There was a time when, unless you were a traditional 9-5 employee, your chances of securing a mortgage (at a reasonable interest rate) were slim. In recent years, major mortgage lenders have relaxed their lending criteria to fit the changing nature of the UK’s workforce.
Despite this, some brokers struggle to submit mortgage applications to these lenders in a way that genuinely reflects what contractors earn.
For this reason, we recommend using a specialist mortgage adviser with access to ‘contractor-friendly’ mortgage lenders who understand how contractors work in practice.
Read on for answers to dozens of the most commonly asked questions about securing a mortgage as a contractor.
What’s in this guide?
- Can contractors get access to ‘high street’ mortgage rates?
- How much can I borrow?
- What mortgage loan products are available?
- How does the mortgage application process work?
- Mortgage products – fixed vs. variable rates
- Introductory Fees and Early Repayment Charges
- Contractor mortgage FAQs
- Top 5 tips for securing a mortgage
- What are your options? Get advice and ask for quotes
Can contractors get access to ‘high street’ mortgage rates?
If you are applying directly to the lender, they may charge a premium depending on your accounts and how long you have been contracting, or they may insist that you pay a higher deposit.
However, a contractor-specialist broker can access ‘high street’ mortgage rates, giving you access to the same mortgage products as permanent employees.
We recommend you use a contractor specialist. They will know which lenders to approach and exactly what type of information and proof of income you will need to produce to secure a mortgage offer.
How much can I borrow?
Unsurprisingly, this depends on a number of factors, including:
- The size of your deposit.
- Your contract rate / other income.
- Any existing financial commitments you may have.
- Your credit rating.
- How many applicants there are.
Contractor specialist mortgage brokers typically estimate that you can secure lending of between 4.5 and 5 times your income.
If you are basing lending on your contract rate, multiply your daily rate by 5 to get your weekly rate, then multiply this by 48 weeks in the year.
For example, if you are on a daily rate of £400, you should be able to borrow £432,000 (based on a 4.5 multiple).
What mortgage loan products are available?
Depending on your personal circumstances, there are a number of mortgage products on offer to contractors.
Your mortgage will either be fixed-rate (where the interest rate remains constant over a fixed period of time) or variable rate (where the rate may change – such as when the Bank of England raises the base rate).
Most mortgages are repayment (where you repay part of the capital loan, plus interest each month).
Interest-only mortgages are far less widely available these days, as the mortgage industry has had to tighten up its lending criteria following the credit crunch over a decade ago.
There are many types of variable rate products available, including those offering discounted, tracker, and capped rates.
Your mortgage broker can present you with a variety of mortgage options. Once you take any introductory fees and other charges into account, make sure you know the real cost of each option.
Read our dedicated article – what mortgage products are available to contractors.
How does the mortgage application process work?
The process of applying for a mortgage as a contractor is very similar to that of a traditional employee – although your proofs of income and employment will be provided by your own company and accountant rather than an ’employer’.
As alternative types of employment have boomed in recent years, many contractor-friendly lenders are keen to lend to the self-employed.
The key to a successful application is using a contractor mortgage broker and ensuring that you can provide all the required paperwork promptly and accurately.
Here are the typical steps you take when applying for a contractor mortgage.
1. Choose a mortgage broker
There are many ways to choose a mortgage broker – use your (or another) high street lender directly, use a mortgage comparison site, or find a specialist lender.
Of course, you may well have a successful experience with mainstream brokers, but from our experience, we’d recommend hiring a specialist contractor mortgage broker to search the market for you.
A specialist will be very familiar with contractors, their finances, the paperwork required, and how to deal with potential problems. They will also have access to rates and products which have been designed especially for the contractor market.
The mortgage broker can provide you with a range of potential products based on your preferences, the mortgage types you are interested in, and your contract rate / annual company profit.
Once you have narrowed your search down to one product, the broker will try to arrange an agreement in principle.
2. Provide information
Mortgage lenders will require a wide range of information and data from each applicant. The proof of income documents will vary according to the lender/broker/ your position.
For example, you can secure a mortgage based on your contract rate alone, whereas other contractors may be asked to provide their company / personal accounts if they have been in business for several years.
For limited company contractors, the information required will depend very much on your position. Documents include:
- Copies of your ID (passport, driver’s licence).
- Proof of residence (your address) – Council Tax/utility bills, etc.
- A copy of your contract / previous contracts (for new contractors / no accounts available).
