Top Contractor Mortgage Tips

Being a contractor brings flexibility and a sense of autonomy, but it can also create challenges when trying to get a mortgage. Lenders sometimes view contractors as higher risk due to irregular or fluctuating income. This article aims to guide contractors in the UK through the steps they can take to improve their mortgage approval chances. We’ll look at everything from credit scores and deposit sizes to maintaining strong contract histories and working with specialist lenders. By following these tips, contractors can boost their likelihood of securing a favourable mortgage deal—even with a less traditional employment background.

With the help of a contractor-friendly lender and a specialist contractor mortgage broker, the process can be straightforward.

Below is a comprehensive guide on how contractors in the UK can improve their chances of being approved for a mortgage. This article is written in simple, clear language. It will help contractors understand the challenges they might face, as well as provide practical steps to improve the likelihood of a successful application.

1. Understand the Challenges Contractors Face

Contractors often run into stricter mortgage requirements compared to traditional employees. Why? Lenders sometimes view contractors as having more variable income and less job security. Knowing the hurdles helps you prepare effectively. Here are some key reasons why getting a mortgage can be trickier for contractors:

• Irregular Income: Contractors are typically paid project-to-project or have intermittent contracts, leading to income variations.
• Short Work History: If you are a new contractor, lenders may question the stability of your work history.
• Complex Financial Structure: Contractors sometimes receive payment through limited companies or umbrella companies, which can be confusing for lenders if proper documentation isn’t provided.

2. Keep Accurate and Up-to-Date Financial Records

One of the most critical factors in securing a mortgage is proving you can afford the repayments. As a contractor, it’s essential to keep your financial records clear and up to date. Good record-keeping helps establish your earnings trend, especially if you have fluctuating income. Here’s what you should consider:

• Organised Bank Statements: Make sure you have well-organised bank statements that reflect your income and expenses over a reasonable period, typically the last 6 to 12 months (though some lenders may want 2 years of statements).
• Proof of Contracts or Invoices: Having a track record of previous contracts or invoices will strengthen your case. Ideally, show a history of steady contract work.
• Tax Records: Keep copies of your Self-Assessment tax returns (SA302 forms) if you are a sole trader or personal tax returns if you operate through a limited company. Lenders usually like to see at least two years’ worth of tax documents.
• Up-to-date Accounts for Limited Companies: If you operate through a limited company, make sure your accounts are up to date and filed on time. This avoids any red flags with lenders.

3. Maintain a Healthy Deposit

The size of your deposit can have a significant impact on your mortgage approval chances and the interest rate you receive:

• Aim for 10% or More: Generally, a deposit of 10% or more is viewed more favourably. Some lenders may accept a 5% deposit with certain schemes, but a higher deposit often opens the door to more competitive rates.
• Consider Help-to-Buy or Shared Ownership (If Applicable): If you’re a first-time buyer, explore government schemes that might help increase your deposit or reduce your mortgage requirements.

Remember, having a larger deposit can reassure lenders that you are serious about your purchase and financially equipped to cope with repayments.

4. Maintain a Good Credit Score

Your credit score play a very important role in securing a mortgage. Maintain a healthy credit score by keeping up with loan payments, and reducing outstanding debts. Plan ahead and stay away from any new debts and credit applications in the months leading up to your mortgage application. Here are steps to maintain or improve your credit score:

• Register on the Electoral Roll: Being on the electoral roll at your current address makes it easier for lenders to confirm your identity.
• Pay Bills on Time: Late or missed payments negatively affect your credit score. Set up direct debits or standing orders for regular bills.
• Avoid Unnecessary Credit Applications: Each time you apply for credit, it leaves a mark on your credit report. Too many applications in a short span can lower your score.
• Check Your Credit Report: Look for errors or outdated information and get them corrected. Major credit reference agencies in the UK include Experian, Equifax, and TransUnion.

5. Show Long-Term Contracts or Continuous Employment

Contractors often have varying contract lengths. Showing lenders that you have either continuous contracts or a series of stable gigs can significantly improve your mortgage application:

• Longer Contracts: If possible, try to secure contracts with a longer duration or a clear extension clause. This indicates steady future income.
• Back-to-Back Contracts: If you have a series of shorter contracts, ensure there are no large gaps between them. Explain any gaps in employment clearly—whether it’s due to holidays, childcare, or contract transitions.
• Letters from Clients or Agencies: A letter confirming your contract, its length, and the agreed-upon day rate or project fee can also serve as solid proof of ongoing income.

6. Work with a Specialist Mortgage Brokers

Not all mortgage lenders view contractors in the same way. Some lenders have specific criteria for contractors, while others might have no dedicated policies at all. A mortgage broker who specialises in working with contractors can guide you towards lenders that are more flexible or have favourable terms. Benefits of using a specialist broker include:

• Industry Expertise: They understand how contracting works, including IR35, day rates, and limited company structures.
• Access to Specialist Products: Brokers often have access to deals not directly available on the high street.
• Expert Guidance on Documentation: They’ll help you prepare the right documents and mitigate concerns a lender might have about your income.

7. Consider Your Business Structure

Many contractors work as sole traders, through umbrella companies, or have their own limited companies. Your mortgage application process can vary based on how your business is structured:

• Sole Trader: Lenders will look at your Self-Assessment tax returns (SA302) and yearly net profits.
• Limited Company: Lenders typically assess your salary and dividends. Some lenders may also consider the retained profits in the company.
• Umbrella Company: Your payslips might look like those of a traditional employee, which can sometimes make the process a bit simpler, but be prepared to explain exactly how your income is generated if asked.

It’s best to make sure you have clear documentation that explains your business structure and annual earnings, whichever route you choose.

