Everything You Need to Know About Contractor Mortgages in 2023

Aug 13, 2023

Written by Greg Hanton. Greg is co-founder of Joy Pilot, No Worries Accounting, No Worries Red Umbrella, and Capital City Accountancy. He has over two decades of experience in providing tax and accounting support to contractors, especially those working in the UK. Greg holds a BE (Hons) in Chemical & Process Engineering from the University of Canterbury and a BSc in Chemistry from the University of Otago. He is also a Chartered Accountant (ACCA), member of AAT, and a Chartered Engineer (IChemE). With a passion for innovation and client-focused solutions, Greg continues to lead the charge in transforming the accounting landscape. See more on LinkedIn.

With house prices not faring so well at the moment, along with the rise in interest rates, interest in getting a new mortgage would understandably be low right now. However, new data from the Bank of England revealed a surprise increase in demand for mortgages, with the increase from 51,100 in May to 54,700 in June.

So today I wanted to take a look at getting a new mortgage as a limited company contractor.

Obtaining a mortgage as a contractor might seem like a daunting task, because earnings can be erratic and the usual mix of a low salary and high dividends can confuse some lenders. This guide I have put together will provide you with everything you need to know about contractor mortgages in 2023. We will explore the ins and outs of contractor mortgages, the benefits of using a specialist mortgage broker, how to find the right mortgage lender, and much more. Let’s dive in and unlock the doors to your dream home (or one bed flat in Hackey depending on your budget)!

Video Summary

Want to watch our YouTube video instead? It summarises the main points but refer back to this article for more in-depth information.

Short Summary

  • Contractor mortgages are designed to help contractors secure a loan despite having irregular income.
  • A specialist mortgage broker can provide tailored advice and access to exclusive deals for the best possible deal.
  • Strategies such as evaluating interest rates, supplying income documentation, and assessing affordability can help overcome common contractor mortgage challenges.

Understanding Contractor Mortgages

A contractor signing a mortgage agreement with a specialist mortgage broker

Contractor mortgages are specifically designed for those with irregular income who are considered higher risk by lenders, making it difficult for them to get a mortgage through traditional means. This unique mortgage type helps contractors secure a loan without the hassle of meeting standard criteria, as they cater to the specific needs of contractors.

Mortgage providers evaluate various factors when assessing contractor mortgage applications, such as contracting history, industry experience, contract renewals, and remaining contract length, as well as other factors like age, credit rating, anticipated income, and property type.

The challenges contractors face when seeking a mortgage often stem from a lack of guaranteed, consistent income, and the mortgage market’s traditional focus on salaried employees.

Types of contractors

Contractors come in various forms, such as self-employed, fixed-term contracts, agency workers, and zero-hour contract Umbrella workers. Each type has its own eligibility requirements when it comes to securing a mortgage, which is why it’s crucial to understand the differences between them and how they impact mortgage eligibility.

For example, limited company contractors may have their taxable income, salary, and dividends taken into consideration when seeking a mortgage. On the other hand, fixed-term contractors are generally required to have 6-12 months remaining on their current contract at the time of mortgage application.

Understanding the specific criteria for each type of contractor can help in choosing the right mortgage and increase the chances of approval.

Lending criteria

Lending criteria for contractor mortgages can vary depending on the mortgage lender and their understanding of the contractor market. Factors like the remaining duration of the fixed term contract, income, and employment history, as well as credit score, play a significant role in determining a contractor’s eligibility.

To ensure a fair assessment of your situation, it’s often a great idea to work with a specialist contractor mortgage broker who understands the nuances of contracting and has established relationships with genuine contractor mortgage lenders who operate in the contractor mortgages niche. This can help you navigate the lending criteria and find suitable mortgage options tailored to your unique contracting circumstances.

The Benefits of Using a Specialist Mortgage Broker

A specialist mortgage broker giving tailored advice to a contractor

Working with a specialist mortgage broker who understands the contractor market can be a game-changer. They have the expertise and connections to help you find competitive mortgage deals that cater to your specific needs. They just remove a large amount of stress because they know how the market operates.

These brokers can assist you in compiling the required documents and obtaining competitive quotes in a timely manner. Additionally, they handle all paperwork and offer out-of-hours appointments, making the mortgage application process smoother and more convenient. And having first-hand experience with what the required documents will be makes information requests to your accountant faster and easier!

Tailored advice

Receiving tailored advice based on your unique contractor situation is such a huge time saver. A specialist mortgage broker can provide personalized guidance that takes into account the differences between contracting and standard employment, ensuring a fair assessment of your mortgage eligibility.

This personalized approach can make all the difference in securing the best mortgage deal for your specific needs.

Access to exclusive deals

Specialist mortgage brokers have access to exclusive deals that may not be available directly from specialist lenders or through conventional channels. These deals often come with more favorable terms and rates, providing a competitive advantage for contractors.

