Mortgages for Contractors: Everything Contractors Need to Know about Mortgages

7 min
Important to know

A mortgage is a loan secured against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

Freelancers and contractors looking for mortgages may encounter difficulties in getting one. Working on Contractors’ mortgages requires specific attention, and for most lenders, underwriters are the only staff capable of providing these requisite levels of attention. 

Sadly, you hardly find underwriters in your High Street branch, making the contractor mortgage application process challenging. If this is your first time looking for a mortgage, you might need to familiarise yourself with information like this. 

So, to make the entire process less complex, we covered every question you may have about contractor mortgages in this guide. Let’s dive in. 

#1. Can I Secure a Mortgage if I Just Won My First Contract?

Contract-based underwriting eliminates the need for two years’ documented trading history. Therefore, It is possible to obtain a contractor mortgage if you have just won your first contract. However, there are conditions.

You will need to prove that you can repay the loan and have at least two years of experience in the same line of work. A CV with a recent work history reflecting the contractor industry is required. 

#2. Can I get a Contractor Mortgage as an Umbrella Employee?

The short answer is yes. You can get a contract mortgage as an umbrella employee. However, umbrella employees may be subject to additional checks in addition to the usual criteria for borrowers: credit history, age, and income. 

Some lenders require a minimum six-month trading history, but the additional criteria may differ from one lender to another.

#3. Why Do High Street Mortgage Lenders Continue to Let Down Contractors? 

High-street lenders classify all independent professionals in the same category and assess them based on their tax returns or accounts, which are disproportionate to their income.  

Most limited company contractors maintain low salaries and dividend drawings, and their income may exceed anything they have ever earned as a contractor. But with High Street, you will likely get an unfair offer because of how bank staff categorise self-employed applicants.

#4. Can I Secure a Contractor Mortgage if My Contract is Almost Over?

You can still secure a contractor mortgage even if your contract is almost over. Usually, the more time you have left on your current contract, the better your chances of getting a contractor mortgage. A lender will typically be satisfied if you have 4-6 weeks left on your contract. 

#5. What Documents Do Lenders Require to Process Mortgage My Application?

Mortgage lenders often request an offer of an extension if you have a short time left on your contract. They also require proof of identification and copies of your business and personal bank statements. Other documents that lenders will require include your CV, SA302 form, and a copy of your last contract.

#6. Can I Know the Current Stamp Duty Rates for Contractors?

The table below shows the property value and current UK government’s Stamp Duty Land Tax rates (SDLT):

Property Value (£) SDLT (%)
<= 250,000 0
>250,000 but <925,000 5
>925,000 but < 1.5M 10
>1.5M 12
  • First-time buyers pay no SDLT on purchases up to £425,000
  • First-time buyers pay 5% SDLT on the portion from £425,001 to £625,000
  • First-time buyers pay standard SDLT on property values over £625,000
  • Second-home purchases attract a 3% premium for valuations over £40,000, on top of the above rates.

#7. What are the Key Differences between Standard and Contractor Mortgages?

Standard and contractor mortgages differ regarding employment status, income verification, eligibility criteria, and borrowing capacity. Standard mortgages require a minimum of 2 years of employment history, use tax records as proof of predictable income, and multiple borrowers’ salaries to determine loan amounts. 

Contractor mortgages, on the other hand, accept annual contract income as proof of earning potential. They also focus on income and future contract stability and use the annual contract income or day rate to calculate the borrowing amount. 

#8. When Applying for a Contractor Mortgage, will I be better off using my Current Bank?

Not necessarily, even if you have been banking with the high street for a long time, the relationship is unimportant. This is because an underwriter who does not know you from anywhere before will be the one to review your application. So, rather than using your current bank, it is generally advisable to use a specialist contractor mortgage broker.

#9. My Credit Rating is Bad. Can I still Secure a Mortgage?

Self-employed individuals with poor credit should apply for mortgages through a specialist broker. Each lender search on your credit files leaves a footprint. 

When a high-street lender conducts a search and later fails, it leaves an unpleasant footprint. Working with a specialist broker increases your chances of getting a contractor mortgage, even with poor credit.

#10. If I Work Out Affordability Using My Contract Rate, How Much Mortgage Can I Get?