8. Prepare a Comprehensive Affordability Assessment

Mortgage lenders need to be confident you can keep up with repayments, even if your contract finishes and you don’t land a new one immediately. Ways to show you can manage:

• Budget Planner: Create a clear breakdown of your monthly income and outgoings.
• Emergency Funds: Show you have savings that could cover a few months of mortgage payments if work dried up.
• Future Cash Flow: If you have upcoming contracts lined up, detail the payment dates, terms, and invoice amounts.

Demonstrating that you’ve planned for fluctuations in income can boost your credibility.

9. Manage and Minimise Your Outgoings

The less financial burden you have, the easier it is to prove you can meet mortgage repayments. Review your monthly outgoings to make sure you’re not paying for unnecessary expenses:

• Pay Off Debts: Clear as much outstanding debt as possible before applying. This lowers your debt-to-income ratio.
• Avoid New Major Purchases: Putting a large purchase on credit shortly before applying for a mortgage can raise questions.
• Reduce Subscriptions: Cancel any unused or rarely used subscriptions to reduce your monthly expenses.

Keeping your expenses under control also has a positive impact on your credit score and general financial health.

10. Be Prepared to Offer Extra Documentation

Because your income might look more complicated than that of a full-time employee, you should be ready to supply extra proof to the lender. This could include:

• Copies of Current Contracts: With start and end dates, day rates, and the scope of work.
• Evidence of Extensions or Renewal Options: If your contract states it can be extended, gather any written evidence.
• Business Bank Statements: If you have a separate business account, you may need to present statements to show consistent cash flow.

The more transparent your earnings appear, the more comfortable the lender will be when assessing your affordability.

11. Plan Ahead and Don’t Rush the Process

When applying for a mortgage as a contractor, it’s wise to start the process several months before you aim to buy. This allows you to:v

• Build Up Your Savings: More time to save for a bigger deposit.
• Clean Up Your Finances: Pay off outstanding debts, improve your credit score, and gather your documents.
• Seek Professional Advice: Consult with brokers, accountants, or financial advisors to ensure everything is in order.

Rushing the process can lead to mistakes, missed paperwork, or incomplete applications that risk being rejected by the lender.

12. Consider an Offset Mortgage

Offset mortgages can be an interesting option for contractors:

• How It Works: You link your savings account to your mortgage. The lender calculates interest only on the difference between the outstanding mortgage and the balance in your savings.
• Advantages for Contractors: If you expect fluctuating income but sometimes have large chunks of cash (e.g., from contract payments), you can place money in the offset savings account to reduce your mortgage interest. You still have access to those funds if needed for business or personal expenses.
• Flexibility: This arrangement can act as a buffer during low-income months, allowing you to dip into savings without losing out entirely on mortgage benefit.

Not every contractor will find this beneficial, but it’s a useful option to explore if you regularly hold a significant amount of cash in savings.

13. Don’t Forget About IR35

IR35 legislation can affect contractors working through their own limited companies. While IR35 is primarily a tax-related issue, changes in your net income (due to correct classification under IR35) can directly impact how much you can borrow:

• Check Your Employment Status: Make sure you’re correctly classified as inside or outside IR35.
• Consult a Specialist: If you’re uncertain about your IR35 status, professional advice can clarify your standing and help ensure you’re paying the right amount of tax.
• Keep Lenders Informed: If there are any changes to your take-home pay because you’re inside IR35, you need to factor that into your mortgage affordability calculations.

14. Explore Government Schemes

The UK government offers various schemes to assist buyers, including contractors:

• Help to Buy: Designed for first-time buyers purchasing a new-build property. You only need a 5% deposit, with the government providing a loan to top up your deposit to 25% (in England). Note that Help to Buy currently has specific regional rules and deadlines.
• Shared Ownership: Allows you to buy a share of a property (between 25% and 75%) and pay rent on the remaining portion. You can increase your share over time, a process known as ‘staircasing.’
• Lifetime ISA (LISA): If you’re saving for your first home, a LISA gives you a 25% bonus on your yearly contributions (up to certain limits).

Be sure to check eligibility and deadline details for each scheme, as they can change over time.

15. Prepare for Additional Checks or Higher Rates

Depending on your situation—such as having just one year of contracting experience or a smaller deposit—you may find some lenders apply higher interest rates or add extra scrutiny:

• Enhanced Due Diligence: Lenders might want to see more extensive documentation if you’ve only been contracting for a short period.
• Insurance Requirements: Some lenders might require you to have certain insurance policies in place (like income protection) to cover your mortgage if you fall ill or lose contracts.
• Building a Relationship: If you have a good relationship with a particular bank or have your business account there, it may smooth out the process and help you secure a more favourable rate.

16. Stay Flexible and Don’t Get Discouraged

Finally, remember that mortgage offers can vary from lender to lender. One refusal doesn’t mean you can’t get a mortgage at all. If you face a setback:

• Learn from Feedback: Ask the lender or broker for specific reasons your application was declined.
• Make Improvements: Whether it’s boosting your credit score or saving up a larger deposit, you can address these issues for a stronger application next time.
• Try Different Lenders or Brokers: Some lenders specialise in working with self-employed individuals and contractors. What one bank views as ‘risky,’ another might view as entirely acceptable if you can show reliable income.

Getting a mortgage as a contractor in the UK can be more complex, but proper planning and preparation can significantly increase your chances of success. Maintain accurate financial records, improve your credit score, and work with specialist brokers who understand the nuances of contractor income. Build a solid deposit where possible, show continuity in your contracts, and keep an eye on government schemes that might help you get on the property ladder faster. Above all, don’t be discouraged if you don’t succeed on the first try, keep refining your approach and exploring different lenders until you secure the best possible deal.

Your home may be repossessed if you do not keep up repayments on your mortgage.