Can contractors get buy-to-let mortgages?

Navigating the mortgage market as a contractor can be challenging, particularly when seeking a buy-to-let (BTL) investment property. While high street lenders often adhere to strict income assessment models based on PAYE or lengthy self-assessment histories, specialist financial institutions recognise the unique nature of contractor pay structures, making BTL ownership achievable for those with stable contracts and proven experience.

Can Contractors Get Buy-to-Let Mortgages? Understanding Your Options

The short answer is yes, contractors can secure buy-to-let mortgages. However, the path to approval is often different from that taken by permanently employed applicants. Standard high street lenders typically assess affordability based on documented annual salary or the average of the last two or three years of self-employed taxable income. For contractors operating through limited companies or umbrella companies, this method often fails to reflect their true earning potential.

Specialist BTL lenders, however, are geared towards assessing non-standard income structures. They understand that a contractor’s income, though fluctuating, can be high and stable, provided their contract history is robust. These lenders look beyond the SA302 form—which often shows minimised profits for tax purposes—and focus instead on the gross contract value or day rate.

The Challenges of Contractor Income Assessment

Contractors typically face difficulties because their income proof doesn’t fit the rigid criteria used by standard automated mortgage systems. The primary issues include:

• Tax Efficiency: Many contractors running limited companies pay themselves a low salary supplemented by dividends, retaining significant profits within the company. Traditional BTL lenders often only count the salary and dividends taken, ignoring the retained earnings.
• Contract Breaks: While high earnings are common, short breaks between contracts can concern lenders looking for continuous employment history.
• The Nature of Income: A day rate model requires specific calculations to translate into an annualised income figure that a lender can use for affordability assessment.

This is where specialist brokers and lenders come into play. They use bespoke underwriting criteria designed specifically for contractors, often requiring fewer documents and faster processing times once the relevant evidence is provided.

How Specialist Lenders Assess Contractor Income for BTL

Specialist BTL lenders typically assess a contractor’s affordability using one of two primary methods, depending on whether the contractor operates via an umbrella company or a limited company (Personal Service Company).

1. Day Rate Calculation Method

This is the most common method for experienced contractors with stable rates. The lender takes the contractor’s average day rate and annualises it, usually assuming a maximum number of working days per year (often 46 or 48 weeks, allowing for holidays and short breaks). The calculation generally looks like this:

(Day Rate × 5 Days) × (46 or 48 Weeks) = Annualised Income

Lenders may require the contractor to have been contracting for a minimum period (e.g., 12 months) and have a minimum remaining contract duration (e.g., three to six months) to use this approach.

2. Reviewing Limited Company Accounts

For contractors operating via a Limited Company, some specialist lenders may be willing to look at the gross turnover or the combination of salary, dividends, and retained profits, provided they can verify the stability of the company. However, this method is less common for BTL than the day rate method, as BTL affordability relies heavily on the projected rental income (the Interest Cover Ratio, or ICR).

Key Criteria for Contractor Buy-to-Let Applications

While specialist lenders are more flexible on income proof, they maintain stringent requirements on other aspects of the application. Preparing the following is essential:

• Deposit Size: BTL mortgages usually require a minimum 25% deposit, especially for contractors, as they are often perceived as higher risk than standard PAYE applicants.
• Contract History: Lenders typically prefer applicants who have been contracting for a continuous period (often 1-2 years minimum) and can show a history of contract renewals.
• Minimum Income Threshold: Although the affordability calculation for BTL is primarily driven by rental income, lenders usually require the applicant to demonstrate a minimum personal income (e.g., £25,000 per annum) from their contracting work, proving they can manage personal finances outside of the BTL property.
• Credit History: A clean credit record is crucial. Any history of late payments, defaults, or county court judgments (CCJs) will necessitate sourcing a specialist lender who deals specifically with adverse credit BTL products.

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The Importance of Rental Affordability (ICR)

It is important to remember that Buy-to-Let mortgage affordability is calculated differently from residential mortgages. Lenders primarily focus on the Interest Cover Ratio (ICR). The rental income must cover the mortgage interest payments, usually stress-tested at a higher rate (e.g., 5.5% or 6%) and a high coverage ratio (e.g., 125% to 145%).

While your contractor status influences whether the lender accepts your application, the property’s projected rental income dictates the maximum loan size you can secure. If the rental income is insufficient to meet the ICR requirements, the lender may offer a smaller loan, irrespective of your high day rate.

Tips for a Successful Contractor BTL Application

1. Use a Specialist Broker: An experienced broker familiar with contractor finances will know exactly which specialist BTL lenders accept day-rate assessments and where to place your application for the highest chance of success.
2. Prepare Documentation: Ensure you have your current and recent contracts (showing extensions or renewals), bank statements proving income receipt, and, if applicable, detailed information on your limited company accounts.
3. Understand Landlord Obligations: Acquiring a BTL is a long-term commitment requiring adherence to specific regulations and responsibilities regarding tenant safety and property maintenance. Information on these obligations is available from organisations such as MoneyHelper’s guide on landlord responsibilities.

People also asked

What is the minimum contract length required for a contractor BTL mortgage?

While it varies, many specialist lenders prefer applicants who have at least 12 months of continuous contracting history. They usually require a minimum of three to six months remaining on the current contract to ensure income stability during the initial mortgage period.

Do I need to be contracting via a Limited Company to get a BTL mortgage?

No, specialist BTL lenders accommodate contractors operating under various structures, including umbrella companies and sole traders. The key factor is the consistency of income, regardless of the precise legal structure used to receive payment.

Can I use retained profits from my Limited Company as a deposit?

Yes, specialist lenders may allow you to use retained company profits for the deposit, provided the company meets specific criteria (such as being solvent and having the necessary financial capacity) and the required legal documentation is in place to transfer the funds personally.

Are BTL mortgage rates higher for contractors?

Contractors applying via the specialist BTL route may find rates marginally higher than the lowest rates available to traditional, low loan-to-value applications, reflecting the increased administrative complexity and risk assessment associated with non-standard income proof. However, the rates are highly competitive within the specialist sector.

Do I need BTL experience to qualify as a contractor?

Most specialist lenders are happy to consider first-time landlords (FTLs), even if they are contractors, provided they meet the financial stability requirements. However, FTLs may face slightly stricter criteria regarding deposit size or rental coverage (ICR) compared to experienced landlords.

Conclusion

While contractors face initial hurdles with traditional lenders, the specialist mortgage market is well-equipped to handle applications based on proven contract history and high day rates. By preparing comprehensive documentation and partnering with a financial adviser knowledgeable in specialist BTL lending, contractors can successfully secure the financing needed to grow their property portfolio.