By working with a specialist mortgage broker, you can tap into these exclusive deals and improve your chances of securing a mortgage that suits your unique contracting circumstances.

Finding the Right Mortgage Lender

A contractor-friendly lender evaluating interest rates

Finding the right mortgage lender for a mortgage as a contractor can be a bit like finding a needle in a haystack because there are so many lenders and mortgage products on the market, and not all lenders understand the unique challenges faced by contractors. To increase your chances of success, it is a good idea to identify contractor-friendly lenders who are well-versed in contractor-related mortgages.

Contractor-friendly lenders

There are several high street lenders known for their contractor mortgage offerings, such as Clydesdale Bank, Halifax, Leeds Building Society, and Furness and Newbury Building Societies. These lenders are more likely to understand the unique needs of contractors and offer mortgage products tailored to their circumstances.

Working with contractor-friendly lenders can increase your chances of securing a mortgage. They take into account your contracting experience and offer competitive interest rates that reflect your unique situation. By partnering with a specialist mortgage broker, you can gain access to these contractor-friendly lenders and improve your chances of mortgage approval.

Evaluating interest rates

An image showing a calculator and a document with the title Contractor Mortgages - important for evaluating interest rates.

When comparing mortgage interest rates on offer, lenders will consider several factors, such as your credit score, home location, loan term, and personal financial situation. A higher credit score and stable income can lead to lower interest rates, while a longer loan term may result in higher rates.

To find the best interest rates for your contractor mortgage, work with a specialist mortgage broker who has access to various lenders and can help you navigate the complex mortgage landscape. They can provide guidance on comparing rates and assist you in finding the most competitive mortgage deals for your unique contracting situation.

Preparing Your Contractor Mortgage Application

A contractor preparing their mortgage application with income documentation and credit score

When applying for a contractor mortgage, being well-prepared will smooth out the whole process and increase your chances of success. Being well prepared means having your company financial records up to date, and (if you can) ensuring you have a good credit score.

Working with a specialist mortgage broker can help you navigate the application process and ensure you’re presenting the best possible case for your mortgage approval. They can guide you in determining the required documents, assessing your credit score, and addressing any potential obstacles that may arise during the application process. This kind of first-hand experience is invaluable and a real timer saver.

Income documentation

Lenders typically require contractors to provide proof of income, such as bank statements, tax returns, and/or payslips. The specific documentation needed will depend on the type of contractor you are, as different classifications have unique eligibility requirements.

For example, limited company contractors may be required to provide evidence of salary and dividends taken in the previous year, while fixed-term contractors may need to show the remaining duration of their current contract. And just to reiterate, by working with a specialist mortgage broker, you can ensure you gather the appropriate documentation for your specific contractor classification.

Credit score

A good credit score is helps a lot when obtaining a competitive mortgage deal. Lenders consider your credit score when determining your eligibility for a mortgage, and a higher score can lead to more favorable interest rates and terms. To improve your credit score, make sure to pay bills on time, reduce outstanding debt, and review your credit report for any errors or discrepancies.

By taking these steps, you can bolster your credit score and increase your chances of securing a competitive mortgage deal as a contractor.

How Much Can You Borrow?

A contractor assessing their income and affordability considerations for a mortgage

It’s important to understand the specific criteria for your contractor classification, as this can impact the amount you can borrow for a mortgage. If you are using a specialist mortgage broker, they will ensure you’re presenting the best possible case for your mortgage approval and borrowing the maximum amount possible based on your unique contracting situation.

Income assessment

Lenders calculate a contractor’s average income for mortgage purposes by considering factors such as the contractor’s daily rate, annual earnings, and time spent as a contractor. This income assessment helps determine the maximum loan amount a contractor can borrow for a mortgage.

For example, limited company contractors may have their taxable income, salary, and dividends taken into consideration when determining their maximum loan amount. Understanding how lenders assess your income can help you prepare for the mortgage application process and ensure you’re borrowing the maximum amount possible based on your unique contracting situation.

Affordability considerations

In addition to the income assessment, other factors impact the amount contractors can borrow for a mortgage. Lenders will carry out an affordability assessment to determine the amount they are willing to lend based on your income and outgoings.

When applying for a contractor mortgage, you need to be transparent about your financial circumstances and provide precise information regarding your basic income details. A specialist contractor mortgage advisor will be able to advise on this and can enhance your chances of securing a mortgage that meets your specific affordability criteria.

Mortgage Options for Contractors

A contractor considering buy-to-let, remortgaging and government schemes for their mortgage

Just like everyone else, contractors have various mortgage options available, such as fixed-rate, variable, tracker, discount, and capped interest rate mortgages. Additionally, these mortgages can be either interest-only or repayment, depending on your needs and financial situation.

