Being a contractor can offer you flexibility and independence, but also uncertainty – especially when buying a home. But as the number of freelancers and independent contractors in the UK climbs, don't despair - many mortgage lenders could be willing to lend to you, even if your income jumps around.
This guide tells you exactly how lenders will assess your mortgage application and what steps you can take to improve your chances of getting approved.
How much can contractors borrow on a mortgage?
When you apply for a mortgage, the mortgage provider will first work out how much to lend you - known as an affordability assessment. It will look at how much you generally earn, what your expenses are and how secure your income is.
As a contractor, you will usually need to show evidence of your earnings history for at least the past six months, though many lenders will expect to see two to three years of accounts. Due to this, applying for a mortgage early in your contractor career can be more difficult, though you may still have options.
Find out more: How much can you borrow - learn how banks decide how much to lend
How a contractor's income is assessed for a mortgage
If you have been working as a contractor for a long time, lenders will often average out the income you’ve earned over recent years to estimate your average income. They will then use this average to work out how much you can afford to repay each month.
If, for example, you earned £40,000 in one year and £45,000 the next, the lender may assume your annual income is around £42,500.
However, a mortgage lender is not likely to use this approach if your earnings have changed dramatically from year to year. In these cases, they may take the most recent year, or the lowest, as an indication of your earning capacity. This may mean you can borrow a smaller sum than you would otherwise.
Find out more: Applying for a mortgage - the ins and outs of making an application
Getting a mortgage when you're paid a 'day rate'
Some lenders may be willing to calculate your annual income on the basis of your day rate, though many require you to have a 12-month contract for this to be an option.
In this case, lenders will take your daily rate and multiply it by the number of days you generally work per week, then multiply that out to the full year. Be aware that lenders will also want to factor in any holidays and gaps between contracts, so most will assume you only work 46 and 48 weeks per year.
Day rate example
If your day rate is £400 and you generally work four days per week, your estimated annual income would be around £76,800.
- £400 x 4 days = £1,600 per week
- £1,600 x 48 weeks = £76,800
This approach can be especially helpful if you only recently left full-time employment and do not have an established track record. In this situation, lenders will want to see evidence that you’re likely to succeed as a contractor, including previous experience and qualifications in your field, signed agreements and an existing network.
How to strengthen your mortgage application as a contractor
Offering a larger deposit – and so borrowing a smaller amount – is one way to improve your chances of success. The less risk a bank takes in lending to you, the more favourably they will view your application.
Lenders will also look for signs of long-term security. If you can produce an ongoing agreement with an employer, or evidence of past agreements that are likely to be renewed, this may make your application more appealing to lenders.
While taking breaks between stints may be one of the perks of contracting, minimise time off in the lead-up to buying a home – lenders may be wary if they see you out of work for more than eight weeks in a 12 month period.
In addition, consider how good your credit score currently is and whether you need to work on improving it before submitting a mortgage application. This may be even more significant for contractors, as lenders will look for evidence of good financial management when your income is not guaranteed.
You'll also need to show evidence of your expenses and operating costs - the more information you provide, the better the lender can understand your financial situation and feel confident lending to you.
Find out more: Improving your mortgage chances - learn how to boost your odds of success
How mortgage affordability is assessed for a limited company
If you’re set up as a limited company, lenders are likely to apply different lending criteria to your application.
As a company, many mortgage lenders will only consider your salary and dividends as your income – not your total earnings. If you’re taking a low salary but your company is profitable, it might help to find a mortgage lender that offers specialist underwriting, and is willing to look at your full book of accounts.
When providing bank statements and financial information, you should also distinguish between money held by you and money held by the company. Funds set aside to pay company tax, VAT or income tax will generally not count towards your personal assets.
Find out more: Mortgages for the self-employed - how to buy with a company
Contractors buying with another person
If you’re a contractor planning to buy with a partner, mortgage providers may be more willing to lend if your partner has full-time employment. While variations in your income levels may be less important if you’re buying with someone else, you’ll still need to show a consistent earnings pattern.
Alternatively, if your income tends to vary, you may consider applying with a guarantor mortgage. In these situations, a parent or family member provides a guarantee on your mortgage against their own home.
Find out more: guarantor mortgages
Choosing a lender for a contractor mortgage
If your income is fairly consistent and you’ve been employed for a long time period, some high street banks might be open to approving your application – even if you’re a freelancer or contractor.
But many lenders use strict score-based assessments modelled on full-time permanent employment, which may mean you’re offered a smaller sum or your application is rejected altogether.
Your best chance may be speaking to a lender who will refer you to an underwriter, meaning a person who assesses your application. An underwriter may be able to take into account factors about your employment history and expertise that are overlooked by a rigid points system.
Alternatively, a number of specialist lenders offer mortgage deals tailored to contractors, including some that cater to specific professions.
If you’re a contractor or freelancer, it can be valuable to speak to a mortgage broker. They can help you find a lender that accepts mortgages from people in your situation and help you navigate the application process.
- Which? Mortgage Advisers will look at every deal on the market and recommend the lender most likely to accept your application. For expert advice, call Which? Mortgage Advisers on 0800 197 8461
Safeguarding your credit score
Because contractors tend to fall outside of many lenders’ criteria, it's possible that your mortgage application may be turned down. If you’re rejected, don’t despair – you may have more luck with a specialist lender.
In the first instance though, try to avoid making applications if you’re unsure of your chances of success. A declined application will be recorded on your credit history, and make it harder to be accepted in future.
Find out more: How to improve your credit rating
Contractor mortgage checklist
While getting a mortgage without a permanent position can be tricky, you can put yourself in the best possible position by following these steps:
- Bring as much evidence as possible of your earnings over recent years, including bank statements, invoices and other accounts
- If you’re a limited company, bring your full business accounts and balance books
- Provide evidence of your current and previous contracts, as well as qualifications and previous experience
- Improve your credit score before applying
- Offer a higher deposit
- Consider a joint or guarantor mortgage
- Find a mortgage lender that specialises in contractors or freelancers
Correct as of date of publication.