If you’re new to contracting or considering a mortgage as an established contractor, understanding how the mortgage process works for contractors is essential. The landscape differs significantly from traditional employment-based mortgages, and having the right information helps you make informed decisions.
As experienced contractor mortgage brokers, we’ve guided many contractors through this process. This guide explains the key concepts, common challenges, and practical considerations for contractor mortgages.
How Contractor Mortgages Differ from Standard Mortgages
Income Assessment Methods: Traditional mortgages rely on salary certificates and payslips showing consistent monthly income. Contractor mortgages require different assessment approaches, as your income comes from day rates, contracts, and business payments rather than salary.
Documentation Requirements: Instead of standard employment documentation, contractors typically provide contracts, invoices, bank statements, and sometimes business accounts. The specific requirements vary between lenders.
Lender Expertise Levels: Some lenders regularly work with contractors and understand the income patterns, whilst others have limited experience in this area. This can significantly affect your application experience and outcome.
Assessment Timeframes: Contractor applications may take longer to assess as they require more detailed review than standard salary-based applications. However, experienced contractor lenders often have streamlined processes.
Types of Contractor Arrangements
Limited Company Contractors: Many contractors operate through their own limited companies, taking a combination of salary and dividends. Lenders assess this structure differently, considering both extracted income and company profitability.
Sole Trader Contractors: Some contractors work as sole traders, with income assessed based on business profits and personal tax returns. This is often simpler for lenders to understand than limited company structures.
Umbrella Company Contractors: Contractors working through umbrella companies receive payslips, making income assessment more straightforward for lenders, though the employment status may still require explanation.
Inside IR35 Contractors: Contractors working inside IR35 often have employment-like arrangements, which can be easier for some lenders to assess, though the complexity of IR35 rules may require specialist understanding.
Key Factors Lenders Consider
Contract Strength and Duration: Lenders typically review your current contract terms, including day rate, duration, and renewal prospects. Longer contracts or those with renewal options are generally viewed more favourably.
Contracting History: Your track record as a contractor matters. Lenders often want to see evidence of consistent contracting work, successful contract renewals, and progression in your day rates over time.
Industry and Skills: Some industries have more stable contracting markets than others. Lenders may consider the demand for your skills and the typical contract patterns in your sector.
Financial Management: How you manage your contractor income – including saving patterns, expense management, and financial planning – can influence lender perception of your application.
Common Contractor Mortgage Challenges
Income Volatility Concerns: Some lenders worry about income consistency, even when contractors have stable client relationships and regular contract renewals. This can affect their lending decisions.
Documentation Complexity: Gathering and presenting the right documentation can be challenging, especially if you’re unfamiliar with what different lenders require.
Lender Knowledge Gaps: Not all lenders understand contractor employment patterns, which can lead to unnecessary complications or unsuitable lending criteria being applied.
Timing Considerations: The timing of your application relative to contract starts, renewals, or gaps can impact how lenders view your income stability
The Application Process
High Street Banks: Major banks vary in their contractor experience. Some have dedicated processes, whilst others may struggle with non-standard income assessment.
Specialist Lenders: Some lenders focus specifically on non-traditional income sources, including contractors, and may have more flexible assessment criteria.
Building Societies: Many building societies work with contractors, particularly those with established contracting careers and strong financial profiles.
Private Banks: For higher-value mortgages, private banks may offer contractor services as part of broader banking relationships.
Preparing for Your Mortgage Application
Gather Relevant Documentation: Ensure you have current contracts, recent bank statements, proof of address, identification, and any business accounts or tax returns that may be required.
Understand Your Income Presentation: Be clear about your annual income calculation, including how you present day rates, working patterns, and any variable elements of your contracting.
Consider Timing: Think about when to apply relative to your contract situation. Starting applications when you have a new contract or renewal can be beneficial.
Research Lender Options: Not all lenders are suitable for contractor applications. Understanding which lenders have experience in your area can save time and improve your chances.
The Role of Professional Broker Guidance
Lender Selection: Experienced brokers can identify which lenders are most suitable for your specific contractor situation and circumstances.
Application Preparation: Professional guidance helps ensure your application is presented effectively and includes all necessary documentation.
Process Management: Brokers can manage the application process, communicate with lenders, and help address any queries that arise.
Market Knowledge: Specialist brokers stay current with lender criteria changes and market conditions that may affect contractor applications.
Case Studies
Case Study 1: James, New IT Contractor - First Contractor Mortgage
Situation: James had recently moved from permanent employment to contracting and was unsure how this would affect his mortgage prospects. He had 6 months of contracting history and a 12-month contract.
Guidance Provided: We explained how different lenders assess newer contractors and identified those who consider employment history alongside contracting income.
Outcome: James understood his options and chose a lender who could assess his application based on his combined employment and contracting background. His application was successful.
Case Study 2: Rachel, Established Consultant - Remortgage Considerations
Situation: Rachel had been contracting for 5 years and wanted to remortgage to release equity. She was concerned about how her limited company structure would be assessed.
Guidance Provided: We explained how different lenders assess limited company contractors and the documentation typically required for remortgage applications.
Outcome: Rachel gained clarity about the process and requirements. She chose to proceed with a lender experienced in limited company contractor assessments.
Case Study 3: David, Construction Contractor - Understanding Seasonal Patterns
Situation: David’s contracting work followed seasonal patterns, with higher activity in summer months. He was unsure how lenders would view this income variability.
Guidance Provided: We explained how lenders typically assess seasonal contracting patterns and which lenders have experience with construction industry cycles.
Outcome: David understood how to present his seasonal income effectively and chose a lender familiar with construction contracting patterns.
Frequently Asked Questions
Q1. How do lenders calculate contractor income for mortgage purposes?
Ans: Methods vary by lender, but common approaches include annualising day rates based on working patterns, averaging income over recent periods, or assessing current contract value. Some lenders also consider contract renewal prospects and market demand for your skills.
Q2. Do I need a certain length of contracting history?
Ans: Requirements vary between lenders. Some prefer 2+ years of contracting history, whilst others may consider newer contractors, especially those transitioning from relevant permanent employment. Your specific situation and the lender’s criteria determine what’s acceptable.
Q3. Can I get a mortgage if I'm inside IR35?
Ans: Yes, many lenders work with inside IR35 contractors. The employment-like nature of inside IR35 arrangements can actually make income assessment more straightforward for some lenders, though you may need to explain the IR35 legislation.
Q4. What's the typical deposit requirement for contractors?
Ans: Deposit requirements for contractors are generally similar to those for employed borrowers. Most lenders offer mortgages with 10% deposits for contractors with strong income profiles, though having a larger deposit can improve your options.
Q5. How important is my credit score as a contractor?
Ans: Credit scores remain important for contractors, just as for employed borrowers. However, some specialist lenders may be more flexible with credit issues if your contractor income is strong and well-documented.
Q6. Should I wait until I have a permanent job to apply for a mortgage?
Ans: Not necessarily. If you have stable contracting income and choose the right lender, contracting doesn’t have to prevent homeownership. Many contractors successfully obtain mortgages whilst remaining in contracting careers.
Professional Contractor Mortgage Guidance
Understanding contractor mortgages is the first step towards successful homeownership as a contractor. If you’d like professional guidance tailored to your specific situation, our experienced team is here to help.
Schedule your consultation today. We’ll explain how contractor mortgages work for your specific circumstances and help you understand your options clearly.
