Applying for a mortgage and getting approved can be a slow process and it can be made even harder if you are classed as a contractor. With inconsistent income and varied employment status, contractors are not always seen as the safest option to lend to by mortgage providers.

That being said, contractors can get mortgages, and it is not always difficult, however, it can, at times, be a little tricky. In this blog, we’ll explain why.

What is a contractor mortgage?

A contractor mortgage is a mortgage offered to those who are either self-employed, have fixed-term contracts or are employed on a zero-hour contract basis. Some lenders put stringent criteria on their applications, others are a lot more flexible.

For example, some lenders will require proof of earnings that covers a much longer period than what would be requested on a more typical mortgage.

This is largely because the income earned could fluctuate considerably, and even if it is generally higher than someone in permanent employment, it could be there one day but then gone the next.

As a result of the more stringent application process, contractor mortgages are often harder to find and get approval for. This means that securing complex mortgages such as these often requires specialist help from a mortgage broker like us.

Can contractors get a mortgage then?

Yes, and in many cases, contractor mortgage rates and terms are the same as any other kind of mortgage. It may just be that the application process requires you to jump through a few more hoops to get approval.

For lenders, any loan has a degree of risk, and lending to someone with an inconsistent income could see them holding back on making an offer. This is despite the self-employed or fixed-term employee potentially earning more than someone in full-time employment.

For example, if you have a contract that expires within the next few months, a lender will want to know what income, if any, is likely to be coming when that contract ends. If you have months without work, they are much more likely to reject your application.

How do contractor mortgages work?

They are fundamentally the same as any other mortgage. You borrow money from a lender, and then pay it back over time with interest. However, the process of applying and the eligibility requirements are a little different.

The lenders open to contractor mortgages will, for the most part, expect you to be either self-employed or employed by a company and on a short-term or fixed-term contract.

If you fulfil either of these criteria, you are on the first step to securing the home loan you require.

You’ll then need proof of income. Rules for this vary per lender so don’t be surprised if some lenders want to see 2-3 years’ worth of income, others may look at the day rate rather than an income history and accounts. Your mortgage broker will be able to advise on the requirements of each suitable lender.

As a general rule though, expect to need your self-assessment calculations plus tax year overview for each of the last two/three years and two or more years of your accounts.

This gives a lender ample information to assess affordability, risk and the amount they will be able to lend you.

Further to proof of financials, you’ll also need a copy of your current contract. This will show the lender how long you’ll be working one particular job; how much it is paying and whether it will be renewed. A batch of bank statements, preferably 3-6 months’ worth would also be handy. That way the lender can see that you are earning what the contract states.

Finally, equip yourself with a copy of your CV. This will not only show how frequently you are hired but also how experienced you are, and therefore how likely it may be that you are hired again and again.

After that, it is simply collecting all the information you would normally hand over to a lender if you were applying for any other kind of mortgage. Think, ID, proof of address, utility bills, any current debt, childcare costs and so on.

What is the day rate and why does it affect contractor mortgages?

We mentioned above that some lenders may look at your day rate rather than profit and loss. The day rate is simply the rate you charge per day’s work. The lender will work out your yearly income using this rate and multiply it by the number of days you work per week. This is then multiplied by the total number of weeks you are likely to work that year.

Not all lenders use the day rate to work out your income so having advice from a mortgage broker would be essential if you plan to use your day rate as proof of income.

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

If you are no longer tied down to a permanent position or are now going it alone as self-employed, you might find getting a mortgage a little tough but with a host of lenders open to helping you, it may not be as difficult as you first thought. Perhaps one of the hardest parts is ensuring you are eligible.

Your status as a contractor will play a large part in determining your suitability for a contractor mortgage. For example, a self-employed contractor will have different criteria than a zero-hours contract worker.

Typically, self-employed contractors need a contract with at least six months of work on it and can even apply for a mortgage from the start of that contract.

Those with zero-hour contracts would need to show a year’s worth of work history from their specific industry. Agency workers are similar. To be eligible for a contractor mortgage, they will need to show that there has been 12 months’ worth of agency work completed.

How much can I borrow for a contractor mortgage?

There is no set rule here as much depends on your earnings and affordability. The lender will look at the value of the property you want to buy, any deposit you have saved and your current income and expenditure. From here they will be able to work out how much you can borrow.

How much deposit do I need for a contractor mortgage?

Mortgages for contractors are similar in many ways to the regular mortgages people apply for. The bigger the deposit, the better the rates for example. In the case of contractor mortgages, a ten per cent deposit is normally deemed suitable, however, with some contractors seen as a higher risk by lenders, the deposit requirement can sometimes reach 20 per cent or more.

How can you make getting a contractor mortgage easier?

If you’ve been refused in the past or are concerned that you won’t get approval at the first attempt, there are a few things you can do to improve your chances before you apply for a contractor mortgage.

Improving your credit score will always be a good place to start. Showing lenders that you can manage payments, and debt will help give them added confidence when it comes to lending.

You should also look to have contract renewals in place. This will show lenders that your income will be consistent and therefore make paying the mortgage much easier.

Try and fill your calendar too. Book in jobs with appropriate timelines so the year is busy, but not so busy that you cannot complete them. The consistency of work will please lenders, incomplete work that results in non-payments will not.

Document everything. If you can show a lender that work is constantly being booked, that you are being paid on time and that your finances are well managed, they are much more likely to say yes.

Getting a mortgage as a contractor can be complicated but with the help of a specialist mortgage broker, it can be made much easier. Our team at Mortgage Saving Experts, for example, can help you find the best lenders for your situation. Whether you are self-employed, on a fixed-term contract or have a zero-hour contract, speak to us today. As a fee free mortgage broker, we start saving you money from the moment you start your mortgage journey.