A contractor is identified as a combination of employed and self-employed applicants for mortgage purposes in the UK. Majority of contractors in the UK are working off payroll for clients who are similar to conventional employers. Contractors provide their services based on agreed time and rate. This is where the contractors become different to standard self-employed applicants as they provide services to many clients at a time.

Day rate contractors prefer the term “contracting” as it pays better than them being permanently employed. Also, it gives provides them with proper work-life balance. This is the main reason why high-street banks consider the contractors as high risk due to their temporary work nature. Therefore, high-street banks and building societies have their own criteria to assess contractors’ income. Few banks consider the contractors as Employed-PAYE where as the other banks consider them as self-employed.

Do the contractors earn more?

Contractors usually earn more than permanent employees in similar roles. Contractors earn more than the permanent employees because they have expert skills and they are not inside the HR management of the company. Contractors use short term contracts and do not receive employee benefits.

Contractors have a higher earning potential as their skills are unique and employers prefer short term contract basis which has rising demand. Lenders have identified this scenario and have come up with new policy and criteria for contractor mortgages. Therefore, it is important to speak to a specialist contractor mortgage adviser to find a suitable lender.

High-street banks and building societies have also identified that contractors usually have small gaps between contracts. Lenders have adjusted their lending criteria in line with this by considering a gap of four to eight weeks in between the contracts. This has made the life much easier for contractor mortgage applicants.

Can I get a mortgage as a contractor?

Yes, there are lots of contractor friendly lenders in the UK. However, it would be a huge challenge to find the suitable lender as the lending criteria are specific to lenders. This is why it is important to have a contractor specialist mortgage adviser by your side when buying your dream home.

Most contractors set up their own limited companies. Most of them add their spouse as a shareholder of the company. From the lender’s perspective, they would consider the combination of salaries and dividends income. Most lenders would require latest two years’ SA302 Tax Calculations and Tax year overviews from the HMRC to verify their income.

Contractors’ income gets accumulated in their business bank account over the time. The amount of salary and dividends they withdraw depends on several factors including the tax position. They usually speak to a qualified accountant when planning the income structure. Lenders are happy with the contractors working qualified accountants as they sometimes request accountant’s reference.

How do the lenders assess contractor mortgage borrowing capacity?

Contractors maximum loan amount affordability is dependent on number of months/years worked with the current contract provider, experience in the same line of work, current annual income, deductions, commitments and credit score as usual.

· Start date of the contact and time remaining

Lenders are interested to know the start date of the current contract and how long the applicant has been working as a contractor with the same or different providers. Also, most lenders would require minimum number of months to be remaining on the contract for future work assurance.

The lender would further search the likeliness of contract renewal depending on the contract end date. For example, the fixed term contractors work with established businesses and provide IT consultancy services. Therefore, their contracts are likely to be renewed and lenders would be confident with this.

· Experience in the same line of work

Contractors are an additional risk to the banks given the short-term nature of work. Therefore, they will like to see some work history in the same line of work. Different lenders will have different rules around this.

Lenders also prefer to see no or very little gaps between contracts. They will also want to see some time left in the contract until termination date. In general, the longer the contract the more comfortable a lender will feel.

· Current annual Income

Contractors’ income could be assessed in different ways by each lender. One common method of contractor income is annualizing the Day or hourly rate income. The lender would take the daily rate and multiply it in to the number of weeks per day and number of weeks they work in the year. Contractor friendly lenders have their own criteria on the number of weeks they consider. It could vary from 41 to 52.

Other lenders would consider the Self-assessment Tax returns to calculate the annual income. They would take the average of salaries and dividends income on SA302 Tax calculations income for the latest two years. This method of calculating the contractor income usually gives a lower annual income figure compared to the annualized daily rate income.

Why do contractors need to speak to a specialist mortgage adviser?

A specialist mortgage adviser could assist them to understand different mortgage options and guide them through the process. Bespoke contractor-based underwriting may be needed for some contractors. A good contractor mortgage specialist would know which lenders would fit different unique circumstances.

A day rate or hourly rate-based calculation may be needed for contractors in some instances. If you are a new contractor or do not take much salary/dividend and require a larger mortgage loan or using an umbrella company, contractor mortgages may be a route for you.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the repayments on your mortgage.

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