- An up-to-date copy of your CV(for new contractors / no accounts available).
- Copies of previous P60 forms(for new contractors / no accounts available).
- Copies of your limited company’s accounts signed/stamped by a qualified accountant.
- Copies of your SA302(HMRC personal tax calculations).
- Up to 6 months’ worth of bank statements.
3. The mortgage offer is sent out
Once the lender has undertaken credit checks and validated your documents, they will issue a formal mortgage offer.
4. Undertake the legal process to buy the property
When purchasing a property, the applicant(s) and their solicitor need to take several legal steps.
You will need to arrange a survey on the property, secure all necessary paperwork from the buyer, and transfer a deposit so that the exchange can take place after all legal checks have been done.
The deposit is typically 5-10% of the purchase price, which you must provide in cash.
Your mortgage broker will liaise with your conveyancer to ensure everything goes smoothly.
Finally, on completion day, funds will be transferred from your solicitor to the buyer’s solicitor, and the property will legally be yours.
Mortgage products – fixed vs. variable rates
The types of contractor friendly mortgage on offer can confuse the hardiest contractor veteran. Here we explain what products are available, and what they mean in practice.
Before we explain what each product really means, we should look at how mortgages of all types are repaid.
Repayment vs. Interest
When you repay your mortgage loan, the instalments will be used to repay the interest charged on the loan (interest-only), or be used to pay off the capital itself (the amount borrowed) as well as the interest payable to the lender.
Interest-only mortgages were popular before the credit crunch, but since 2008/9, lenders have been forced to abide by stricter lending criteria, so these days you are most likely to be offered loans on a repayment basis only.
Factors which affect the mortgage type you choose
There are over a dozen commonly-used labels for mortgage products – including ‘tracker’, ‘offset’ and ‘flexible’ mortgages. And confusingly, many are simply variations of the same type of fundamental product.
Which type you choose will be determined by a number of factors, such as:
- The mortgage term
- The interest rate payable
- Any initial charges
- The method of repayment
- Special situations (such as Buy to Let/using Government assistance)
Most contractor mortgages are of one of two types:
- Fixed Rate– where the interest rate you pay is fixed over a specific time period
- Variable Rate– where the interest you pay may change – for example, if the Government changes the central rate of interest (bank/base rate)
Fixed Rate Mortgages
You will pay a fixed rate of interest for the full mortgage term (often between 2 and 5 years). The rate will often be higher than a variable-rate mortgage, but you will have the security of knowing exactly what your monthly repayments will be.
When the fixed term expires, you will be moved to your lender’s standard variable rate (SVR) – which will often be significantly higher. So, make sure you secure a new deal several months before your fixed term comes to an end.
A good contractor mortgage broker will contact you usually 6 months before your term ends to arrange a new deal for you, thereby avoiding you from going onto the higher SVR.
In the current climate of steeply rising interest rates, our preferred partner Broadbench, is offering contractors a flexible option. They can help you secure a rate now with a new/current lender based on the market rates today. The new deal won’t go live until your current rate expires, so if a better mortgage deal becomes available before your current rate expires, they’ll switch you to this deal. In this way, you’ll ensure that you get the best interest rate no matter how the market changes.
Watch out for early repayment penalties, or other charges.
Variable Rate Mortgages
There are many variants of variable rate mortgages – where the interest you pay during the mortgage term can change – either upwards or downwards (most typically when the Bank of England changes the base rate).
Standard Variable Rate (SVR)
This is the ‘standard’ rate your particular lender charges. The SVR will vary between lenders.
Discount Rate
As the name suggests, lenders offer loans at a discount to their Standard Variable Rates, for a specific length of time. Make sure you compare the final rate you will pay after the discount… not the amount of the discount.
Tracker Mortgages
These types of loans track the Bank of England’s bank rate, plus a fixed additional chunk of interest charged by the lender. If the bank rate increases by 0.25%, your interest rate will rise by the same amount.
Capped Rate
Although your mortgage can rise, this type of agreement limits the amount by which your interest rate can rise during the term of the mortgage. Additionally, the level of the cap will often be fairly high compared to other products.
Offset Mortgages
This product links your savings account to your mortgage account, so the value of any savings you have at any one time will offset the total amount of your mortgage loan.
Be aware of introductory fees and early repayment penalties
- Make sure you compare like with like when choosing a mortgage product. Consider things such as the SVR when an initial discount period expires, as well as additional charges and fees which may be payable.