It’s a good idea to understand the differences between these mortgage options and choose the one that best suits your contracting circumstances. A specialist mortgage broker can help you assess these options by having a good working knowledge of the market and getting you access to a wide range of mortgage products tailored to your unique needs as a contractor.

Buy-to-let mortgages

Buy-to-let mortgages are specialized mortgage loan products intended for individuals interested in purchasing a property for the purpose of renting it out. These mortgages can include fixed-rate, variable, tracker, discount, and capped interest rates, as well as interest-only or repayment structures.

We do have some contractor clients who arrange a buy-to-let mortgage through their limited company, for the situation where the company is buying a property. This is an investment-led decision however and the mortgage criteria will be different than if you are looking to purchase your own property to live in.

Remortgaging

Remortgaging refers to replacing an existing mortgage on a property with a new one, often with a different lender. This is usually done to take advantage of better interest rates, alter the mortgage terms, or access the equity built up in the property.

The application requirements for remortgaging can vary, but again, using the services of a specialist mortgage provider for contractors can help smooth the process.

Government schemes

A contractor overcoming common contractor mortgage challenges such as gaps in contracts and changing from an umbrella company to a limited company

Government-backed mortgage schemes provide access to mortgages that may not be available otherwise. These schemes, typically provided by the government or public bodies, offer lower interest rates, longer repayment terms, and other advantageous benefits.

Contractors may be eligible for a variety of government schemes, such as the Shared Ownership scheme. By engaging with a specialist contractor mortgage advisor, you can review your eligibility and enhance your chances of securing a mortgage through these government-backed schemes.

Overcoming Common Contractor Mortgage Challenges

Contractors can face unique challenges when securing a mortgage which are a different to those faced by full-time PAYE employees, such as the way of proving income, limited access to lenders, and gaps in contracts. By employing strategies like using a specialist mortgage broker, evaluating interest rates, supplying income documentation, and evaluating affordability, you can overcome these challenges and secure a mortgage that meets your specific needs.

Using a specialist mortgage broker can help you find the best deal for your situation.

Gaps in contracts

Gaps in contracts can pose a challenge for contractors when applying for a mortgage, as lenders may interpret them as a potential instability. To mitigate this, lenders may request additional documentation to demonstrate the contractor’s capacity to make mortgage payments during the gap.

By working with a specialist mortgage broker, you can ensure you gather the appropriate documentation to address gaps in contracts and improve your chances of mortgage approval. The broker will know what sort of information the lender is looking for which will help speed things along.

Changing from an umbrella company to a limited company

Changing from an umbrella company to a limited company can present challenges when applying for a mortgage, as lenders may have specific criteria for each type of contractor. This could make the application process more complex as you may need to produce earnings documentation for both types of contracting income.

By working with a specialist mortgage broker, you can ensure you’re presenting the best possible case for your mortgage approval when changing between contractor models.

Summary

Navigating the world of contractor mortgages can be complex if you are new to it, but with the right guidance and support your chances of getting a good mortgage deal that suits your specific needs are significantly increased. Also, we know that securing a mortgage as a contractor is much easier than it was 10 years ago. By understanding the different types of contractors, lending criteria, and mortgage options available, working with a specialist mortgage broker can help you overcome common challenges and find the perfect mortgage solution for your unique contracting situation. The key to success lies in thorough research, preparation, and the support of an experienced mortgage broker who understands the mortgage market.

Frequently Asked Questions

Is it difficult to get a mortgage as a contractor?

Getting a mortgage as a contractor may be more challenging than being employed, but its a growing market, and one that more lending institutions now cater to. The proof of income and stability of on-going work are two important factors that lenders look at, and using a good contractor mortgage provider can help you navigate this.

What is contractor mortgage?

Contractors looking for a mortgage may face difficulty as lenders prefer applicants to have long-term fixed employment contracts, however contractor mortgages offer an option to those who don’t have permanent employment.

These mortgages are designed to meet the needs of contractors, freelancers, and other self-employed individuals who may not have the same security of employment as those with permanent contracts. They are typically offered by specialist lenders, and the terms and conditions may vary from lender to lender.

How long do you have to be a contractor to get a mortgage?

To get the best mortgage, lenders generally require at least six months of evidence of earnings as a contractor. However, if you have more than twelve months of history, you’ll likely have more options to choose from.

Less than six months may be possible with some lenders, but your choice will be more limited.

Do any banks lend 5 times salary?

Mortgage income multiples are often a nice way of quickly determining what your maximum borrowing amount might be. As a rule of thumb, around 4 times your annual salary can be used for any initial calculations. But this is where contractor mortgages differ. There are many different variables that lenders will look at for contractors and a simple rule of thumb such as “x” times your annual salary simply won’t work for contractors.

How do lenders calculate a contractor’s income for mortgage purposes?

Lenders typically take into account a contractor’s daily rate, average annual earnings, and time spent as a contractor to calculate their income for mortgage purposes.

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