you should expect any lender to request accounts to back up your figures. They are also likely to focus on your salary and the dividends you receive from your company, rather than the earnings you are bringing in.
How long do I have to be contracting before I am eligible for a mortgage?
The longer your contracting history goes back the easier it is to get a mortgage as the choice of lenders available to you is far greater.
Where this is not the case, you should be able to demonstrate you have experience in the sector you are working in. For example, you may have years of experience working in that sector, but you have only started contracting in the past year or so. Lenders will want to be sure you are in a good working position when assessing your suitability for a loan to buy a property.
In some circumstances it is possible to get a mortgage even on your 1st day of contracting but as you could imagine the terms and conditions behind approval for this are more demanding than for someone who has been contracting for two years plus.
Can I get a home loan if I am fixed-term contracting?
Yes, you can. You should be able to prove you have a reliable history of fixed-term contracts in the past. Going from one contract smoothly into the next with no break will help, too. You should also make sure you have several months left on your current contract, possibly with plans for your next move as well. Experience in the job itself could also be required by some lenders.
It is worth remembering contracting is far more common in some industries than others. If you work in an industry where most people work on contract terms, it is likely to be better received than if you are the exception. In the latter case, the lender will have little history or knowledge to go on to help them decide.
Can I get a loan with big gaps in contracts?
Some contractors move from one job to the next with little or no gap in between. However, in other cases there could be gaps of several weeks or months when no income is being received. This question is commonly asked by contractors. We would advise you to seek advice from a specialist adviser dealing with contracting and associated loans on a regular basis. Lenders will consider job experience, contact experience, day rate and the reason for the gap in contracts when underwriting a mortgage for you.
Can I be accepted for a home loan with borrowing based on daily rate?
Yes, a lot of contractors are paid a daily rate for their work. If this is true of your own situation, you will find you are limited in the lenders that will consider you for a loan. However, don’t despair – it is not impossible to achieve your aim. The amount of your daily rate of pay will determine how lenders view you as a contractor.
If you are earning over £325 per day, the lender will work out how many days and weeks you work each year, using the daily rate to calculate your income. The likely holidays you will take each year will be considered too, so your day rate might be worked out as five days every week for, perhaps, 46 – 48 weeks of the year, for instance.
I have a small deposit of 5% - can I get a home advance?
There are many rumours and supposed ‘truths’ flying around about mortgages for contractors. Some believe that while the rest of the working population can get a loan with a 5% deposit paid up front and that this would not apply to contractors – this is not true.
You may find you have limited options among lenders who will accept a deposit of just 5%. However, those options are out there. Specialist lenders or brokers dealing with contractors on a regular basis are more likely to find potential sources of these loans.
It is also prudent to try and save as much as possible towards your deposit (again, this applies to everyone). The more you can put down upfront, the more you are reducing the risk you present to a lender. You’ll likely find the interest rate on your loan will be lower too, saving you considerable money over the medium and long term.
Can I get a Help to Buy mortgage as a contractor?
Yes, contractors are not excluded from the Government-run scheme. This should also be your main home – as the scheme does not provide for those looking to purchase a second home anywhere in the country.
It is wise to seek advice from specialist brokers experienced in helping contractors find the right home loans for them. Anyone who is unfamiliar with contractor income and how it is paid could decide you are not earning enough to qualify for the home loan you would still need under this scheme.
Can I get a Buy to Let mortgage as a contractor?
Yes. Similar elements come into play here that we have already seen above. Depending on which ‘Contractor’ category you fall under, a lender will consider you for a buy to let loan. Depending on the lender chosen, your contractor status and the amount of income you earn, a buy to let mortgage should be possible, although you would still have to meet the other buy to let criteria that the lender may require such as a deposit of at least 25% and a rental figure that exceeds the mortgage payment by at least 145% and beyond.
The complexity of this scenario points to the importance of seeking expert advice from those who are familiar with the unique challenges met by those who work as contractors.