The freelance life certainly isn’t for everyone – but flexible hours, a greater variety of work and the ability to earn as much as you want to on your own terms certainly appeals to a large number of the working population. In fact, recent figures have shown that there are nearly 2 million full-time contractors in the UK, and if the trends are anything to go by, this number is only set to increase in the months and years to come. As a contractor, you may find getting a mortgage to be tricky. This is often because this kind of working arrangement is considered to pose a higher risk than a standard permanent position, as your income isn’t necessarily guaranteed and may be irregular in between contracts. Securing a contractor mortgage is by no means impossible, though. Read on for a guide to finding the best mortgage as a contractor, and a breakdown of the various options that are available to you.
If you’d rather discuss your situation during a consultation with an experienced contractor mortgage broker, contact the team at CLS Money today and we’ll be happy to help. We have access to a broad range of lenders who can offer great deals for contractors in all kinds of professions, including IT specialists, locum doctors and other medical professionals, tradespeople, engineers, seafarers and those working within the oil and gas sector.
What is the standard definition of a contractor in the UK?
To qualify as a contractor, you must be either working at the same company on a short or fixed term contract, or be a self-employed individual working through one business, at an agreed rate of pay. You may also be a zero-hour contract worker, or an agency worker.
You must be responsible for your own business dealings, and you have to be in complete control of when you work, and who you work for.
You are not considered to be a contractor if you’re working under an arrangement whereby your employer is obliged to provide work, and you are obliged to do that work. Ultimately, as a freelancer, you decide which contracts you take on, and you negotiate their worth with the company or individual you are working for.
As a contractor, am I treated as self-employed?
If you are registered as self-employed with HMRC, and you pay your own tax and National Insurance contributions, you will be considered self-employed. However, there are a number of lenders that will use your contract day rate. You will be required to have a minimum of 3 months remaining on your current contract or have a new contract lined up. Contact our team to find out more.
Is it hard to get a mortgage as a contractor?
Not necessarily – as long as you prepare your case carefully, and know where to look for a great deal!
Every mortgage company has slightly different lending criteria for people who can define themselves as contractors. This is why navigating offers from a range of providers can be a minefield for contractors who are new to the mortgage market. Speaking to a mortgage advisor can be helpful as they will have a better understanding on different lenders criteria.
Some lenders – including some of the High Street banks – will happily offer to freelancers, while others will consider your working situation to be too unpredictable. The key is to approach contractor-friendly lenders and avoid those who are unlikely to take your application to offer.
It’s also useful to know what lenders will need from you in order to decide whether you are eligible for a mortgage. We’ll cover this in more detail later, but generally, you will need to be able to provide your last 12 months’ working history, along with how much you have earned as a contractor within this period. If you’re a sole trader or in a partnership, lenders will need to see your net profit figures; if you earn through your own limited company, they will need to see how much you took in the previous year in salary and dividends.
If you don’t have this information to hand – or you have been contracting for less than a year – you may be limited with regards to your mortgage choices. That said, some companies are now accepting applications from contractors who only have 6 months’ worth of contracting history, and some are even willing to offer rates to those who are just about to start a new fixed-term contract. It’s just a case of either finding a mortgage lender that will view your case favourably by yourself or feel free to contact our specalist contractor mortgage advisors today for free genuine advisor about your situation.
Is it true that I can borrow less because I’m a contractor?
Once upon a time, contractors and freelancers were penalised by mortgage lenders because the nature of their work was perceived to be higher risk than someone in full-time employment - This problem was something that even experienced mortgage advisors battled with. But as more of the UK working population is seeking independent work, times are changing – and now, as long as you can satisfy the lender’s borrowing criteria, your average income is sufficient, and you have all the necessary documents and records to hand to prove your financial position, there’s no reason why you can’t borrow just as much towards your mortgage as someone in a 9 to 5 job. Mortgage advisors now also have access to specalist lenders offering exclusive rates for contractors, feel free to contact us today to see if we can help source you a exclusive rate on your new or current mortgage.
Additionally, there has been a noticeable shift in recent years towards better standardisation in the mortgage industry in terms of working out a contractor’s mortgage affordability. Banks and lenders are much more likely to use annualised contract rates as a baseline for their calculations, which is levelling the playing field for every freelancer who dreams of owning their own home (or remortgaging their property at a better rate).
