Are remortgage rates higher for contractors?

The financial journey for contractors in the UK often differs significantly from that of permanent employees, particularly when seeking large loans such as mortgages or remortgages. While the base interest rates offered by lenders are generally determined by factors like the Bank of England base rate and your Loan-to-Value (LTV) ratio, the eligibility criteria and the resulting product access can sometimes make securing the most competitive deal challenging for contractors.

The core issue is perception of risk. Lenders favour stability. A contractor’s income, while potentially high, is often seen as inherently less secure than a standard PAYE salary, as it is tied to specific contracts that have defined end dates. Therefore, whether your remortgage rates are higher often hinges on whether you use a mainstream lender with strict scoring criteria, or a specialist lender willing to underwrite your specific circumstances.

Why Contractors Face Different Remortgage Criteria

Standard mortgage applications are primarily built around assessing verifiable, consistent PAYE income. When a lender assesses a contractor, they need to implement additional steps to ensure the continuity of income is reliable enough to service the debt over the long term.

The Lender’s View of Contractor Income

• Consistency: Lenders are looking for a clear, unbroken history of contracts, typically over 12 to 24 months. Gaps between contracts can signal potential instability.
• Duration: Many mainstream lenders require the current contract to have a minimum remaining duration (e.g., three to six months) and often look for proof of renewal history in the same or similar fields.
• Calculation: Instead of simply taking an annual salary figure, lenders usually annualise the contractor’s day rate. They commonly use an assumed number of working weeks per year (e.g., 46 to 48 weeks) to calculate the verifiable annual income.
• Structure: Whether you operate via an umbrella company or through your own Limited Company significantly impacts the documentation required and the way your income is assessed.

If you meet a lender’s specific requirements for income history and stability, you are generally treated as a lower risk, and access to their standard, lower rates is more likely. If your history is short or complex, you may be pushed towards products that carry a slightly higher interest rate to compensate the lender for the perceived risk.

How to Secure the Best Remortgage Rates

Securing the most favourable remortgage rate often depends on careful preparation and identifying the right type of lender. Contractors should aim to demonstrate maximum stability and minimal risk.

1. Maximise Your Loan-to-Value (LTV)

The LTV ratio is critical in determining your rate. LTV is the size of the loan relative to the property’s valuation. For example, if your property is valued at £300,000 and you need to borrow £150,000, your LTV is 50%. Generally, rates improve significantly when your LTV falls below key thresholds, such as 75%, 60%, or 50%. The lower your LTV, the lower the risk for the lender, and typically, the better the rate you will be offered.

2. Demonstrate Contract Stability

Lenders want evidence that your income is reliable. Ensure you have the following documentation ready:

• Evidence of the day rate and the total contract value.
• A history of contracts showing little downtime between assignments.
• Proof that your contract is currently active and that extensions are common in your industry.
• If operating through a Limited Company, comprehensive business accounts (often two years’ worth) reviewed by an accountant are usually required.

3. Utilise Specialist Contractor Mortgages

While major high street banks may offer remortgages, they might struggle to assess complex contractor income structures, leading to lower borrowing limits or higher standard rates. Specialist mortgage brokers are invaluable here. They work with lenders who specifically offer ‘Contractor Mortgages’. These lenders have underwriting teams who understand day rates and contract cycles, meaning they can often apply standard rates based on a realistic annualised income calculation, rather than relying solely on retained profits or complex accounting figures.

It is worth exploring all your options before committing to a provider. The government-backed MoneyHelper service provides helpful guidance on comparing mortgage deals and understanding the associated fees and features. You can find helpful resources on choosing a mortgage product here.

The Impact of Your Credit History on Rates

Regardless of whether you are a contractor or an employee, your credit score and history play a fundamental role in determining the interest rate you are offered. A strong credit history demonstrates to the lender that you are reliable at managing debt.

If you have missed payments, defaults, or county court judgments (CCJs) on your record, you may find that mainstream lenders decline your application entirely, pushing you towards specialist providers who charge higher rates to compensate for the adverse credit history.

Before applying for a remortgage, it is always wise to review your credit file to ensure all information is accurate and up-to-date. 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)

Potential Risks When Remortgaging as a Contractor

While securing a remortgage offers significant financial benefits, particularly if you are moving off a high Standard Variable Rate (SVR), it is essential to be aware of the potential risks associated with any borrowing, especially when relying on variable contract income.

• Interest Rate Hikes: If you choose a variable or tracker rate, unexpected increases in the base rate could significantly increase your monthly repayments, potentially straining your finances during a period between contracts.
• Early Repayment Charges (ERCs): Most fixed-rate products carry significant ERCs if you switch lenders or pay off the mortgage early within the fixed period. Ensure the lock-in period aligns with your career and financial plans.
• Income Gaps: Even the most reliable contractors may face unforeseen gaps between assignments. If you cannot maintain repayments during this time, you risk defaulting on your mortgage.

It is vital to budget for contingencies. If you fail to meet your monthly repayments, the consequences can be severe. Your property may be at risk if repayments are not made, potentially leading to legal action, repossession, increased interest rates, and additional charges from the lender.

People also asked

Can I remortgage if I have recently started contracting?

Remortgaging is more challenging with limited contracting history. Most standard lenders require a minimum of 12 months, and often 24 months, of contracting history. However, some specialist lenders may consider applicants with as little as six months’ experience if they have extensive previous experience in the same industry under PAYE employment.

Do remortgage rates differ for umbrella company contractors versus limited company directors?

Yes, the assessment method differs, which can affect the offered rate. Umbrella contractors are often easier to assess as they receive a clearer ‘salary’ figure, simplifying the underwriting process. Limited company directors require far more detailed accounts, and lenders typically assess affordability based on salary plus dividends, or sometimes net profit, which can sometimes restrict the amount they are willing to lend unless a specialist provider is used.

How is my day rate calculated into an annual salary for remortgaging purposes?

Lenders calculate annual income by multiplying your current day rate by an assumed number of working days or weeks per year. A common calculation uses 46 weeks (accounting for holidays and sickness) multiplied by five days. For example, a £500 per day contractor might be assessed on an annual income of £115,000 (£500 x 5 days x 46 weeks).

Are buy-to-let remortgage rates different for contractors?

Buy-to-Let (BTL) mortgages are primarily assessed based on the rental income generated by the property, not the applicant’s personal earned income. Therefore, the contractor status generally has less impact on the BTL rate than it would on a residential remortgage, provided the rental income meets the lender’s required interest cover ratio (ICR).

In Summary: Contractor Remortgaging Strategy

While the initial assessment hurdle for contractors is higher than for permanent employees, it does not mean rates will automatically be higher. If you can provide robust evidence of contract continuity, maintain a low LTV, and present a strong credit history, you stand an excellent chance of securing competitive rates comparable to the wider market.

The key to success is preparation and professional guidance. Working with a qualified mortgage broker who specialises in contractor finance can significantly streamline the process and ensure your unique income structure is presented to the most appropriate lenders, increasing your access to the best available rates.