Do contractors need a bigger deposit for a mortgage?

Contractors often face unique challenges when applying for a mortgage compared to traditionally employed applicants. While the required deposit percentage (Loan-to-Value or LTV) is generally the same as for standard applicants, how lenders assess a contractor’s income determines the maximum loan size, which can indirectly necessitate a larger deposit to achieve the desired property price.

Understanding If Contractors Need a Bigger Deposit for a Mortgage in the UK

The journey to securing a mortgage can often feel complex, especially for self-employed individuals and contractors whose income streams do not fit the standard PAYE model. The question of “do contractors need a bigger deposit for a mortgage?” is rooted in the common perception that lenders view contract work as inherently riskier than permanent employment.

The simple answer is usually no—the minimum deposit required by a lender is based on the Loan-to-Value (LTV) ratio they offer, not your employment status. However, your employment status critically affects the maximum amount a lender is willing to offer you, and this is where the need for a larger deposit may arise.

Deposit Size vs. Affordability: The Contractor Nuance

For any mortgage applicant, the deposit is expressed as a percentage of the property value, with the remaining percentage being the loan. For instance, a 10% deposit means a 90% LTV mortgage. Lenders set minimum LTV thresholds (e.g., typically a 5% or 10% minimum deposit).

For contractors, the key issue is affordability. If a standard employed person earning £60,000 might qualify for a loan of £270,000 (4.5x salary), a contractor earning the same amount may only qualify for a significantly smaller loan if the lender adopts a cautious method for calculating their income. If the maximum loan available to you is lower than you expected, you must bridge that gap with a larger deposit to reach the target property price.

How Lenders Assess Contractor Income

The biggest obstacle contractors face is inconsistent income assessment across the mortgage market. Mainstream high-street lenders traditionally prefer the clear documentation of payslips and P60s. When dealing with contract income, they must decide which method to use:

• Limited Company Accounts: If you operate via a limited company (the most common structure), many lenders will only assess the salary and dividends you draw, often ignoring retained profits within the company. Since contractors often minimise declared income for tax efficiency, this can severely reduce the loan amount you qualify for.
• Day Rate Calculation: Specialist or contractor-friendly lenders often use your gross day rate to project annual income. This is typically a much more favourable assessment. They might annualise your rate based on 46 to 48 working weeks per year, ignoring retained profits and providing a much larger figure for affordability calculations.

If you apply to a lender who insists on using your declared salary and dividends from company accounts, the resulting affordability calculation will be lower. This reduced maximum loan size means you will effectively need a larger deposit to purchase the same property compared to applying to a lender who accepts your day rate.

Standard LTV Ratios and Mortgage Deposit Tiers

Contractors are generally eligible for the same LTV tiers as employed workers, providing they meet the lender’s specific criteria regarding credit history and employment longevity.

Common deposit tiers in the UK mortgage market include:

• 5% Deposit (95% LTV): These mortgages are usually reserved for first-time buyers or standard applications and often come with the strictest lending criteria and the highest interest rates. Contractors may struggle to qualify for 95% LTV unless they have an exceptional track record (e.g., 2+ years of continuous contracting).
• 10% Deposit (90% LTV): A very common tier. Many lenders feel more secure at this level, and interest rates start to become more competitive.
• 15% to 25% Deposit (85% to 75% LTV): Holding a larger deposit, especially 25% or more, significantly improves your access to the most competitive rates and gives lenders greater confidence in your application, which can be highly beneficial when submitting complex contractor applications.

To reduce the perceived risk associated with self-employment, some contractors proactively choose to put down a 20% or 25% deposit. While this is not mandatory, it strengthens the application, improves the interest rate offered, and provides a buffer against the lender’s strict affordability calculations.

Requirements for a Contractor Mortgage Application

To ensure you secure the best possible loan size, and thus minimise the deposit you need, preparation is key. Contractors must focus on proving stability and longevity in their sector.

Lenders will typically require:

• Proof of identity and address.
• Evidence of continuous contracting history (typically 12 months, sometimes 2 years).
• Copies of current and previous contracts, showing the day rate and contract length.
• Bank statements (usually 3 to 6 months) showing consistent income deposits.
• Full limited company accounts (if required by the lender) or SA302 tax calculations (if you are a sole trader).

Consistency is paramount. If you have gaps between contracts, or if you have recently shifted from a sole trader status to a limited company, you may need a specialist broker to find a lender who accepts these circumstances.

The Importance of Credit History

While income is the main challenge for contractors, your credit history plays a vital role in demonstrating reliability. A poor credit score may not immediately demand a bigger deposit, but it can limit your access to mainstream lenders who offer the best LTV deals, forcing you towards specialist lenders who might, in turn, require higher deposits or charge higher rates to mitigate risk.

It is prudent to check your credit file before making any mortgage 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)

Specialist Contractor Mortgages

If you are struggling to achieve the desired loan size via a high-street bank using standard limited company accounts, a specialist contractor mortgage could be the solution. These products are specifically designed for high-earning professionals who operate on fixed-term contracts.

Specialist lenders are far more likely to:

• Accept and annualise a day rate calculation.
• Require less trading history (sometimes as little as 3 months remaining on a current contract, provided there is a history of renewal).
• Be flexible regarding retained profits, acknowledging the tax efficiency structure of contracting.

By finding a lender who accurately assesses your true earning potential using your day rate, you maximise your loan amount, thereby reducing the chance that you will need to increase your deposit significantly above the minimum required LTV.

For more detailed guidance on assessing your eligibility and understanding how self-employed income is treated by lenders, the government-backed MoneyHelper service offers excellent unbiased information.

People also asked

Can a contractor get a 95% LTV mortgage?

Yes, but it is challenging. While some lenders offer 95% LTV products, contractors must meet very strict affordability and stability criteria, often requiring a minimum of two years of consistent contracting history, a strong credit score, and proof of contract renewals.

Do I need two years of accounts to get a contractor mortgage?

While two years of certified accounts is preferred by many high-street lenders, specialist contractor lenders often accept shorter periods. Many will consider applicants with just 12 months of experience, or even less, provided you can demonstrate long-term employment within the same sector and have a high day rate.

How is my day rate converted into an annual income for a mortgage?

Lenders typically calculate your annual income by multiplying your day rate by the average number of days worked annually. This usually ranges from 220 to 240 days. For example, a £400 day rate might be calculated as £400 x 220 days, resulting in an assessed annual income of £88,000.

Do I need to be using an umbrella company or a limited company?

Lenders generally offer mortgages regardless of whether you operate through a limited company or an umbrella company. However, the documentation required differs. Umbrella company contractors are often treated similarly to PAYE employees, making the application process sometimes simpler, but the ultimate affordability calculation remains tied to the income received.

What is the minimum contract length required by lenders?

Most contractor-friendly lenders prefer applicants to have a contract that has either recently been renewed or has at least three to six months remaining on the current term. Proof of previous renewals is often more important than the remaining length of the current contract, as it demonstrates ongoing work stability.

Conclusion

The assumption that contractors automatically need a bigger deposit for a mortgage is generally a misconception. The LTV requirement remains consistent across employment types. However, if you are a contractor, it is crucial to understand that the critical challenge lies in maximising your assessed income. By working with a specialist broker who understands day-rate calculations, you can often secure a larger loan amount, ensuring that the deposit you require is competitive and proportionate to the property value, rather than being artificially inflated by cautious lending criteria.