Contractor mortgages – how to get one – an expert guide

If you think getting a mortgage as a contractor is difficult or unattainable, you’re not alone. Even amongst those who have succeeded in getting one, 71% think being self-employed makes the process harder than it is for people with full-time jobs.

But while it’s true that lenders used to be inflexible in the past, things are slowly changing.

These days, more lenders are becoming aware of how contractors work and what their financial situation typically looks like. So, increasingly, the key to securing a competitive contractor mortgage lies in understanding how different lenders calculate affordability so you can pick one that meets your needs.

How do lenders calculate affordability?

The difficulty with getting a mortgage as a contractor is that lenders often use score-based assessments that — to put it bluntly — aren’t realistic.

The typical affordability calculation works this way:

  • You submit two to three years’ worth of accounts
  • The lender averages out your salary and dividend income
  • They use that figure to work out how much you can afford to borrow

This approach makes sense for someone in full-time employment. It doesn’t make sense for contractors, for two reasons.

Firstly, unlike full-time employees, a contractor’s salary and dividend income isn’t necessarily a true reflection of how much they could afford. Or even of their earning power. Case in point, you might’ve chosen to withdraw only part of your profits and left the rest in your company bank account.

Those profits are still available to you whenever you want them, so it’s not accurate to say your income is “only” what you’ve taken out in salary and dividends.

Secondly, this approach assumes your income is fairly consistent. If there’s a big difference from one year to another — for example because you’ve embraced the freedom and flexibility of contracting and taken a sabbatical — the lender will usually work out affordability on your most recent accounts.

Needless to say, if your last year wasn’t as good as previous years revenue-wise, you might not be able to borrow enough to afford the property you want.

Getting a mortgage as a contractor: what are your options?

If traditional affordability criteria make it harder for contractors to get a mortgage, the good news is that some lenders now use alternative methods. These are:

  • Looking at your retained profits
  • Contract-based underwriting

It’s worth noting that not all lenders take this approach.

With this in mind, it’s a good idea to ask before you’re in too deep, or you risk getting disappointed. Alternatively, speak to a mortgage broker that understands contractors, like our trusted partners Broadbench. Fill in the form at the bottom of this page if you’d like to find out more from a trusted broker.

With that out of the way, let’s take a more detailed look at these two alternative approaches.

Retained profits

Here, the lender will calculate affordability based not only on your salary and dividends, but on your global earnings. In other words, they’ll also look at your company accounts and take your retained profits — profits you haven’t withdrawn from the company — into account.

If your salary and dividend income is only a portion of your total profits, this can make a big difference to how much you can borrow.

Contract-based underwriting

Here, the lender will work out your annual income — and, so, affordability — by:

  • Taking your day rate
  • Multiplying it by the number of days you typically work each week
  • Using this figure to estimate your annual income. As a rule, lenders will calculate your annual income over 46 to 48 weeks instead of a full 52, in order to allow for holidays and other gaps.

This can work well if you’ve just started out as a contractor and haven’t yet filed annual accounts.

But lenders will want to set their mind at rest that you can succeed as a contractor in the long term. So be prepared to provide them with evidence of your qualifications and experience, copies of client contracts, and proof of how you intend to grow your business, such as industry contacts.

Setting yourself up for success

Choosing a lender who takes retained profits into account or uses contract-based underwriting will boost your chances of securing a good mortgage. But there are also other steps you can take to strengthen your application.

Let’s take a look.

1. Build your credit score

Your credit score is important regardless of whether you’re a contractor or a full-time employee, because it shows lenders you can be trusted to pay your debts on time and not take on more than you can handle.

Getting your credit score into shape takes time and dedication, so it’s worth starting as early as possible. Here are some quick tips to get you started:

  • Sign up to Credit Club, ClearScore, and CreditKarma to get free access to your Experian, Equifax, and CallCredit scores. Monitor them regularly to make sure they’re complete, accurate, and up to date
  • Pay your bills — including your credit card statements — on time. Setting up direct debits can help you make sure you never forget a payment
  • Avoid using more than 50% of your total credit limit. So if you have two credit cards, one with a £1,000 limit and one with a £2,000 limit, avoid putting more than £1,500 on them
  • Space out any credit applications. As a rule, you shouldn’t apply for credit — that includes broadband and phone contracts — more than once every three months. Searches get recorded on your credit report and having many of them close together makes you look like you’re in financial difficulty. If you’re shopping around, use eligibility checkers. These don’t get recorded on your credit report

2. Pay a bigger deposit

The vast majority of lenders will require you to pay at least 10% of your home’s purchase price — or your home’s market value, if you’re in Scotland — up front. But if you can afford it, it’s worth putting down 15% or even 20%.

A larger deposit means you’ll need to borrow less. That’s less risk for your lender, which makes it more likely you’ll be accepted and get a good rate. As a plus, your mortgage repayment will be lower and you’ll pay less interest.

A good way to save for a property deposit is to pay yourself first. Open a separate account and set up a standing order so an amount is paid into it automatically each month. This way, saving for your mortgage becomes just another expense, instead of an afterthought.

Alternatively, you could have two accounts for your company — a working account and a savings account — and cap how much stays in your working account.

So, for instance, you could decide to keep a float of £20,000 in your working account to cover your salary and other expenses. Anything over that limit goes into the company’s savings account. Once you’ve saved enough for your deposit, declare a dividend and withdraw it.

The only catch with this method is that you’ll need to pay dividend tax on what you’ve saved.

3. Take time off responsibly… at least temporarily

Being able to take time off whenever you want — and for as long as you want — is one of the best things about being a contractor. Unfortunately, gaps in your work history can make lenders worry your income isn’t enough, or consistent enough, to afford a mortgage.

For this reason, it may be a good idea not to take too much time off, at least in the run up to your mortgage application. Avoid taking more than eight weeks off in a 12-month period.

You can always treat yourself to a long break once you’ve secured your mortgage.

4. Borrow with your partner

Is your spouse or partner in full-time employment?

While you’ll still need to show your lender you’re financially secure, fluctuating income may be less of an issue if you take out the mortgage jointly with someone whose income is more consistent.

If that’s not an option, a guarantor mortgage may also be a good choice. This is where a close family member promises to make good on the repayments if you default.

Needless to say, family occasions could get pretty awkward if things go wrong and you do default So make sure you have a frank discussion first, including setting down some ground rules.

You can be a contractor and own your dream home

While, admittedly, the choice of lenders is more limited when you’re a contractor, getting a mortgage isn’t the impossible feat it once was. Provided you’re informed and get your ducks in a row before you start looking.

Firstly, consider what kind of mortgage would work best for you.

Been contracting for a while and have fairly consistent profits? A lender that takes retained profits into account could be the way to go.

Alternatively, consider contract-based underwriting, borrowing jointly, or taking out a guarantor mortgage.

Secondly, prepare yourself ahead of time. Make sure your credit score is in the best shape it could be, avoid long gaps between projects, and save up as big a deposit as you possibly can.

Lastly and most importantly, it pays to speak to a specialist. A broker who specialises in contractor mortgages will better understand your situation and can advise you on what would work best for you.

Want to find out more about your mortgage options as a contractor?

Fill in this form for a free, no-obligation chat with Broadbench – our trusted partner.

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    Please use this article as a guide only. Always seek professional advice when considering your mortgage options.

    Last updated: 20th March 2024