After working out affordability, contractors who qualify for a mortgage can borrow up to 4 1⁄2 and, in some cases, 5 times their annualised contract rate. However, working with a mortgage broker who understands your peculiar circumstances and helps you find a suitable mortgage product is ideal.

#11. How Do Mortgage Lenders Distinguish Between Contractors and Freelancers?

Clients often describe contractors as freelancers. However, mortgage lenders and brokers appraise contractors differently.

For freelancers, tasks are ordered on an ad hoc basis and invoiced per task, and the hours are not set. Additionally, the cost per client is quoted per task, with no long-term commitment, and the worker has to handle raising and following up on invoices. 

On the other hand, contractors invoice their work weekly or monthly, with commitments spanning up to a year and tasks ordered for a specified period through the agency. Also, the hours usually coincide with the client’s business hours, and the cost per client is unquoted for the specific task but for the time. 

#12. Can I Remortgage once my Introductory Rate Finishes?

Naturally, homeowners will want to shop around when their initial rates expire. Most mortgages have a fixed rate for the first 2-3 years before defaulting to the vendor’s track rate.

The best way to apply for a contractor mortgage is to use only a specialist mortgage broker. While many people go with this high-interest rate, consulting with a specialist broker will help you decide if using your contract to remortgage is the best for you.

#13. Must I Provide Three Years’ Accounts to Secure a Contractor Mortgage?

No, if you go through a specialist contractor mortgage broker. But the high street probably requests 2-3 years’ accounts.

#14. Do I Need Life or Income Protection Cover as a Contractor?

Contractors are advised to secure an income protection policy. This is not mandatory, but with such a policy, you can safeguard a percentage of your earnings to assist you in meeting your financial obligations and cover everyday living expenses. When you cannot work due to injury or illness, you may receive tax-free monthly payments of up to 70% of your income.

#15. How Do I Apply for a Contractor Mortgage?

The process of applying for a contract mortgage involves having an idea of how much you can borrow based on your contract rate. You will also need to enter into an Agreement/Decision in Principle with the lender, after which you will receive an offer confirming the amount you are eligible for and the repayment rate. However, the process can be a little tricky but not to worry. We can walk you through the process. All you need to do is contact us.

#16. How Much Deposit Do I Need to Secure a Contractor Mortgage?

Many have erroneously believed that to secure a contractor mortgage, one will need a huge deposit. You do not need a deposit bigger than that required for permies for a contractor mortgage. However, putting down a huge deposit can result in many added benefits. 

#17. Do Lenders Charge Higher Interest Rates from Contractors?

No, but the amount you put down as your initial deposit affects the interest rate. A bigger deposit equals greater security. In other words, the more down payment you make, the smaller the percentage a lender puts at risk on a home’s value and the lesser the interest rate they will charge.

#18. Using my Contract Rate to Calculate my Affordability, How much of a Mortgage can I Secure?

There are numerous factors to consider, but the general rule of thumb is between 4½ and 5 X your annualised salary. Contacting a specialised mortgage broker will help determine the exact figure you can borrow.

#19. Is it Vital to Get a Decision or Agreement In Principle (AIP)?

An AIP is a powerful weapon in a bargaining position as it shows the lender that you have a strong interest. When two parties are conflicting over the same house, an AIP will positively impact your negotiation decision. However, an AIP is not a firm mortgage offer.

#20. Are Self-Cert Mortgages Still Available to Contractors?

Self-cert mortgages were risky for both the lender and borrower because there were no checks on whether the applicant could repay the loan. After the 2008 banking collapse, the Financial Services Authority (FSA) conducted a comprehensive market appraisal and introduced a responsible lending policy that required borrowers to pass affordability checks. This policy forced lenders to remove self-cert mortgages from their portfolios.

However, contract-based underwriting is available and even a better option for contractors. Interest rates are at least as competitive as those available for Pay As You Earn (PAYE) employees.

#21. How Long Does it Take to Complete a Contractor Mortgage Process?

Contractor mortgages often take four to six weeks to complete. This is because underwriters require so few documents.

image brand label your mortgage

Luca Bertolino

Mortgage Expert

Your Mortgage Experts is led by Luca Bertolino with 20 years experience in financial services and in the property market. Through Luca’s wealth of knowledge and expertise, Your Mortgage Experts have become a trusted adviser that clients have come to rely upon for all their mortgage and protection needs.

Other Articles