How long do I need on my contract?
There’s no getting away from the fact that the longer you have remaining on your existing contract, the more favourable your case will be to mortgage lenders. Your mortgage application is more likely to be accepted if you have at least 6 months left on your arrangement, preferably longer if you are an agency worker, if you’re working on a zero hours contract, or if you’re working under an umbrella company.
However, if you are soon to finish in your current contracting role, or you are just about to embark on a brand new contract, don’t panic. Some mortgage providers will base their decision on other factors instead, such as how long you have been contracting for, whether your previous contracts have been renewed, the rate of pay you’re able to command, and how much demand there is in your industry for someone with your skills and experience.
Can I get a mortgage with a gap in between contracts?
Technically, yes – but less lenders may be willing to offer a mortgage on this basis, so your options may be limited.
Most companies accept that contractors are likely to endure a few days, weeks, or sometimes months in between new contracts. After all, one of the perks of working on a freelance basis is the ability to pick and choose the right opportunities as they come along! However, if you are planning to apply for a mortgage or a remortgaging product any time soon, try not to be without some sort of contracting agreement for more than eight weeks in any 12 month period. Even more importantly, make sure that gaps in employment do not affect your ability to meet your financial commitments, as missed payments could leave an unfavourable mark on your credit score. More on this later.
What else do I need to consider?
Rightly or wrongly, your age could prevent you from finding a suitable mortgage deal. Some lenders will only offer mortgage agreements to freelancers on fixed or short term contracts if they are over 25. Others apply strict upper restrictions, so you may struggle to find a deal if you are purchasing or remortgaging a property in later life.
A history of poor credit is another barrier to getting a contractor mortgage. In the lender’s eyes, there is already a certain amount of risk involved in offering a mortgage to somebody with inconsistent or unpredictable income, so they will be reluctant to lend to an individual who has missed repayments to suppliers in the past.
It’s also worth noting that most lenders are more willing to offer repayment-type mortgages to contractors. Getting an interest-only mortgage can prove to be difficult (although not impossible if you work with a broker who has access to the whole of the market and can therefore track down deals from more niche lenders - feel free to contact us regarding this).
What income is used when calculating a contractor mortgage?
The income your lender uses to calculate your mortgage affordability will depend on your setup. Here are the two most common scenarios:
Sole traders and partnerships
If you are a sole trader or partner within a business, lenders will usually take your net profit figures into consideration. (This is the amount of money left after you have deducted all your business expenses from your revenue total.)
If you are the director of a limited company, mortgage providers will only consider your salary and dividends as your income – not your business’ total earnings.
This could be a problem if your company is profitable, but you draw a relatively low salary from it. In this case, you would benefit from contacting a mortgage advisor to source a lender that is willing to take a view on your entire limited company accounts and underwrite your terms based on these figures instead.
How much can I borrow?
This will depend on two key factors: how you receive your income, and how much you can afford to repay towards your mortgage on a monthly basis.
If you have been working as a contractor, either in a sole trader, partnership or limited company capacity, for a significant period of time (and you have the accounts to prove it), your lender may decide to work out your average earnings and use this total as your income multiple.
However, if for whatever reason your takings vary dramatically from year to year, the lender may choose to use your lowest figure as an indication of how much you are likely to earn.
Income and earnings aside, the lender will also need to look at your expenses. They will carry out an affordability assessment to see how much you can feasibly afford to pay back towards your mortgage each month when all outgoings and financial responsibilities are taken into consideration. It can be hard to assess the whole market on your own, especially if you have income from multiple sources. Contacting a mortgage advisor is a good start, as they could tell you a maximum loan amount with different lenders.
Can I get a mortgage if I’m paid a day rate?
In some cases, lenders will be happy to calculate your yearly income based on your day rate.
They will do this by multiplying this rate by the average number of days you work in any given week, then multiplying the total by the number of weeks you expect to work throughout the year. (They will factor in time for holidays and breaks between contracts to keep this assumption as realistic as possible. our mortgage advisors are able to run through this over the phone with you free of charge.)
