Are there specialist mortgages for IT contractors?

For high-earning professionals whose income streams differ from standard employment, such as those working on contracts in the technology sector, the mortgage application process can seem daunting. While high street banks often rely solely on P60s or two to three years of audited accounts, specialist lenders and brokers recognise the stability and lucrative nature of professional IT contracting, offering tailored mortgage products designed specifically for this demographic.

Understanding Specialist Mortgages: Are There Specialist Mortgages for IT Contractors?

The short answer is yes. The UK mortgage market has evolved significantly to cater to the complex ways modern professionals earn a living. IT contractors, whether operating via their own limited company, an umbrella company, or on a fixed-term contract basis, often find that their income doesn’t fit neatly into the assessment boxes used by mainstream banks.

Because IT contracting is a well-established sector known for high day rates and reliable repeat business, a growing number of lenders specialise exclusively in underwriting mortgages based on contract income. These specialist mortgage products aim to assess the applicant’s true earning potential, not just the declared salary and dividends often kept low for tax efficiency.

Why Standard Lenders Struggle with Contractor Income

Most large high street banks rely on automated systems and rigid affordability criteria. When assessing self-employed or contractor income, they typically look for evidence of continuity and stability through:

• P60s for PAYE employees.
• Two to three years of Self-Assessment tax returns (SA302s) for sole traders.
• Two to three years of company accounts showing declared salary and dividends for limited company directors.

For an IT contractor, this traditional assessment presents several challenges:

1. Limited Company Directors: Contractors often minimise declared salary and dividends, choosing to retain earnings within the company for tax reasons. Standard lenders will only use the declared income, which might significantly underestimate the contractor’s true affordability.
2. Contract Gaps: Even stable contractors experience short gaps between contracts. Standard lenders may view these gaps as instability, regardless of the high day rate earned during the working periods.
3. Short Operating History: Many IT contractors transition from permanent employment to contracting. If they haven’t been operating their limited company for the standard two-year period required by mainstream lenders, they are often immediately rejected.

This is where the specialist contractor mortgage market steps in, offering a more nuanced and common-sense approach to underwriting.

How Specialist Lenders Assess IT Contractor Income

Specialist lenders do not focus primarily on company accounts or dividends. Instead, they use a standardised method based on the contractor’s day rate to calculate an equivalent annual income (EAI).

The Day Rate Calculation Method

The EAI calculation typically works by multiplying the daily rate by the number of working days in a year, acknowledging standard time off. While criteria vary between lenders, a common calculation is:

(Day Rate) x (5 days per week) x (46 or 48 weeks per year) = Equivalent Annual Income (EAI)

For example, a contractor earning £450 per day could be assessed as having an EAI of £103,500 (£450 x 5 x 46). This full EAI figure is then used for affordability checks, potentially allowing the contractor to borrow significantly more than if the lender relied on their declared salary and dividends alone.

It is important to note that lenders generally apply standard income multiples (usually 4x to 5.5x the EAI) to determine the maximum borrowing amount. Some lenders may offer higher multiples for contractors earning above a specific threshold, though strict affordability checks must always be passed.

Criteria for Specialist Contractor Mortgages

While specialist lenders are more flexible, they still require specific evidence to prove stability and reliability:

• Minimum Contract History: Most specialist lenders require the contractor to have at least 6 to 12 months of demonstrable contract history. Some may consider applicants with only a newly signed contract if they have extensive previous experience in the field.
• Contract Value and Duration: Lenders prefer to see that the current contract has at least three to six months remaining, or that the contractor has a proven history of securing back-to-back contracts without significant gaps.
• Minimum Day Rate: Some lenders impose a minimum day rate requirement, typically £300 to £350 per day, to qualify for their specific contractor products.
• Credit History: As with any mortgage application, a strong credit score is essential. Lenders need assurance that previous financial commitments have been met reliably. You can check your credit profile to understand how lenders might view your application.

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Limited Company vs. Umbrella Company Structures

The structure through which the IT contractor operates impacts how their income is verified, although specialist lenders can usually accommodate both:

Limited Company Contractors

If you run your own limited company, the specialist lender will ignore the declared salary and dividends for the affordability assessment, focusing entirely on the day rate calculation described above. This is the most common path for professional IT contractors seeking high-value mortgages.

Umbrella Company Contractors

If you contract via an umbrella company, your income is often processed as P.A.Y.E., although it may include large payments for expense claims. Lenders dealing with umbrella company contractors typically require payslips and evidence of continuous employment, treating the applicant closer to a fixed-term employee than a limited company director, which can sometimes simplify the process.

Regardless of your structure, engaging a specialist broker who understands the intricacies of the IT contracting world is highly recommended. They can match your specific circumstances to lenders whose criteria align perfectly with your income stream. For further unbiased guidance on the mortgage process, resources like MoneyHelper provide valuable, reliable information on general mortgage advice.

Managing Deposit and Loan-to-Value (LTV)

Being an IT contractor does not usually influence the required deposit amount. Deposits and Loan-to-Value (LTV) ratios are based on the risk associated with the loan size relative to the property value, not the applicant’s profession.

• Most applicants will require a minimum of a 5% deposit (95% LTV), although higher LTV mortgages may be subject to stricter underwriting.
• Contractors seeking the most competitive rates will often aim for LTVs of 75% or 80%, meaning they have a 25% or 20% deposit.

Due to the often high earning potential of IT contractors, many are in a strong position to build up substantial deposits quickly, which greatly enhances the variety of mortgage deals available to them.

People also asked

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

While traditional lenders demand two to three years of accounts, specialist lenders typically require only 6 to 12 months of demonstrable contract history in the same or similar role. Crucially, they want to see evidence of consistency and that you have recently secured your next contract.

Can I use retained earnings as income for a contractor mortgage?

Under standard mortgage rules, no, retained earnings (profits kept within the limited company) are usually disregarded. However, specialist contractor mortgages circumvent this issue entirely by assessing your income based on your higher EAI (Equivalent Annual Income) derived from your day rate calculation, making the issue of retained earnings less relevant.

Is it harder to get a mortgage if my contract is only three months long?

It can be challenging if you are a new contractor, but if you have a track record of numerous back-to-back short contracts, specialist lenders will typically accept this continuity. They generally require the existing contract to have at least four weeks left to run, alongside confirmation of renewal or evidence of a forthcoming contract being lined up.

What if I have poor credit history as an IT contractor?

A poor credit history will complicate any mortgage application, regardless of income. However, some specialist lenders offer criteria tailored to those with historic credit issues, such as CCJs or defaults, provided the issues are minor or occurred a long time ago. These mortgages typically involve higher interest rates and require a larger deposit.

In conclusion, the path to homeownership for IT contractors is significantly easier now thanks to a robust market of specialist mortgage providers. By focusing on your contractual day rate and demonstrated history of contract renewal, you can access the necessary financing to purchase property without being penalised for managing your finances efficiently through a limited company structure.