What contract types are accepted by mortgage lenders?

Navigating the mortgage market when you do not hold a standard permanent contract can be complex. While permanent contracts offer the smoothest path to securing a mortgage, UK lenders accept a wide range of employment agreements, including fixed-term, zero-hours, and various self-employed and professional contracting roles. The fundamental requirement is demonstrating stability and longevity of income, regardless of the contractual structure.

Understanding what contract types are accepted by mortgage lenders in the UK

The type of contract you hold is crucial because it dictates how a lender assesses your income and, consequently, how much you can borrow. Affordability assessments rely heavily on predictable income streams. While lenders are increasingly flexible to reflect modern employment patterns, those with less traditional agreements must often provide greater evidence of financial stability.

The Standard: Permanent Employment Contracts

A permanent (or indefinite) contract is generally considered the “gold standard” by mortgage lenders. This contract signifies that your employment is ongoing and that your income is unlikely to cease abruptly, making the income calculation straightforward.

Lenders typically require the following documentation for permanently employed applicants:

• Three months of recent payslips.
• P60 form (Annual statement of earnings and tax paid).
• Six months of bank statements to show the salary credit.
• A letter from your employer confirming your status, tenure, and salary.

If you have recently started a new permanent role, some lenders may accept the mortgage application based on the employment contract and a start date, although many prefer to see at least one monthly payslip before proceeding.

Navigating Non-Standard Employment Contracts

If your employment contract is not permanent, lenders will apply greater scrutiny to gauge the risk of future income gaps. Consistency and history are key factors when applying for a mortgage with these arrangements.

Fixed-Term Contracts

Fixed-term contracts are common in sectors like education, healthcare, and IT. They run for a defined period, such as six months or one year. Lenders need reassurance that your income will continue after the current contract expires.

To accept income from a fixed-term contract, lenders will often look for:

• Evidence of renewal history: If you have been renewing fixed-term contracts with the same employer (or consecutively in the same industry) for two years, the income may be treated similarly to permanent employment.
• Contract length remaining: If the contract has less than three or six months left, some lenders may require evidence of a signed contract renewal or a new job offer before approval.
• Industry stability: Contracts in industries with predictable future demand are generally viewed more favourably.

Zero-Hours Contracts

Zero-hours contracts (ZHCs) are particularly challenging for mortgage applications because they guarantee no minimum working hours. However, they are accepted by a growing number of specialist and mainstream lenders, provided the applicant can demonstrate reliable income.

Lenders will typically ignore the “contract type” and focus entirely on the income history. They usually require:

• Proof of income consistency over 12 to 24 months, demonstrated via payslips and bank statements.
• The lender will calculate an average income based on this period, and they may only utilise a percentage of this average (e.g., 80%) to mitigate risk.

Agency and Umbrella Company Contracts

If you work via an agency or an umbrella company, your employment status may technically be defined as ’employed,’ but your income structure mimics self-employment due to variable assignments and pay. Lenders will assess your income based on your P60s and payslips over an extended period (usually 12 months) and confirm your continuous engagement through the agency or umbrella company.

Contracts for the Self-Employed and Professional Contractors

Self-employed individuals, including sole traders and limited company directors, operate on specific contractual agreements (or absence thereof) that require detailed examination by mortgage providers. Lenders need legally certified proof that your business is viable and generating sustainable profit.

Sole Traders and Partnerships

For sole traders and partners, income assessment is typically based on your net profit declared to HM Revenue and Customs (HMRC). Standard requirements are:

• A minimum of two years of trading history is standard, though some lenders accept 12 months if the business is robust.
• HMRC documentation: SA302 forms (tax calculations) and a Tax Year Overview (TYO) for the past two to three years. These documents provide independent verification of declared income.

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Limited Company Directors

If you are a director of a limited company, lenders assess your income based on a combination of salary and dividends, or, in some cases, the retained net profit of the company, provided your shareholding is sufficient.

• Salary and Dividends: Most lenders will require two to three years of company accounts, along with corresponding SA302s showing personal income (salary and dividends taken).
• Retained Profit: Some specialist lenders may consider the company’s net profit before tax, especially if the funds are accessible and required for affordability.

Specialist Professional Contracts (Day Rate Contractors)

Professional contractors, particularly those outside IR35 (off-payroll working rules), who work on a specific day rate basis (common in IT, finance, and engineering), are often assessed by annualising their contract rate.

For instance, a lender might calculate income by taking the day rate, multiplying it by five (days per week), and then multiplying that figure by 46 to 48 weeks (to account for holidays and gaps between contracts).

Lenders often require a copy of the current contract and confirmation that contracting has been continuous for 12 months or more. For up-to-date, impartial information on finding a mortgage, consult government-backed resources like MoneyHelper’s guide to getting ready to buy a home.

Why Lenders Care About Contract Stability

Lenders are tasked with ensuring the mortgage is affordable over the entire term, not just today. The Consumer Credit Act and FCA regulations require lenders to perform rigorous affordability checks. The contractual stability directly influences the risk profile of the loan.

• Predictability of Income: Stable contracts allow lenders to accurately predict future earnings.
• Mitigating Gaps: Contracts with built-in risks (like ZHCs or short fixed terms) require lenders to build buffers or require larger deposits.
• Underwriting Policy: Every lender has a unique underwriting policy. Some prefer to only lend to permanent employees, while others use specialist criteria for complex contract types.

If you fail to make repayments on any secured loan, including mortgages, there are severe consequences. Your property may be at risk if repayments are not made. Consequences can include legal action, repossession, increased interest rates, and additional charges which significantly increase the total debt burden.

Key Documentation for Non-Standard Contracts

Regardless of your specific contract type, preparing comprehensive and accurate documentation is essential. This often involves providing evidence beyond the basic payslip and bank statement:

• Full copies of all contracts for the last 12–24 months.
• Evidence of funds received, clearly matching the contracts (bank statements).
• For self-employed applicants: Proof that tax returns have been accepted and processed by HMRC (SA302s and TYOs).
• If working through an agency: A letter from the agency confirming ongoing assignments and payment regularity.

People also asked

Can I get a mortgage if I have just started a new contract?

It depends on the type of contract. If it is a permanent role, many lenders will accept a signed employment contract and potentially a first payslip. If it is a fixed-term or self-employed contract, lenders almost always require a history of stable income, typically ranging from 6 to 12 months, and often 2 years for limited companies.

Do lenders treat umbrella company contracts and self-employment differently?

Yes, significantly. While both involve varying income, umbrella company workers are technically ’employed’ and assessed based on PAYE income and P60s. Self-employed individuals (sole traders or limited company directors) are assessed based on declared net profit or salary/dividends, verified by HMRC records (SA302s) and audited accounts.

Will a short gap between contracts affect my mortgage application?

A short, reasonable gap (e.g., 4–6 weeks) between consecutive contracts in the same industry is often acceptable, provided the overall employment history remains strong (12+ months). However, significant or frequent gaps may lead lenders to average your annual income down or require a larger deposit.

How is income calculated for zero-hours contract workers?

Lenders calculate an average of your earnings over a defined period, usually the past 12 or 24 months, using payslips and bank statements. Some lenders may apply a reduction (a ‘haircut’) to this average to account for potential instability, for example, only assessing 90% of the calculated average income.

Ultimately, while the range of accepted contract types is broad, the consistency of income remains the paramount factor for securing a mortgage. If your employment structure is complex or non-standard, consulting an experienced mortgage broker who specialises in complex income types is strongly recommended, as they can identify specific lenders whose policies align with your employment history.