What else do I need for my contractor mortgage application?
You will need to let the mortgage company know how long you’ve been contracting for, how many years you have worked in your chosen industry, whether any of your previous contracts have been renewed, and how long you have left on your current contract.
When combined with other factors, such as your age, credit rating, expected income and the type of property you’re looking to purchase (or remortgage), these details will help the lender build a clearer picture of your ability to make repayments throughout the term of your mortgage – and allow them to accurately calculate your mortgage eligibility.
How many years’ accounts will I need?
As part of the contractor mortgage application process, you will need to prove that you are earning as much as you say you are. Many companies, particularly High Street lenders, will need to see at least two or three years’ of accounts before they will even consider your case.
However, many lenders are becoming more flexible in their approach to contractor mortgages. A growing number of providers are considering applications from freelancers and self-employed individuals who can only supply figures from a shorter time period, or who are on already-confirmed contracts.
If you have just started out as a contractor and are struggling to provide proof of earnings, make sure you seek advice from a mortgage broker who understands your predicament and who can access a wider range of niche-market specialists. He or she will be able to introduce you to lenders with more flexible affordability criteria, and who may not need 6 to 12 months’ of accounts.
How large does my deposit need to be?
Generally speaking, most low-risk contractors will be able to get a mortgage on a residential property with a deposit of 10%. This means that the lender will need to agree to your mortgage on the terms of a 90% loan to value ratio. If the property is more unusual or not of standard construction, you may be required to place down a slightly larger deposit of 15-20% to mitigate some of the risk involved from the lender’s perspective. Similarly, if you have a history bad credit, or only have a short amount of time left on your current contract, you may be asked to provide more money upfront in order to secure a competitive rate. Some specialist lenders may be able to offer you a mortgage with a 5% deposit thanks to the government’s Help to Buy scheme.
As a contractor, can I apply for a buy to let mortgage?
What’s interesting is that, even though there is still a degree of risk involved in lending to a Buy to Let landlord, mortgage companies are normally more concerned with the viability of your investment than your working situation or income sources. As long as you can prove that the predicted rental income from the property will be enough to cover the Buy to Let mortgage, this should be enough to satisfy the lending criteria.
Some lenders will specify minimum income requirements, especially if you’re investing in property for the first time, so it’s always worth checking the fine print before submitting your application. Others may want to be assured that you have a certain amount of time left on your current contract. Most will request a slightly higher deposit than if you were purchasing a residential property; you can expect to have to put down at least 25% of the purchase price. The contractor mortgage brokers here at CLS Money can help you compare terms from different providers and settle on an agreement that best suits your circumstances.
What about more complex mortgaging arrangements?
Shared Ownership schemes are popular amongst younger contractors who need help getting onto the property ladder. Shared Ownership models involve purchasing a percentage of the property, then renting the remaining share from either a developer or a local housing association. Normally, you can purchase between 25% and 75% of your home via your mortgage.
Similarly, Help to Buy mortgages can provide a welcome boost to freelancers who are struggling to save a sizeable deposit. If you’re a first time buyer looking to purchase a new property using this scheme, you will only need to put down 5% of the home’s value as a deposit, while the government will provide an equity loan of up to 20% of the property price (40% if you’re in London), as long as it’s not worth more than £600,000.
Offset mortgages are often a good choice for contractors who have built up a solid bank of savings and who want to use this money against their mortgage balance in order to pay less interest on their mortgage loan. These types of mortgages are especially useful for freelancers and contractors whose income may fluctuate from month to month, and who want the flexibility to be able to pay more or less towards their loan as their financial situation changes.
These mortgage arrangements can work well in many circumstances. However, as a contractor, finding a lender who will be willing to offer you a Shared Ownership mortgage or an offset mortgage is often something of a challenge. Having access to the whole of the market is key here. Speak to our advisors if you believe a more complicated mortgage arrangement would best meet your needs, and they will use their experience and expertise to connect you with a provider that will be able to offer you a deal that will work for you in the longer term.
Other deals are also available to contractors, including self-build agreements, guarantor mortgages and Right to Buy mortgages. Again, contact CLS Money for more information on what these mortgages typically entail, and whether you might be eligible for one of these more complex loan types based on your individual circumstances.
