What is the difference between a contractor mortgage and a regular mortgage?

Navigating the UK mortgage market as a self-employed professional can be challenging. While a regular mortgage uses standardised proof of income (like P60s and payslips), a contractor mortgage is a specialist product designed to assess affordability based on your daily or hourly contract rate, rather than relying solely on declared income and accounts. This distinction is vital for contractors who manage their finances to be tax efficient, often declaring lower salaries or profits.

What is the Difference Between a Contractor Mortgage and a Regular Mortgage in the UK?

The fundamental difference between a contractor mortgage and a regular residential mortgage lies in the methodology lenders use to prove affordability and verify income. Standard mortgages are designed for those in traditional employment (PAYE), while specialist contractor mortgages cater directly to the unique financial structures used by self-employed professionals.

Understanding Income Assessment in the Mortgage Market

For any mortgage application, lenders must rigorously assess that the borrower can afford the monthly repayments, not only now but also if circumstances change (such as rising interest rates). This is mandated by the Financial Conduct Authority (FCA).

How Regular Mortgages Assess Income

If you are a standard employee (PAYE), the mortgage application process is relatively straightforward regarding income proof. Lenders require:

• Recent payslips (usually the last three months).
• P60 forms (annual statement of earnings and tax paid).
• Proof of consistent employment history.
• Bank statements showing salary deposits.

Affordability is typically calculated based on your gross annual salary, multiplied by a standard factor, often 4 to 5 times your income, depending on the lender and your deposit size.

The Challenge for Contractors and Self-Employed Individuals

Contractors often operate through a Limited Company or an Umbrella Company. While these structures offer tax advantages, they can complicate traditional mortgage applications:

• Limited Company Contractors: To minimise corporation tax, many directors draw a small, fixed salary and take the rest of their income as dividends. When applying for a regular mortgage, the lender might only consider the low salary and declared dividends, significantly understating the contractor’s true earning potential.
• Short-Term Contracts: Standard lenders prefer long-term stability. The perceived risk of a contractor’s short-term contracts expiring can trigger stricter lending criteria.

If a contractor applies for a regular mortgage using their self-assessment tax returns, they might find their borrowing capacity severely limited because the declared, taxable income is much lower than their gross contract value.

The Specialist Solution: Contractor Mortgages

A contractor mortgage is not a distinct legal product but rather a specialist underwriting approach offered by certain lenders (often niche or those willing to be more flexible) who understand the contracting lifestyle. Instead of demanding two or three years of audited accounts, these specialist lenders focus on the value of the current contract.

How Specialist Lenders Calculate Affordability

Specialist lenders bypass the tax-efficient structure and calculate affordability based on your average daily or hourly rate. The standard calculation method typically involves:

1. Taking your current day rate (e.g., £500 per day).
2. Multiplying it by the average number of working days per week (usually 5).
3. Multiplying this weekly figure by the typical number of weeks worked per year (usually 46 to 48 weeks, allowing for holidays).

Using the £500 example, the lender calculates your projected annual gross income as approximately £115,000 to £120,000, which is then used for the affordability multiplier. This calculation offers a much higher borrowing ceiling than if the lender relied solely on the contractor’s declared salary and dividends.

Key Requirements for a Contractor Mortgage

While specialist lenders are more flexible on the income calculation, they still require solid evidence of stability and experience. Typical requirements often include:

• Contract History: Lenders typically prefer applicants who have been contracting for at least 12 months, though some may accept 6 months if you have strong professional experience in the same field.
• Future Contracts: You usually need at least 4 to 6 weeks remaining on your current contract, and ideally, evidence of a renewal or an upcoming contract.
• Consistency: The lender needs to see a consistent history of high-value contracts without long gaps between assignments.
• Day Rate: A minimum day rate is often required, which varies significantly by lender but is typically above £300–£350 per day (or the hourly equivalent).

Comparing Criteria: Regular vs. Contractor Mortgages

The following table summarises the core areas where the two mortgage types diverge:

Criteria Regular Mortgage (PAYE) Contractor Mortgage (Specialist) Primary Income Proof P60s, 3 months payslips, SA302/Tax returns (for 2–3 years if recently self-employed). Current contract document and day rate calculations. Affordability Basis Gross annual salary (or declared taxable profit/salary/dividends). Gross projected annual contract value (Day Rate x Weeks Worked). Employment Stability Focus Long-term, permanent employment history. History of short, successful, high-value contracts.

Contractor mortgages are fundamentally about mitigating the risk associated with non-standard employment by focusing on the potential long-term value of the contract rather than the declared taxable income.

Navigating the Application Process and Credit Checks

Whether you choose a regular route (if your accounts support it) or a specialist contractor route, the underlying requirements for eligibility remain high. Lenders will perform a credit check to assess your reliability in managing existing debt, such as loans, credit cards, and existing mortgage payments.

Before submitting any application, ensuring your financial records are accurate and up-to-date is crucial. It is highly recommended that you check your credit file, as errors or unexpected adverse marks could hinder an application. 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)

If you are uncertain about the documentation required or how best to present your contracting income, seeking advice from an independent mortgage broker who specialises in self-employed lending can be invaluable. They will have access to lenders who are known for their flexible underwriting criteria for contractors.

For more detailed guidance on preparing your finances and documentation when self-employed, resources like MoneyHelper offer practical, non-commercial advice.

People also asked

Is it harder for a contractor to get a mortgage than an employee?

Yes, generally it is harder to secure a mortgage through mainstream lenders who rely solely on declared income, as contractors often manage their finances to minimise taxable profits. However, applying through a specialist contractor mortgage provider or broker significantly simplifies the process by allowing the use of your higher gross contract rate for affordability calculations.

How long do I need to be contracting before applying for a specialist mortgage?

Most specialist lenders typically require a track record of 12 months (or two contract renewals) to demonstrate income stability, though some will consider applicants with six months of contracting history if they have substantial prior experience in the industry or a high-value, long-term contract in place.

Do contractor mortgages have higher interest rates than regular mortgages?

Historically, specialist mortgages sometimes carried a slight premium, but due to increased competition and understanding of the contracting market, rates for contractor mortgages are now highly competitive and often comparable to standard residential mortgage rates, assuming the applicant meets all other lending criteria and has a good credit score.

Can I apply for a contractor mortgage if I work via an umbrella company?

Yes, many specialist contractor lenders are comfortable underwriting mortgages for those working through umbrella companies. They will usually assess income based on the employment contract provided by the umbrella company and the gross invoice value submitted to the end client, effectively treating the income similar to a standard limited company day-rate calculation.

What deposit will I need for a contractor mortgage?

The deposit requirements for a contractor mortgage are generally the same as for a regular residential mortgage. While 10% is common, providing a larger deposit (e.g., 25%) can open up better interest rates and increase the range of lenders available, regardless of your employment status.

Summary of Key Takeaways

The choice between a regular and a contractor mortgage depends entirely on how your income is structured. If your declared, taxable income (salary plus dividends/profits) accurately reflects your borrowing requirements, a regular mortgage may suffice.

However, if you are a tax-efficient contractor seeking to maximise your borrowing potential, a specialist contractor mortgage is essential. By focusing on your contract day rate, these products provide an accurate, high-value picture of your true earning power, helping you secure the financing required for your property purchase.

Working with a broker familiar with the specialist lending market is the most effective way to identify lenders who will assess your contract income favourably, ensuring a smoother application process tailored to the reality of contract work in the UK.