Do contractors pay extra when remortgaging?

Remortgaging as a professional contractor in the UK can present unique challenges compared to standard employed applicants, primarily because lenders often perceive contract-based income as less stable. While contractors do not necessarily pay a mandatory “extra” fee or higher interest rate simply due to their employment status, they may face a narrower selection of lenders or stricter requirements, which could indirectly lead to slightly higher overall costs or fees if they must use specialist providers.

Do Contractors Pay Extra When Remortgaging? Understanding Specialist Lender Criteria

The journey of remortgaging is essentially an application for a new loan designed to replace your current mortgage. For contractors, the primary hurdle is not the remortgaging process itself, but how lenders assess affordability and income stability. Traditional high-street lenders are structured to evaluate standard Pay As You Earn (PAYE) documentation, making it difficult for them to properly underwrite contract-based or self-employed income structures.

The perception of risk stems from the fact that contract work, by its nature, is finite. A standard employee has indefinite employment rights, whereas a contractor’s income flow stops when the contract ends. This perceived risk can lead lenders to apply different, and sometimes more stringent, criteria.

Why Remortgaging Can Be More Complex for Contractors

When you are employed under a standard PAYE arrangement, lenders typically require only P60s and payslips to confirm stable income. Contractors, however, fall into various categories, each requiring different proofs of earnings:

• Limited Company Contractors: Income is often taken via a mix of low salary and dividends. Lenders traditionally assess affordability based on the salary and dividends drawn, which can dramatically underrepresent the actual gross income generated by the business.
• Umbrella Company Contractors: While technically employees of the umbrella firm, their income relies entirely on the underlying client contracts. Lenders must verify the contract’s duration and day rate, rather than just the payslips.
• Sole Traders/Partnerships: Lenders rely on Self Assessment tax returns (SA302s) and tax year overviews, usually requiring two or three years of trading history.

If a lender cannot easily verify stability or if the applicant has fewer than two years of accounts, they might refuse the application, or only offer a product with a higher associated interest rate or higher arrangement fees to offset the perceived risk. This is often why the impression arises that contractors ‘pay extra’.

How Lenders Assess Contractor Income

The crucial difference between a successful contractor remortgage application and a complex one is the method of income assessment. Many mainstream lenders will still insist on using the limited company’s net profit or dividends drawn, even if it leaves the contractor unable to borrow the required amount.

However, specialist lenders and brokers familiar with the contracting world often employ the ‘day rate calculation’.

Understanding the Day Rate Method

The day rate calculation allows a lender to annualise your income based on your standard contractual daily rate, regardless of how you structure your salary and dividends. They calculate your income using a simple formula:

Day Rate x Number of Working Days per Year (typically 220–240)

This method provides a much more accurate reflection of true affordability, potentially enabling contractors to access the same competitive rates as employed applicants, provided they meet longevity and experience requirements.

To use this method successfully, contractors generally need:

• A history of contracting (often 6 to 12 months minimum, sometimes longer).
• Proof of recent contract renewal or a new contract ready to start immediately.
• A substantial CV demonstrating experience in the field.

Key Factors that Influence Remortgage Costs

The eventual cost of your remortgage, whether you are a contractor or an employee, is influenced by three main factors:

Loan-to-Value (LTV) Ratio

The LTV is the percentage of your property’s value that you wish to borrow. If you have built up significant equity (i.e., a low LTV, such as 60% or 70%), you are considered lower risk, and you are more likely to qualify for the best available market rates, regardless of your employment status.

Credit History

A strong, clean credit history is paramount. Any defaults, County Court Judgments (CCJs), or late payments will signal increased risk to a lender and will likely result in higher interest rates or outright rejection. Before applying for a remortgage, it is highly advisable to review your credit profile to identify and rectify any errors.

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The Lender’s Underwriting Policy

If a high-street lender struggles to fit your unique income profile into their standard computer model, they may decide to price the perceived risk by adding an extra percentage point to the interest rate or by charging high arrangement fees. By contrast, a specialist lender who uses manual underwriting based on the day rate method may offer a highly competitive rate, thereby avoiding the “extra cost” often associated with contracting.

Strategies for Securing Competitive Rates

To ensure you do not pay extra when remortgaging as a contractor, preparedness and the right advice are essential.

1. Keep Documentation Immaculate

Gathering the necessary paperwork upfront can significantly speed up the application process and present a strong case for stability. Required documents typically include:

• Your current and previous contracts (showing continuity).
• Your CV, highlighting your industry experience and longevity.
• Bank statements (usually 3–6 months) showing the consistent payment of contract fees.
• For Limited Company directors, recent HMRC tax calculations (SA302s) and corresponding Tax Year Overviews.
• Confirmation of your current mortgage balance and redemption figure.

2. Engage a Specialist Broker

A specialist broker who focuses specifically on contractor and self-employed mortgages will know which lenders utilise the day rate methodology and which ones have flexible criteria regarding contract gaps or limited company structures. They can package your application in a way that highlights stability and minimises perceived risk, often securing better overall deals than you might find approaching a standard bank directly.

3. Understand Your Income Reporting

If you have recently shifted your income structure (e.g., moving from limited company to umbrella, or vice versa), ensure you understand how the new structure is documented for tax purposes. Lenders usually require a period of stability in any new structure before they will lend competitively. For comprehensive information on self-employment and tax documentation, the government’s guidance through MoneyHelper can be very informative regarding budgeting and financial stability for the self-employed: Managing money when self-employed.

People also asked

How much deposit do contractors need to remortgage?

The deposit requirements (or required equity if remortgaging) for contractors are generally the same as for employed individuals, typically starting at 5% (95% LTV). However, contractors may find the best rates are reserved for lower LTV tiers, such as 75% or 60% LTV, which demonstrate lower risk to the lender.

Does IR35 status affect my remortgage application?

Yes, IR35 status is relevant. If you are contracting ‘outside IR35’ via your own limited company, lenders are typically more flexible regarding assessing gross contract value via the day rate. If you are ‘inside IR35’ and treated as an employee for tax purposes, lenders may insist on using the employed (PAYE) calculation methods, though a specialist broker can still help navigate this complexity.

How long do I need to be contracting before I can remortgage?

While some specialist lenders may consider applicants with as little as 3–6 months of contract history, the majority of competitive products require a minimum of 12 months, and often 24 months, of continuous or near-continuous contracting history to demonstrate reliable income flow.

Do I need an accountant to apply for a contractor remortgage?

If you operate through a limited company, having a qualified accountant is essential for preparing your necessary accounts and tax returns (SA302s and Tax Year Overviews). If you use the day rate method, the requirement for detailed accounts is sometimes lessened, but lenders will still need documentation signed off by an accountant or HMRC.

Conclusion

Contractors do not inherently pay extra when remortgaging. The difference lies entirely in the complexity of income verification. By focusing on stability, maintaining exceptional documentation, and seeking out specialist lenders who understand the day rate methodology, contractors can access competitive remortgage products available to standard employees. The key is to prepare thoroughly and ensure your application accurately reflects your gross earning potential, rather than being limited by complex dividend structures.