Why are contractor mortgages harder to get?

For high-earning professionals, contracting offers freedom and excellent remuneration, but when it comes to securing a mortgage, this non-traditional employment structure often presents significant obstacles. Lenders prefer the certainty of standard Pay As You Earn (PAYE) income, making the self-employed, particularly contractors, subject to more stringent checks and narrower product availability. Understanding the core issues surrounding income verification and stability is key to navigating the contractor mortgage market successfully.

Why Are Contractor Mortgages Harder to Get? Understanding Lender Hesitations

The journey to securing a mortgage as a contractor can often feel frustratingly complex, especially if you approach lenders who primarily cater to traditionally employed individuals. While contracting often results in a higher annual income than permanent employment, the structure of this income—typically based on short-term contracts, day rates, and often managed through a Limited Company—does not fit neatly into the standardised risk assessment models used by most mainstream UK lenders.

The fundamental issue boils down to one word: consistency. Lenders are primarily concerned with the borrower’s ability to maintain repayments throughout the term of the mortgage, usually 25 years or more. For a permanent employee, this is evidenced by payslips and P60s. For a contractor, the financial picture is far less straightforward.

The Core Challenge: Income Stability and Verification

Traditional mortgage underwriting relies on two primary pillars: a consistent history of earnings and a high likelihood that those earnings will continue. Contractors struggle to satisfy both criteria under standard lending rules.

Fluctuating Income and Perceived Risk

Unlike a salaried worker who receives a fixed amount every month, a contractor’s income is inherently linked to their current contract. If the contract ends, the income stops until a new one is secured. While contractors may have significant buffers and high savings, the risk profile, from a lender’s perspective, is higher. Lenders must factor in potential gaps between contracts, known as ‘void periods’, which could lead to missed mortgage payments.

If you are contracting, lenders will typically look for evidence of continuity, often requiring:

• A minimum number of years operating as a contractor (typically 12 months, sometimes 2 years).
• A history of renewals or back-to-back contracts demonstrating demand for your skills.
• Significant time remaining on the current contract (usually at least three to six months).

The Problem of Accounts and Dividends

Many experienced contractors operate through a Limited Company for tax efficiency. This is often why contractor mortgages are harder to get via standard routes. Standard lenders assess affordability based on the figures reported to HMRC. When using a Limited Company, contractors typically:

1. Draw a small, tax-efficient salary.
2. Take the remainder of their remuneration as dividends.

The goal is to minimise corporation tax and income tax. However, the resulting taxable income shown on official documents, such as HMRC’s SA302 forms (Self Assessment Tax Calculations), may appear substantially lower than the contractor’s actual gross fee income. When assessed by a standard mortgage underwriter, this low taxable income often results in a much smaller maximum borrowing amount than the contractor can realistically afford.

To verify accurate income records, lenders often rely on official documentation. You can view guidelines on self-assessment tax returns and calculations on the UK Government website.

Specialist Underwriting: Moving Beyond Traditional Accounts

Because the traditional assessment process severely limits the borrowing power of contractors, a niche market of specialist lenders and brokers has emerged to assess affordability based on a contractor’s actual earning potential, rather than just their historic tax returns.

The Day Rate Calculation Method

Specialist lenders often use the ‘day rate’ method for assessment. This allows them to annualise your income based on your current contract rate, providing a more accurate reflection of your true income. The calculation typically involves:

• Taking your current daily or hourly rate.
• Multiplying it by the average number of days worked per week (usually 5).
• Multiplying that weekly figure by the typical number of working weeks in a year (usually 46 to 48 weeks, allowing for holidays and short gaps).

This method acknowledges that the income is high and focuses on the consistency of the contract chain, rather than the low figures reported in historic accounts.

It is important to note, however, that accessing these specialised products usually requires working with a broker who has established relationships with lenders that offer non-standard criteria.

Improving Your Mortgage Application as a Contractor

While the process is challenging, contractors can take several proactive steps to improve their application strength and eligibility for competitive mortgage products:

1. Maintain a Detailed Contract History: Keep all records of contracts, start dates, end dates, and renewals. Demonstrating a stable history of contract work with minimal gaps is crucial proof of stability.

2. Boost Your Deposit: A larger deposit reduces the Loan-to-Value (LTV) ratio, immediately lowering the lender’s risk. Contractors putting down 20% or 25% often find a wider array of products available than those seeking 90% or 95% LTV.

3. Ensure Impeccable Credit History: A strong credit score and clean history of managing existing debts reassure lenders that you are a reliable borrower, counteracting the perceived employment risk. Check your financial health before applying for any major credit facility, as lenders will conduct hard searches.

A good starting point is understanding exactly what information lenders see about you. 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)

4. Plan Your Finances: If you are planning a mortgage application in the next 12–24 months, discuss your plans with an accountant and a specialist broker. They may advise adjustments to how you draw income or manage expenses to present your financial affairs in the most favourable light.

5. Use a Specialist Broker: Standard high-street lenders may instantly decline applications based purely on tax return figures. A specialist broker knows which lenders accept day rates, which have specific criteria for IT contractors, and which offer suitable products for those with short contracting histories. They can match your unique financial situation to the right underwriting criteria immediately, saving you time and protecting your credit file from multiple unsuccessful applications.

People also asked

Do I need two years of accounts to get a contractor mortgage?

Not necessarily. While many mainstream lenders require two or three years of audited accounts or SA302s, specialist contractor lenders may accept just 12 months of trading history, or even less, provided you have a long history of professional experience in that sector before you began contracting.

Does my job title affect my mortgage application?

Yes, to an extent. Lenders often categorise contractors by profession. Highly sought-after professions with a predictable contract lifecycle, such as IT consultants, financial specialists, and medical professionals, may find it slightly easier to secure bespoke products than those in volatile or niche industries.

Can I use my retained profits as proof of income?

Some specialist lenders will allow you to use retained profits—money kept within your Limited Company—as part of their affordability calculation, especially if you can demonstrate that these profits are easily accessible and that the company is financially stable. This is a common requirement when standard salary and dividend income are low.

What is the minimum contract length lenders require?

Typically, lenders prefer to see a minimum of three to six months remaining on your current contract at the time of application. Furthermore, they usually want evidence that you have been contracting for at least 12 months previously to demonstrate that contract work is a long-term, sustainable career choice for you.

Is a bridging loan a good alternative if I am struggling to get a contractor mortgage?

No. A bridging loan is a short-term, high-interest financial tool designed specifically for property purchases where the main finance is temporarily unavailable (e.g., buying a property at auction or buying before selling your current home). It is not a suitable long-term replacement for a standard residential mortgage. Your property may be at risk if repayments are not made. Consequences of default can include legal action, repossession, increased interest rates, and additional charges, so you should only use bridging finance when you have a clear repayment strategy, usually involving securing a long-term contractor mortgage subsequently.

Summary

The difficulty in securing a mortgage as a contractor stems from a clash between the contractor’s fluid, tax-efficient income structure and the inflexible risk models of conventional lenders. While contractor mortgages are harder to get through standard high-street channels, they are certainly achievable. By understanding the requirement for specialist underwriting, maintaining meticulous records, and engaging an expert broker, contractors can successfully leverage their high day rates to secure the necessary finance.

Planning ahead and presenting a clear, stable financial picture that highlights long-term professional stability, rather than relying solely on low historic tax returns, is the surest route to homeownership.