What is a contractor mortgage?

As the UK workforce evolves, many professionals choose the flexibility of contracting. However, securing a conventional mortgage can be challenging when you don’t receive a standard P60 or salary slip. This guide explains what is a contractor mortgage, how it differs from traditional mortgages, and the specialist requirements lenders look for when assessing your application.

What is a Contractor Mortgage and How Does it Work?

A contractor mortgage is a tailored residential mortgage product designed specifically for individuals who earn their income via fixed-term contracts, typically operating through a limited company or an umbrella company. Unlike standard employed individuals, a contractor’s income stream is often viewed as irregular by mainstream mortgage providers, making traditional affordability assessments difficult.

Specialist contractor mortgages solve this problem by offering unique underwriting criteria. Instead of requiring two to three years of company accounts or relying solely on the director’s salary and dividends (which might be intentionally kept low for tax purposes), these lenders assess your affordability based on your gross annualised contract value.

This approach allows contractors to potentially borrow significantly more than they could otherwise, as the assessment reflects their true earning potential rather than just their taxable income.

Why Do Contractors Need Specialist Mortgages?

Standard lenders usually rely on simple, predictable income proof:

• P60s for employed applicants.
• Two to three years of certified accounts for self-employed applicants, focusing on profit or salary/dividend split.

For contractors, especially those running a limited company, the formal taxable income might be low, making them appear less creditworthy than they are. They might also frequently change employers or have short gaps between contracts, which triggers caution with traditional underwriters.

Contractor mortgages are underwritten by specialist lenders who understand the contracting lifestyle. They recognise that a consistent history of high day rates often equates to a stable, high income, even if the employment structure is project-based.

Contractor Mortgage Eligibility and Income Assessment

The primary factor distinguishing what is a contractor mortgage is the way the lender calculates your income. Lenders typically work backwards from your current or recent contract day rate to determine an equivalent annual income.

The Day Rate Calculation Explained

Affordability is generally calculated using the following formula:

Day Rate x Number of Working Days per Year = Assessable Gross Income

Most UK lenders calculate the number of working days per year as 48 or 46 weeks (to account for holidays and short gaps), resulting in approximately 220 to 240 days per year. For example, if your day rate is £500, a lender might calculate your income as:

£500 (Day Rate) x 220 (Days) = £110,000 (Assessable Income)

This full £110,000 figure is then used to calculate the maximum loan available, usually applying a standard income multiple (e.g., 4.5x or 5x). Crucially, this calculation often applies regardless of how much salary or dividend you actually draw from your limited company.

Key Eligibility Requirements

While the calculation method is flexible, lenders still require evidence of stability. Typical minimum criteria include:

• Minimum Day Rate: While not absolute, many specialist lenders prefer contractors earning at least £300 to £350 per day (or an equivalent hourly/weekly rate).
• Contract History: Lenders usually require evidence of continuous contracting for a minimum period, often 12 months in the last 18 or 24 months.
• Contract Continuity: You should ideally have at least four to six weeks remaining on your current contract, or have signed documentation for a subsequent contract, demonstrating ongoing employment.
• Deposit: As with any mortgage, you will typically need a deposit, often starting at 10% of the property value, although larger deposits may secure better rates.

Limited Company vs. Umbrella Company Contractors

The type of business structure you use affects how the mortgage application is processed:

1. Limited Company Directors

If you contract through your own limited company, you have the greatest need for a specialist contractor mortgage. Traditional high street lenders will look at your accounts, which might show low taxable income. Specialist lenders, however, focus on the day rate or the overall gross revenue of the contract, ignoring the salary/dividend split, making the application much smoother.

2. Umbrella Company Contractors

If you operate through an umbrella company, your income structure is closer to traditional employment. The umbrella company processes your payroll, deducts taxes, and issues payslips. Some lenders may treat you as standard employed, provided they understand and accept the complexity of the payslips. However, specialist contractor mortgages can still be advantageous, as the underwriting criteria are tailored to these specific pay structures.

Required Documentation for a Contractor Mortgage

To secure a contractor mortgage, you must provide comprehensive evidence of your professional history and financial stability. Typical documents include:

• Your full CV, detailing your continuous contracting history.
• Copies of your current and previous contracts (usually covering the last 12–24 months).
• Bank statements showing receipt of the contract funds.
• Proof of identity and address (passport, driving licence, utility bills).
• Confirmation that tax returns (SA302s or Tax Year Overviews) are up-to-date, particularly if you are a limited company director.

Tips for Securing a Contractor Mortgage

To improve your chances of securing the best deal, consider the following strategic steps:

1. Maintain Continuity: Lenders favour applicants who can demonstrate minimal gaps between contracts. Try to secure your next contract before the current one ends.
2. Keep Records Immaculate: Ensure all contract documents, invoices, and bank statements are easily accessible and match your stated income.
3. Understand Your Credit Profile: A strong credit history is vital, as specialist mortgages still rely on credit scoring. Reviewing your file helps ensure accuracy and address any potential issues early. 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. Seek Expert Advice: A mortgage broker specialising in contractor finance will know which lenders offer the most favourable terms based on your specific contract duration, day rate, and structure (limited company or umbrella).

It is important to remember that while specialist products offer flexibility, they may sometimes carry slightly higher interest rates or fees than standard residential mortgages, reflecting the perceived complexity of the income assessment.

Regardless of the specific product type, remember that a mortgage is a significant financial commitment, and 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. Always ensure you can comfortably afford the monthly payments, even if your contract length fluctuates. You can find independent guidance on choosing a mortgage product from sources like the UK Government’s MoneyHelper service.

People also asked

Can I get a contractor mortgage if I have only just started contracting?

It is difficult, but not impossible. While many lenders prefer a minimum of 12 months of continuous contracting history, some niche specialists may consider applicants with as little as three to six months experience, provided they have significant professional experience in that industry preceding the contract work and a substantial contract already secured.

Do contractor mortgages require a larger deposit?

Generally, no. Contractor mortgages typically start at the standard 85% or 90% loan-to-value (LTV) limits, meaning you require a minimum 10% or 15% deposit. However, securing a lower LTV (e.g., 75%) by putting down a larger deposit often unlocks better interest rates, regardless of your employment type.

How long does the contract need to be remaining?

Lenders usually require a minimum of four to six weeks remaining on your current contract at the time of application submission. Crucially, they want to see a history of renewals or evidence of a confirmed extension or a new contract lined up immediately afterwards, ensuring continuity of income.

What if my day rate fluctuates?

Lenders prefer stability. If your day rate fluctuates significantly, they will typically calculate your affordability based on an average rate over the last 6 or 12 months, or they may use the lower end of your earning range to ensure the mortgage remains affordable during leaner periods.

Are contractor mortgages regulated by the FCA?

Yes. If the mortgage is for a residential property that you intend to live in (owner-occupied), it falls under the jurisdiction and regulation of the Financial Conduct Authority (FCA), offering the same protections as standard residential mortgages.

Securing a contractor mortgage doesn’t have to be a complicated process. By understanding how specialist lenders assess income based on your day rate rather than complex corporate accounts, and ensuring your documentation is in order, you can successfully navigate the process and achieve your goal of homeownership.