Do contractor mortgages come with higher fees?

Navigating the mortgage market as a professional contractor in the UK can feel like entering a specialist niche. Unlike employed applicants who present clear payslips and P60s, contractors often require lenders to assess income based on complex day rates, contract history, and company structure (such as limited companies). This specialised underwriting sometimes leads applicants to wonder: do contractor mortgages come with higher fees?

The short answer is nuanced: while the interest rates offered on contractor mortgages often align closely with standard residential mortgages, specific arrangement fees and the cost of specialist advice may potentially elevate the overall price of the deal.

Do Contractor Mortgages Come with Higher Fees than Standard Residential Loans?

For high-earning professionals who operate on fixed-term contracts or through their own limited company, accessing the residential property market requires working with lenders who understand contractor finances. Traditional high-street lenders sometimes struggle to assess variable or contract-based income, leading contractors towards specialist providers.

The perception that contractor mortgages are inherently more expensive is common, but it is often based on the total associated costs, rather than just the core interest rate. To understand if contractor mortgages come with higher fees, we must break down the typical expenses involved.

Understanding the Fee Structure of Contractor Mortgages

When securing any residential mortgage in the UK, costs generally fall into two categories: lender fees (product costs) and third-party fees (service costs). For contractors, both categories can be affected by the nature of their work.

1. Lender and Product Fees

Lender fees are charged by the mortgage provider for the product they offer. These typically include:

• Arrangement Fees (or Product Fees): This is the cost charged by the lender to set up the specific mortgage deal (e.g., a two-year fixed rate). For standard mortgages, these can range from zero (a fee-free deal) up to 1% or more of the loan amount. Specialist products, including some contractor deals, may sometimes carry a slightly higher arrangement fee to offset the increased administrative effort and risk associated with bespoke underwriting.
• Valuation Fees: The cost of valuing the property. This is generally the same regardless of applicant status, though complex or high-value properties may cost more.
• Booking Fees: A smaller, sometimes non-refundable fee charged upfront to reserve a specific mortgage product.
• Exit/Redemption Fees: Fees payable when the mortgage is fully paid off or refinanced outside of the initial fixed term. These are standard across most mortgage types.

If a lender is willing to assess your income based on your day rate (often converting it into an annual figure, typically multiplying the day rate by 5 days a week for 46 or 48 weeks), the resulting mortgage rate and fees are often highly competitive, sometimes identical to those offered to permanent employees.

2. Specialist Broker and Advice Fees

One primary cost differentiator for contractors is the frequent necessity of using a specialist mortgage broker. Many contractors find it essential to use a broker who understands how different lenders calculate contract income, especially if they are paid via dividends or retain earnings within a limited company.

• Broker Fees: While standard residential brokers may charge a fee of a few hundred pounds, specialist contractor brokers sometimes charge slightly more for their niche expertise. However, this cost is often worth the investment, as a good specialist broker can secure a significantly better interest rate, potentially saving thousands over the mortgage term, offsetting the upfront fee.
• Legal and Conveyancing Fees: These costs relate to the legal transfer of the property and are independent of your employment status.

Why Specialist Underwriting Might Affect Costs

Lenders who offer contractor mortgages take a flexible approach to underwriting, which means they are willing to accept evidence of income beyond standard P60s. For example, they might require:

• A minimum continuous contracting history (e.g., 12 or 24 months).
• Evidence of a current contract with a minimum remaining term (e.g., 4-6 weeks).
• Calculation based on your gross contract day rate rather than declared salary/dividends.

Because assessing these factors requires manual review by an experienced underwriter rather than an automated system, the lender’s operational cost is slightly higher. This increased operational cost may sometimes be reflected in the product arrangement fees, although this is not universally true, particularly among major lenders who have developed dedicated contractor policy teams.

The Influence of Credit Score on Contractor Mortgage Fees

Regardless of whether you are a contractor or permanently employed, your credit history plays a significant role in determining the fees and interest rates offered. A strong credit score signals lower risk to the lender, typically resulting in access to the most preferential products and lowest fees.

