There was a time when, unless you were a traditional 9-5 employee, your chances of being able to secure a mortgage (at a reasonable rate of interest) were slim. In recent years, the major mortgage lenders have relaxed their lending criteria in line with the changing nature of the UK’s workforce.
Despite this, some brokers struggle to submit mortgage applications to these lenders in a way that is a true reflection of what contractors earn.
For this reason, we recommend using a specialist mortgage adviser who has access to ‘contractor-friendly’ mortgage lenders who understand the way contractors work in practice.
Read on for answers to dozens of the most commonly-asked questions about securing a mortgage as a contractor.
How does the mortgage application process work?
In the past, contractors would typically have to wait until they had 2 or 3 years of trading accounts before approaching mortgage lenders. Some lenders prefer to lend only on multiples of your salary, not a combination of salary plus dividends. However, thankfully this is no longer the case.
Many lenders are now far more aware of non-traditional ways of working, and all you need to produce now is a copy of your current contract, your photo ID, 3 months’ bank statements, and proof of address (typically a utility bill).
So, there are no time restrictions these days. A specialist contractor-friendly broker will even be able to secure a mortgage offer on the first day of your contract.
Can contractors get access to ‘high street’ mortgage rates, or will they have to pay a premium?
If you are applying directly to the lender then they may charge a premium depending on what your accounts show and how long you have been contracting, or they may insist that you pay a higher deposit.
However, a contractor-specialist broker will be able to access ‘high street’ mortgage rates – giving you access to the same mortgage products as permanent employees.
We would recommend you use a contractor specialist as 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.
Can I use a high street broker to get a mortgage?
Yes – there are many approaches you can take to secure a mortgage – your own bank, another high street bank, or by using a comparison site. However, you will usually be better off using a specialist broker who has experience in 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.
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 got a 5% deposit, then a specialist lender can help in two ways either via the Help To Buy scheme where an additional 20% (40% in London) deposit is provided by a Government-backed loan scheme in order for you to purchase a new build property.
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.
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, first 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 there?
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).
The majority of 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 which offer discounted, tracker, and capped rates.
Your mortgage broker will be able to present you with a variety of mortgage options. Make sure you know what the real cost of each option is, once you take any introductory fees and other charges into account.
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?
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 will be able to 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.
What is an Agreement in Principle?
When you / your broker approaches a lender, and have provided them with your basic details, they will provide you with an Agreement in Principle (Decision in Principle) – which states, subject to further checks and proofs of income, they will be willing to lend you £x.
This is not a guarantee that they will lend to you but should give you the confidence to make an offer on a property. An Agreement will typically last from 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. A formal mortgage offer is still, of course, subject to conditions. A formal mortgage offer will typically be valid for between 3 and 6 months.
Do I need a large deposit?
Not necessarily – in some cases a broker will be able to arrange a 95% mortgage, however, you will be able to access much better interest rates if you are able to provide a larger deposit – from 10% and above.
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 financial crisis, many self-employed people were able to 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 are able to 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.
10 things to consider when applying for a contractor mortgage
Here are 10 well-tested things to consider when applying for a contractor mortgage in 2023.
1. Keep an eye on your credit score
One of the first things a prospective lender will do is subject your application to a credit check.
Any missed payments or CCJs will put a dent in your chances to secure a mortgage – or limit the amount you can borrow.
Make sure you and any co-applicant(s) are on the electoral roll for your current residential address.
2. More choices with a higher deposit
Most lenders require a deposit of 10% or more these days.
The more you can put down, the greater the range of products you will be eligible for. The interest rates offered drop significantly if you can raise 20%, 25%, or more.
3. Make sure your mortgage is affordable
Many people stretch themselves as much as possible in order to secure the property they want.
This is understandable, however, you should be sensible when working out how affordable repayments will be, especially if you already have significant outgoings.
Importantly, the Bank of England may raise the base rate, which means lenders will raise their variable rates, and pass on the rise to their clients.
You may be able to afford repayments at, say, 5% by mid-2023, but what if they rise to 6% or more in 2023/4?
4. Use a contractor friendly mortgage specialist
There are many ways to choose a mortgage broker.
Many simply get in touch with the financial services desk at their local bank, and others use well-known comparison sites as the first port of call.
However, due to the particular way limited company contractors work, we highly recommend contacting a contractor friendly mortgage specialist.
Specialists have access to specially negotiated rates with friendly lenders, and they understand the peculiarities of contract work.
The leading lenders will be able to secure you a mortgage even if you have only been working as a contractor for a short time.
5. Make sure your contract paperwork is up-to-date
Many contractors don’t yet have several years of company accounts to use during the mortgage application process. However, a specialist broker will be able to arrange a mortgage with just your current contract paperwork (and the normal ID documents).
So make sure you have your contract (and any past ones) ready to submit with your application. Make sure all the details on the contract (client, rate, your name, etc.) are correctly recorded.
6. Have your personal identification documents to hand
Whether you use your current contract as proof of income, or your company accounts (if you have several years’ worth), you will need to provide various pieces of paperwork to the lender.
In all cases, you will need proof of your name and address (passport, driving licence, utility bills), and recent bank statements.
If you’re using your accounts as proof of income, you will need signed copies of the past 2 or 3 year’s company accounts, and/or copies of your last few year’s HMRC SA302s.
You will need to contact HMRC directly to get printed versions of SA302s (tax calculations), although some lenders are now happy to use copies you have printed off from your online tax account yourself.
7. Avoid lengthy gaps between contracts
Mortgage lenders do not like risk, and if you have gaps longer than 6 weeks between contracts, or if your company accounts aren’t reasonably consistent over a period of time, this may count against you.
Often, a lender will take an average of your past 2 or 3 years’ accounts (if you’ve been contracting for a while).
If your most recent year’s net profit is significantly lower than previously, however, they may opt to use the most recent accounts as a basis for working out how much they are prepared to lend you.
8. Do some basic research before you apply
It is sensible to at least research the fundamentals of mortgage borrowing before you approach a broker so that you have realistic expectations.
There are many different products available – from tracker and discounted rates to offset mortgages. You should also find out the difference between fixed and variable rates, and other common mortgage-related jargon.
9. Will your lender allow overpayments?
There may be times when you have spare cash, which you’d rather use to offset against the capital of your mortgage loan, or simply to pay down the outstanding value of the loan.
Many mortgage products allow for overpayments, but others don’t.
Make sure you can make reasonable overpayments without risking penalties, or alternatively seek an ‘offset mortgage’, which takes into account the value of your savings and then ‘offsets’ this amount against your outstanding mortgage loan.
10. Watch out for additional charges and penalties
In recent years, you may have noticed that increasing numbers of lenders now charge additional fees for mortgage applications, rather than increasing the interest rates on loans.
Typical ‘extras’ include
- Arrangement fees (often for £1000 or more).
- Booking fees (often non-refundable – for processing the application).
- Valuation fees (to establish the value of the property you are buying).
- Early repayment charges (these can be significant – many thousands if you repay your loan early).
These fees can often be added to your mortgage, so you may not even notice in the short-term, however, they do increase the real cost of your mortgage.
The annual percentage rate of charge (APRC) is the total cost of the mortgage expressed as an annual percentage. Your broker should provide you with the APRC for each product you are interested in so that you can make an accurate comparison of different illustrations.
Contractor mortgages – what are your options?
Complete this short form for a rapid response from our recommended partner, Broadbench, who specialise in providing mortgages for contractors.