How do I access the best mortgage rates for contractors?
To get a mortgage with the best possible terms, you need to research the whole of the market to see what deals are currently on offer from a range of lenders.
There’s no harm in enquiring with High Street banks and more mainstream lenders, but bear in mind that these companies often have more stringent affordability criteria, and they may shy away from offering competitive interest rates to contractors because they perceive freelancers to be of a higher risk.
When contacting such companies for quotes, make sure you ask them to perform a quotation search instead of a full credit search. This will not show up on your credit report, so it will not be visible to other lenders. Be sure to check the fine print of every quote, too – it’s easy to be lured into a deal by a competitive-sounding interest rate, but there may be other terms, clauses and variables within the agreement that you need to consider before going to application stage.
To make sure you are getting a great deal, it’s advisable to thoroughly prepare for your mortgage application and make sure you have all the necessary information to hand before you approach the lender. A specialist mortgage broker for contractors can help you gather evidence of your income and expenditure.
If you’re concerned that your current situation may not work in your favour, or you are suffering the after-effects of an adverse credit history, we would always suggest working on improving your profile before seeking a home loan. Remember that you can always access your credit report for free to allow you to see what lenders see!
How can I strengthen my contractor mortgage application?
Ultimately, lenders are looking for indicators that, as a self-employed contractor, you have a stable income and are not short of work. You need to prove to your mortgage company that you are in a strong financial position, and that you will have the means to make the repayments that will be required to secure the kind of property you wish to purchase.
The more information you can provide, the better. This means supplying the lender with all records of earnings and expenditure from as long a period as possible. Presenting the mortgage provider with an ongoing agreement from an employer, or even evidence that a past contract is likely to be renewed, will also add weight to your application and give you a better chance of being accepted for a mortgage loan.
If you haven’t been contracting for that long, or your recent working history shows inconsistency in contracts or income, you could consider putting down a larger initial deposit, as this will mean you need to borrow a smaller amount, therefore decreasing the risk associated with your loan.
Additionally, one of the best ways to ensure the best possible chance of success with any mortgage lender is to maintain a good overall credit score.
Can I take steps to protect my credit score?
For the best chance of securing a competitive mortgage deal, you need to keep your credit score looking healthy. This is true for anyone, not just freelancers and contractors.
There is no single credit rating or score that a lender will use when considering your application. Companies look at a wide range of indicators to determine whether you’re a suitable candidate for a mortgage. However, credit reference agencies such as Experian will give them an idea of your creditworthiness, based on the information in your current credit report.
5 things you can do to improve your credit score to support your contractor mortgage application:
Check your credit report at least once a year to make sure all details are correct. If you spot any mistakes, contact the company that has provided the incorrect information, or flag up the issue with the credit agency, who will investigate the matter for you.
Register to vote. An entry on the electoral roll confirms your official address – and as long as this is the same address that’s on your mortgage application, you’ll stand a better chance of having your application accepted.
Lenders like to see that you have a history of responsible borrowing. Make sure you keep your credit usage at a comfortable level, and always pay off credit card balances and other bills on time.
Only submit applications with mortgage lenders that are likely to approve your request. Rejected applications will leave footprints on your credit file that can be seen by other mortgage companies – and these black marks may lead them to believe that you’re having trouble securing finance.
If you have previously held a financial product with an ex-partner or ex-spouse who has a bad credit rating, be sure to end this association. It’s the only way to make sure their financial situation doesn’t continue to impact your credit rating.
If you believe you may struggle to get a mortgage due to an adverse credit history, watch our quick video giving advice on how to improve your credit score so that lenders look at your case more favourably, alternatively for more infomation read our blog to learn more about how lenders view adverse credit. Contact us today to speak to an expert mortgage advisor and see if we can help with you adverse credit situation.
Does it help to enter into a mortgage with someone who is not self-employed?
Sometimes you have to go it alone. But joining forces with an employed partner, spouse or friend and applying for a mortgage together could help you secure better rates.
Your contractor mortgage checklist
Here’s a quick summary of the things you need to do to secure the best contractor mortgage:
For contractor mortgages made easy, contact CLS Money.
