What types of contractor mortgages are available?

Navigating the mortgage market as a professional contractor can be complex, as standard high-street lenders often struggle to fit non-traditional income structures into their rigid affordability models. Fortunately, specialist lenders and specific mortgage products exist that are designed to accommodate the varied income patterns of UK contractors, whether you operate through a limited company or via fixed-term contracts.

Understanding what types of contractor mortgages are available in the UK

For individuals working on fixed-term contracts or via their own limited company, demonstrating a reliable and sufficient income to mortgage providers requires a different approach than that used for standard PAYE employees. The term ‘contractor mortgage’ usually refers to a standard residential mortgage product but accessed via a specialist underwriting path that takes the nuances of contract work into account.

The Specialist Underwriting Approach

Most traditional lenders require two to three years of certified accounts or payslips to prove affordability. This can be problematic for contractors who may have higher earnings but complex financial structures or shorter working histories. Specialist lenders offer tailored underwriting, focusing on contract security and daily earning potential rather than just the historic net profit shown on company accounts.

1. Mortgages Based on Day Rate Calculation

One of the most common and advantageous routes for highly paid contractors is the Day Rate approach. This method is often preferred by IT consultants, engineers, and healthcare professionals who command high daily fees but may have only been contracting for a short period.

Instead of relying on previous years’ tax returns (SA302s), lenders calculate your annual potential earnings using the following formula:

• Daily Rate x Number of Days Worked Per Week x 52 Weeks

Lenders usually use a conservative figure for the number of weeks worked per year, typically 46 to 48 weeks, to account for holidays, illness, and potential gaps between contracts. This calculation allows lenders to assess affordability based on your gross earning potential, often ignoring the structure of dividends and salary, which can significantly increase your borrowing capacity.

To qualify for a Day Rate mortgage, you typically need:

• A minimum daily rate (this varies but is often £250–£350+).
• A clean contracting history, ideally six to twelve months prior, with documentation to prove it.
• A renewed or immediate future contract lined up (often required to cover at least three to six months).

2. Limited Company Mortgages (Using Retained Profit)

If you run your own limited company, standard high-street lenders will typically only consider your declared salary and dividends when assessing affordability. This approach can be inefficient for tax-efficient contractors who often leave significant retained profit within the company.

Specialist contractor mortgage providers understand that the company’s financial health reflects your ability to service the mortgage debt. These lenders what types of contractor mortgages are available often look at the gross turnover or the director’s salary plus the retained net profit before tax and dividends.

Using retained profit allows lenders to see a truer picture of your overall financial capacity, unlocking greater borrowing potential than if you were assessed purely on distributed income. However, this often requires two to three years of filed company accounts (depending on the lender) and a meticulous review by the underwriter.

3. Fixed-Term Contract Mortgages (PAYE Contractors)

If you are a contractor working through a fixed-term contract but paid via PAYE (often through an umbrella company), lenders may treat you similarly to a permanent employee, provided your contracts are continuous or immediately renewed.

Lenders are generally concerned with stability. If you can demonstrate a strong history of contract renewals, often spanning 12 to 24 months, and the sector in which you work is stable, this may simplify the application process compared to the limited company route.

Key Factors Affecting Contractor Mortgage Eligibility

While specialist mortgages make borrowing possible, several key factors influence the terms you are offered, including the Loan-to-Value (LTV) ratio and interest rates.

Contracting History and Continuity

Continuity is paramount. Lenders look favourably upon contractors who can show a minimal gap between contracts (usually less than six weeks). Consistency in your field—remaining in IT, finance, or healthcare, for example—demonstrates market stability and reliable earning potential.

The Contract Itself

The contract documentation must be robust. Lenders will thoroughly review the current contract to ensure:

• The contract clearly outlines the day rate.
• The remaining term provides sufficient security (usually 3–6 months remaining on the current contract).
• There is a strong track record of previous contract completion with the same or similar end client.

Deposit Size

As with any mortgage, a larger deposit provides better LTV rates and reduces the perceived risk for the lender. While some specialist lenders offer higher LTVs (up to 95%), contractors typically benefit significantly from having a minimum 15% to 25% deposit, which can open up more competitive products.

Preparing Your Contractor Mortgage Application

Due to the complexity of income verification, preparing a detailed and accurate application pack is crucial. Working with a mortgage broker who specialises in contractor finances is highly recommended, as they understand which lenders are most sympathetic to your specific situation.

Required Documentation

The documentation required will vary based on whether you are assessed via Day Rate or Limited Company Accounts, but generally includes:

• Proof of identity and address (e.g., passport, driving licence).
• Detailed CV demonstrating contracting history.
• Current and previous contracts (usually covering the last 12–24 months).
• Bank statements (personal and, if applicable, business) showing regular income.
• For limited company applications: 2–3 years of certified accounts, CT600s (Corporation Tax returns), and proof of company registration.

Understanding Your Credit Profile

Before applying, understanding your own credit history is essential, as any recent issues can complicate access to specialist products. 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)

Seeking advice from regulated professionals ensures you are considering all risks and potential costs involved in taking out a mortgage. For general budgeting and financial planning advice, you can visit the Government’s free, impartial advice service, MoneyHelper.

People also asked

Can I get a contractor mortgage if I have only just started contracting?

It is significantly harder, but not impossible. Some specialist lenders may consider you if you have previously worked in the same industry as a permanent employee and can secure a long-term contract (e.g., 12 months) immediately upon starting your contracting career. However, you may require a larger deposit and face stricter affordability checks.

Do I need a deposit for a contractor mortgage?

Yes, just like standard residential mortgages, you will need a deposit. While 95% LTV products (requiring a 5% deposit) are available for contractors, having a 10% to 25% deposit usually unlocks the most competitive interest rates and provides access to a wider range of lenders.

How much can I borrow as a contractor?

The amount you can borrow depends heavily on the calculation method used. If assessed by day rate, lenders typically multiply your annualised income potential by 4.5 or 5 times, provided your debt-to-income ratio remains acceptable. If assessed by limited company accounts, the borrowing capacity is tied to your declared and retained profit, often making the Day Rate calculation more generous.

Are contractor mortgages more expensive than standard mortgages?

Specialist contractor mortgage products historically carried higher arrangement fees or marginally higher interest rates due to the perceived complexity and risk associated with non-standard income. However, as contracting has become mainstream, many products for contractors with excellent credit and stable histories are now competitive with standard residential mortgage rates.

What if I have gaps between contracts?

Short gaps (e.g., 4–8 weeks) are usually understood and accepted by specialist lenders, provided they are not frequent and you can show a history of securing new work quickly. If gaps are longer or more frequent, the lender may use a lower figure for the annualised working weeks calculation to mitigate the perceived risk.

The Importance of Professional Advice

Contracting income is variable and complex by nature. Due to the diverse range of assessment methods, from retained profits to annualised day rates, it is crucial to seek professional mortgage advice. An experienced broker can accurately determine which of the available assessment types will yield the highest borrowing capacity for your unique financial setup and ensure that your application meets the specific criteria of the chosen lender, streamlining the approval process.

Remember that all mortgages are secured against your property. Your property may be at risk if repayments are not made. Consequences of default can include legal action, repossession, increased interest rates, and additional charges, so always ensure the mortgage is affordable based on realistic projections of your future contracting income.