What is a Contractor?
Defining a contractor can vary among mortgage lenders, leading to different lending criteria. Typically, contractors are self-employed individuals who work for a single company at a time. They engage in fixed-term contracts, providing their expertise for a specific period. Although contractors lack employee benefits, they can compensate by charging higher fees. Understanding your contractor status is vital since it affects your eligibility for specific mortgage options.
The Rise of Contracting and its Advantages
In today's workforce, more individuals are embracing contracting as a career choice. The allure of independence, flexible work arrangements, increased earning potential and ample time for personal pursuits, are among the key advantages. Contractors can select their clients and projects, often earning substantial income whilst enjoying the freedom to charge higher fees.
Assessing Contractor Income
Lenders assess contractor income differently from that of employees. Whilst some calculate annual income based on your day rate, others prefer an average of earnings over multiple years. Both methods have their pros and cons. Lenders considering day rate calculations often assume contractors work between 46-48 weeks per year. However, lenders using multi-year averages provide a comprehensive understanding of your income stability. Finding a lender that understands your unique situation ensures a fair assessment of your earnings.
Unique Challenges Contractors Face
Despite the benefits, contractors encounter certain challenges when it comes to securing a mortgage. Lenders tend to view contractors as higher-risk borrowers due to the fluctuating nature of their income. Consequently, obtaining a mortgage may require extra effort. However, it is essential to remember that this hurdle can be overcome.
Determining Borrowing Capacity
Contractors often worry about their varying income affecting their borrowing capacity. However, the amount you can borrow typically doesn't differ significantly from that of full-time employees. Lenders typically conduct affordability checks, which aim to determine how much they can lend you. This is usually done using an ‘affordability calculator’ which are available on lenders’ websites. Brokers often can search multiple lenders at once using specialist software and their knowledge of the market.
Contractors on Zero-Hour Contracts
The rise of zero-hour or casual contracts has made it more challenging for individuals on such employment terms to obtain a mortgage. If you have been employed on this basis for at least 12 months, there are lenders that will consider this income.
Joint Mortgages for Contractors
Contractors can apply for joint mortgages, provided they meet certain requirements. Lenders will also consider joint mortgages if the borrower's partner, family member, or friend is in full-time employment. While income fluctuations are less significant when buying with someone else, demonstrating the consistency of your earnings, remains essential. If consistency is difficult to establish, considering a guarantor mortgage backed by a parent or family member's guarantee could improve your chances.
Deposit Requirements for Contractors
The deposit amount required will depend on your circumstances and the specific mortgage lender. However, the general rule is that a higher deposit reduces the lender's risk. Most lenders request a minimum deposit of 5-10% for a residential mortgage. Factors such as your loan-to-value ratio (the deposit amount in relation to the property value), earnings, , and overall mortgage term may also influence the deposit amount required.
Tips for Getting a Mortgage as a Contractor
Whilst securing a mortgage as a contractor may involve additional challenges, it is far from impossible. Here are some effective tips to increase your chances of approval:
Compile evidence or a CV, showing current and previous contracts, qualifications, and experience. If applicable, note the rates of pay for each of your current and previous contracts.
If it is your first fixed term contract, be aware that any relevant work experience in your current profession will be useful. For example, a previous PAYE/employed job you have done in the same line of work.
Assess and improve your credit score, especially if your mortgage is going to be a high loan to value (small deposit, in relation to your property value)
Gather evidence of your earnings, including current and recent contracts, bank statements, and tax returns.
Consider a joint mortgage or utilising a guarantor mortgage or JBSP mortgage (Joint Borrower Sole Proprietor mortgage)
For limited company directors, prepare full business accounts and management accounts if necessary.
Seek advice from specialised mortgage brokers who have strong relationships with lenders and experience in working with contractors and non-standard income.
Can I get a Mortgage if I Work as a Contractor?
Whilst securing a mortgage as a contractor presents unique challenges, armed with the right information and strategies, you can overcome them. By understanding lender criteria, gathering relevant documentation, and seeking advice from experts, you can enhance your chances of obtaining a mortgage loan. Furthermore, with many mortgage lenders now recognising the changing landscape of employment, contractors have more options than ever before.
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At MRG Private Clients, we believe in providing our clients with personalised guidance and support when it comes to making important financial decisions. We are based in Medway, Kent but offer our specialist mortgage services nationwide. Learn more about our specialist mortgage services >
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