We know that, as a busy freelancer or contractor, you don’t have the time (or the energy!) to trawl through quotes from multiple lenders. You probably don’t know where to turn, or who to look to for the best deals, either. This is where we can step in.
Having worked with contractors for many years, our brokers have unrivalled experience in sourcing competitive mortgage deals for self-employed individuals and their families.
And because we have access to the whole of the market, we can introduce freelancers like you to more niche lenders who are often willing to take a broader view on your financial situation. These companies often have a better understanding of the challenges faced by contractors than mainstream banks and building societies. They’re also often much more willing to lend to a contractor who has been vetted by a professional mortgage advisor first.
Working with us is simple and hassle-free. Simply contact us to discuss your requirements, and we’ll help you gather everything you need to put a compelling case to the right lender. Our amazing team will complete all of the paperwork on your behalf and also liaise with any third parties to ensure we can find you comparable quotes quickly and move you to application stage with minimal delay as soon as we’ve found the right deal.
We even offer out of hours appointments, allowing you to fit the mortgage application process around your contracting schedule.
How it works
3 simple steps to securing a mortgage with CLS Money
For the majority of mortgages, you borrow money from a lender to buy a property and pay interest on the loan until you have paid it back. The only exception are interest-only loans. Here are the different types of mortgages available:
First time buyers
Buy to let
Repayment mortgages: Every month you make a payment which is calculated so that you pay off some of the capital you have borrowed, as well as the interest. By the end of your mortgage term, you would have repaid the entire loan.
**Interest-only mortgages: **Each month you pay only the interest on your mortgage and repay the capital at the end of your mortgage term. This option will not suit everyone, as you will need to guarantee that you can find the money when the time comes. If you don't, you risk having to sell your property to pay off the mortgage. Lenders can also insist that you provide evidence on how you intend to do this.
Fixed rate mortgages: Popular with first time buyers, as you know exactly how much you'll be paying each month for a particular length of time.
The disadvantages are that you may have to pay a higher rate if the interest rate falls, and a repayment charge if you either switch or pay off your mortgage before the end of the fixed term.
The lender will also automatically place you on a standard variable rate (SVR), which will probably have a higher interest rate, in which case you will need to apply for another fixed rate deal.
**Variable rate mortgages: **Also known as a Standard Variable Rate (SVR) and are every lender's basic mortgage. The interest rate fluctuates, but never above the Bank of England's base rate and is determined by your mortgage lender.
Tracker mortgages: Vary according to a nominated base rate, normally the Bank of England's, which you will pay a set interest rate above or below.
Discount rate mortgages: Some of the cheapest mortgages around but, as they are linked to the SVR, the rate will change according to the SVR and are only available for a fixed period of time.
Capped rate mortgages: A variable rate mortgage, but there is a limit on how much your interest rate can rise. However, as mortgage rates are generally low at present, many lenders are not offering them.
Cashback mortgages: Lenders typically give you a percentage of the loan back in cash. However, you need to look at the interest rate and any additional fees, as it is very likely that you will be able to find a better deal without cashback.
Offset mortgages: Combines your savings and mortgage together, by deducting the amount you have in your savings, meaning you only pay interest on the difference between the two. Using your savings to reduce your mortgage interest means you won't earn any interest on them, but you will also not pay tax, helping higher rate taxpayers.
95% mortgages: Generally for those with only a 5% deposit. However, as there is a risk that you may fall into negative equity if house prices go down, mortgage rates are usually high.
**Flexible mortgages: **Allow you to overpay when you can afford to. Other mortgages give you this option too, but you can also pay less at particular times or miss a few payments altogether if you have chosen to overpay. This does however come at a cost, as the mortgage rate will generally be higher than other mortgage deals.
First time buyers mortgages: All of the aforementioned mortgages are available to first time buyers, although some are more favourable than others. The government also offers a number of incentives for first time buyers through its help to buy scheme.
Buy to let mortgages: Enables you to purchase additional property for renting purposes only. The amount you can borrow is partially calculated on the rent payments you expect to receive.
News and views
Looking to move home or remortgage? Watch the latest vlogs from our mortgage advisors, packed full of handy tips, to help you get on the property ladder and save on your mortgage