- Watch out for introductory fees, which sometimes run into thousands. They will make the real cost of your mortgage higher. Look up the Annual Percentage Rate of Charge (APRC) for your loan to establish the real cost.
- Find out if there are any early repayment penalties on your loan. Again, these can sometimes run into many thousands – and could be a nasty shock if you need to change lenders for whatever reason, before the end of the term.
Contractor Mortgage FAQs
Can I use a high street broker to get a mortgage?
Yes, there are many approaches to securing a mortgage—your own bank, another high-street bank, or using a comparison site.
However, you will usually be better off using a specialist broker who has access to contractor-friendly mortgage lenders and has experience dealing with contractors.
A specialist will have access to a range of mortgage products which have been tailored for the unique working and financial position of contractors.
Do contractors have to pay higher interest rates on their mortgages?
No, contractors are not seen as ‘high-risk’ workers – as perhaps they were a decade or so ago. Many lenders are more than happy to lend to contract workers – and rates are no different from those of traditional ’employees’.
How many years of accounts do I need to prove my income?
Although most company owners will need to provide company accounts to prove their income, specialist brokers are able to secure you a mortgage based on your contract rate alone.
The unique nature of contracting used to be a hindrance when buying property, however, these days many lenders are happy to provide mortgage products to new contractors, based on the terms of your current contract.
I’ve just started contracting. Can I still get a mortgage?
Yes. Specialist brokers can arrange mortgages for contractors who have just started their first contract.
What paperwork will the broker need from me?
All lenders will require proof of your name, address and income. If you are applying based on your contract rate alone, you will need to provide a copy of your contract.
If you’re applying using your company’s accounts, then you will need to provide signed copies. See above to find out how the application process works.
What is an Agreement in Principle?
When you / your broker approach a lender and provide them with your basic details, they will provide you with an Agreement in Principle (Decision in Principle). This states that, subject to further checks and proofs of income, they will be willing to lend you £x.
This does not guarantee that they will lend to you, but it should give you the confidence to make an offer on a property. An Agreement will typically last between 60 and 90 days.
What is a Mortgage Offer?
Once a lender has completed its full checks, they will offer you with official confirmation that they are willing to lend you an agreed sum.
Of course, a formal mortgage offer is still subject to conditions. It is typically valid for between 3 and 6 months.
How does Stamp Duty work?
When you purchase a residential property, you have to pay tax (Stamp Duty Land Tax) – which is based on the purchase price. You can find out your SDLT using this calculator.
There is an SDLT discount if you’re a first-time buyer and a premium to be paid if you already own a property. Find out more in this official guide.
The tax is paid upon completion of the property purchase, so make sure you put aside funds to cover this additional cost.
What about Self Cert mortgages?
Before the credit crisis, many self-employed people could secure mortgages on a self-certification basis.
Unsurprisingly, this type of product is no longer available, and lenders now take a much more stringent approach to lending – to ensure that applicants can meet their repayments.
What costs should I expect to incur when I apply?
You may need to pay your broker a fee for mortgage advice (this is standard practice). You may also have to pay the lender an ‘application fee’ – which is becoming increasingly common.
Other typical house purchase costs include stamp duty (see above), solicitors’ fees, and surveyors’ costs.
Can I get a 95% contractor mortgage?
The answer is yes, however more competitive deals are usually available to borrowers with a minimum 10% deposit.
If you are a contractor and have only a 5% deposit, a specialist lender can help in two ways: via the Help To Buy scheme, which provides an additional 20% (40% in London) deposit for a Government-backed loan scheme to purchase a new-build property, or via the Help To Buy scheme, which provides an additional 20% (40% in London) deposit for a contractor.
Or with lenders offering both 95% products and a contractor-friendly policy. Multiple High Street lenders are willing to lend using specialist contractor criteria to contractors with a 5% deposit.
Top 5 tips to securing a mortgage
- The higher the deposit you can raise, the more products you will have available and the better the rates of interest.
- Try to avoid long gaps of more than 6 weeks between contracts.
- Be upfront and honest about debts or credit commitments to avoid delays.
- To minimise delays, make sure you have all of your paperwork in place (ID, proofs of income, contracts).
- Try to keep your credit rating strong. Make sure you’re on the electoral roll and make sure you make all your credit payments on time.
Contractor mortgages – what are your options?
Complete this short form for a rapid response from our recommended partner, Broadbench, who specialises in providing mortgages for contractors.