If your credit profile is less than perfect, a specialist contractor lender may still offer a mortgage, but this might be categorised as a higher-risk loan, potentially attracting both a higher interest rate and increased product arrangement fees.

It is always sensible to review your credit file before applying. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)

Strategies for Reducing Contractor Mortgage Costs

Contractors are not powerless when it comes to managing fees. By approaching the market strategically, you can often mitigate or minimise specialist costs:

• Maximise Your Deposit: A lower Loan-to-Value (LTV) ratio almost always leads to better rates and lower fees, regardless of your employment status. Aiming for a 15% or 20% deposit will open up a wider range of competitive products.
• Shop the Whole Market: Do not assume the first lender that accepts your contract structure has the best deal. Use a specialist broker who has access to the entire market, including exclusive deals not available directly to the public.
• Assess Total Cost, Not Just the Rate: When comparing offers, calculate the total cost over the fixed term (e.g., two years or five years). A product with a slightly higher interest rate but zero arrangement fee might be cheaper overall than a product with a low rate and a large fee (e.g., 1.5% of the loan amount).
• Review Contract Longevity: Ensure your contracting history is robust. Lenders are more comfortable underwriting applications from contractors who demonstrate long-term stability in their chosen industry.

Compliance and Regulation

All mortgages in the UK are regulated by the Financial Conduct Authority (FCA). This protection applies equally whether you are accessing a standard residential mortgage or a specialist contractor product. Regulations ensure fair treatment, clear terms, and robust affordability assessments.

When considering specialist mortgage products, it is important to remember the core principles of mortgage borrowing. If you secure a mortgage, you are committing to a long-term financial obligation. Should you fail to maintain repayments, consequences could include legal action, increased interest rates, additional charges, and ultimately, repossession.

Your property may be at risk if repayments are not made. Always seek independent financial advice if you are unsure about the suitability of a product or the ability to manage the repayments.

For general guidance on understanding different types of mortgage costs, the government-backed service offers valuable, impartial advice. You can find resources on mortgage costs and fees explained via MoneyHelper.

People also asked

Can a contractor get a mortgage without a deposit?

Getting a mortgage without any deposit (100% LTV) is extremely rare for contractors, as it is for permanent employees. While some specific guarantor mortgages or family-assisted products exist, contractors typically need at least a 5% deposit to access the market, and 10% or more is usually required to unlock competitive rates.

Do I need to be contracting for a minimum time to get a mortgage?

Lender criteria vary, but most contractor-friendly lenders require a minimum of 12 months’ continuous contracting history. Some niche lenders may consider applications with as little as six months’ history, provided you have extensive prior experience in the same field or have a long remaining period on your current contract.

Can I use my day rate to calculate affordability?

Yes, many specialist contractor mortgages are assessed primarily on your day rate. Lenders will usually multiply your day rate by a set number of working days per year (typically 220 to 240 days) to calculate your annual income. This method often allows contractors to borrow significantly more than if they were assessed purely on declared salary and dividends from a limited company.

Are interest-only contractor mortgages available?

Yes, interest-only contractor mortgages are available, particularly for buy-to-let properties or for residential applicants who meet stringent criteria regarding income and demonstrable repayment strategies for the capital. However, lenders offering interest-only terms are typically more risk-averse, meaning rates might be less competitive, and the assessment process more rigorous.

Is it harder for limited company contractors to get a mortgage?

It can be slightly more complex, but not necessarily harder. Limited company contractors often retain profits within the business for tax efficiency. Lenders who do not specialise in contractor finance will only assess the declared salary/dividends, limiting borrowing capacity. A specialist contractor lender, however, will look through the company accounts and use the day rate calculation method, making the process much smoother and resulting in a higher potential loan amount.

Conclusion

The question of do contractor mortgages come with higher fees does not yield a simple ‘yes’ or ‘no’. While the underlying interest rates are often highly competitive, contractors must budget carefully for the possibility of slightly elevated arrangement fees and the cost associated with expert broker advice. The key to securing a cost-effective contractor mortgage is meticulous preparation, ensuring a robust credit file, and partnering with a broker who understands how to present your contract income to the right specialist lenders.