In the UK, a contractor is defined as anyone providing work for someone else under the terms of a contract. Contractors work either on a fixed term or as and when required, then invoice for their time. Contractors sometimes pay their own taxes and National Insurance. They are not usually entitled to holiday pay or sick pay.
If you are self-employed in the building or construction trade, then you will be familiar with the Construction Industry Scheme (CIS). This government scheme requires contractors to deduct money from a subcontractor’s payments and pass this to HM Revenue and Customs (HMRC). These deductions count as advance payments towards the subcontractor’s tax and National Insurance liability.
This is different from other self-employed individuals outside the construction industry, who may receive their payments with no tax deducted. When applying for a mortgage, self-employed individuals can find that their tax situation makes their declared income lower than their turnover, which in turn can impact how much a lender is prepared to lend.
In comparison, those registered with the CIS, are able to present their earnings as a pre-tax gross income, rather than a final post-tax profit.
Is it hard to get a mortgage as a contractor?
Not necessarily, although this will depend on the nature and reliability of your work, any notable gaps in your employment and your credit history. Being aware of how to prepare your application will help, and a specialist contractor mortgage broker will help you to access contractor-friendly lenders in the mortgage market.
One area that can prove tricky is that different mortgage lenders will have different lending criteria for contractors, which is another reason why you will find it useful to speak to a mortgage advisor who specialises in this field and understands what individual lenders require and prefer.
You will need to be able to demonstrate at least 12 months’ working history, alongside your earnings as a contractor over this period. If you have only recently become a contractor, it may be more difficult – although not impossible – to secure a contractor mortgage.
Specialist lenders may prove more contractor-friendly than high-street lenders. Here, a specialist mortgage advisor will help with your contractor mortgage application process, securing a competitive mortgage deal.
How long do I need on my contract?
If you have been a contractor for twelve months or more, and you can demonstrate current/upcoming work as a contractor, you’ll have more choices. There are only a limited number of lenders who will consider shorter contractor records of less than a year.
For those who have been contractors for some time, lenders will differ in how they assess your income. Some will average your income out over a number of years, while others will look at your current income.
Benefits of working with a Contractor Mortgage Broker
A contractor mortgage broker will have experience in managing mortgage applications for contractors, and understand how they can prepare their applications to optimise success. They will have knowledge of and access to specialist mortgage products with more niche lenders and genuine contractor-friendly mortgage lenders.
In addition, using a specialist mortgage broker will help protect your credit score – declined mortgage applications can impact this significantly.
At Mortgage360, we’re completely flexible – we’re happy to talk with you at a time to suit your working patterns and home life.
Types of Mortgages for Contractors
Just like most other mortgages, contractors can access repayment mortgages and interest-only mortgages. There are a couple of specifics for contractors.
Day Rate Mortgages
With a day-rate mortgage, a mortgage lender will take your day rate and multiply this to work out an estimated annual income. It won’t be multiplied by 365 – typically, lenders will take into consideration how many days a week you work and typically multiply this by 46 weeks to allow for holidays.
If you’re on one or more fixed-term contracts, then you can still secure a mortgage deal. Contractor-friendly mortgage lenders will look at the term left on your contract, but also at your employment history and your contracting history, as well as your potential for future employment.
Similar considerations apply to the self-employed. Issues such as irregularity of pay and the need to provide more paperwork can be challenging when approaching self-employed mortgage lenders. Take a look at Mortgage360’s services for the self-employed.
Preparing to Apply for a Mortgage as a Contractor
There are things you can do to increase your appeal to a potential mortgage lender. If you can demonstrate a consistent pattern of earnings and also the ability to manage your money responsibly, you will be in a better position in terms of mortgage affordability.
Make sure you have all the documentation you need in place and ready to go. Your mortgage broker will advise you on exactly what’s needed – requirements may differ slightly from lender to lender.
Gathering Documents and Information Needed for the Application Process
Standard residential mortgages for employed people usually only require payslips and personal bank statements as proof of income, but for a contractor mortgage loan, you will be asked to supply additional documents.
In general, these will be;
- Business bank statements
- Your invoices over a period of time
- Copies of current contracts and all others covering the last 2 years
- Your qualifications and work history (via an up-to-date CV)
- SA302 Tax Calculations and corresponding Tax Year Overviews (available via HMRC’s online services, once you have filed your Self-Assessment form). Or accessed via your Accountant
- Latest 2 years Limited Company accounts (if you are a Limited Company setup)
Understanding Your Current Contract Terms and Conditions
Make sure you fully understand your current contract terms and conditions before you begin your application, and also have a true picture of your current annual income potential to access the best contractor mortgage at the best interest rate to suit your individual needs.
How much can I borrow?
That’s a difficult one to estimate without understanding your personal financial circumstances. Lenders have their own lending criteria for determining this. For employed individuals, most lenders use a multiple of annual income, anything from 4.25 to 5.50 and beyond, dependent upon the applicant and their overall affordability.
For a contractor, they’re likely to look at your earnings (historical and current). If you have a strong and consistent record here, your application is more likely to be viewed favourably and secure better interest rates.
How much of a deposit do I need for a contractor mortgage?
There is no reason for you to need a larger deposit than any employed person seeking a mortgage. If you meet the lender’s other criteria, then a 5-10% deposit should be adequate.
How can I strengthen my mortgage application as a contractor?
There are steps you can take to increase your appeal to mortgage lenders.
Do some work on your credit score. Paying bills on time and even taking out a credit card and paying it off in full each month can enhance your score.
Work consistently. If you’re thinking of applying for a mortgage in the near future, avoid any breaks in your working patterns, where avoidable.
Make sure you have all the right documentation for your application. Work with your mortgage broker to present a full and accurate picture.
How can Mortgage360 help with my mortgage application
At Mortgage360, we’ll help you to put together a compelling case for your contractor mortgage. We’ll look at all the available deals with contractor-friendly lenders, advise on mortgage affordability, complete your mortgage application, and move things forward to make things quick and easy for you. Just give us a call.