If you work as a contractor, you’re probably familiar with the benefits of flexible work, higher earning potential, and the freedom to choose projects. But when it comes to securing a mortgage, the flexibility that makes contracting so appealing can also present some unique challenges. Many contractors discover that, despite solid earnings, traditional mortgage applications aren’t always straightforward.
This guide will break down what a contractor mortgage is, why it differs from standard mortgages, and how you can secure one that aligns with your financial goals—whether you’re buying a home or investing in property. By the end, you’ll have a clear picture of the mortgage options available to contractors and the steps you can take to simplify the process.
What is a Contractor Mortgage?
A contractor mortgage is designed to help people who work on short-term contracts or are self-employed secure a mortgage. Traditional mortgage applications often favour applicants with a steady salary and full-time employment, making the process a bit tricky for contractors whose income fluctuates or comes from multiple sources.
A contractor mortgage takes these unique income structures into account, giving contractors access to competitive rates and terms, much like full-time employees. Mortgage lenders are increasingly aware that contractors are highly skilled professionals with stable earnings, so there are more options available than ever for securing a mortgage on your terms.
It is also worth considering how much you pay a Mortgage Adviser, we believe in being open and transparent, so we have set out how we work here.
Who is Eligible for a Contractor Mortgage?
You’re generally eligible for a contractor mortgage if:
- You work on a contract basis (e.g., an IT contractor, marketing consultant, or financial advisor).
- You’re paid a daily rate or through limited company dividends.
- You have a history of contracts, ideally over the past 1-2 years, although some lenders may consider shorter periods.
Let’s explore the types of contractor mortgages available and how to choose the right one for your needs.
Types of Contractor Mortgages
When it comes to contractor mortgages, you’ll find options similar to those available to full-time employees. Here are the main types:
1. Residential Mortgages for Contractors
Residential mortgages are the most common type of mortgage for those looking to buy a home to live in. With a contractor mortgage, lenders will assess your eligibility differently. They may calculate your income based on:
- Your daily rate multiplied by the number of working days per year (usually around 46-48 weeks).
- Your annual income from self-employment or limited company dividends.
For example, if you’re an IT contractor with a daily rate of £500, some lenders might annualize your earnings by multiplying £500 by 230 working days (46 weeks), giving you a calculated income of £115,000.
2. Buy-to-Let Mortgages for Contractors
If you’re looking to invest in property, a buy-to-let mortgage might be the way to go. Buy-to-let mortgages allow you to purchase properties with the intent to rent them out, building passive income and long-term wealth.
Buy-to-let mortgages for contractors are based on:
- The projected rental income of the property you plan to buy.
- Your overall financial health, including any income from your contracts or self-employment.
Buy-to-let investments can be a great fit for contractors with variable income, as they offer a steady source of rental income that can balance out any fluctuations in contract work. Additionally, many lenders take rental income into account, which can boost your borrowing power.
How to Apply for a Contractor Mortgage: What to Expect
The application process for a contractor mortgage is slightly different from that of a traditional mortgage. Here’s what to expect:
1. Proof of Income
Most lenders will want to see at least 1-2 years of contracting history, so gather any documentation related to your contracts. If you operate through a limited company, you may need to provide company accounts, tax returns, and dividends information. It’s a good idea to work with an accountant if you haven’t already, as they can help you prepare the necessary paperwork.
2. Consistent Contracts
If you have a history of consistent contracts with minimal gaps, lenders will feel more confident in your ability to meet mortgage repayments. Some lenders may be more flexible and consider contracts of varying lengths, as long as you can show a steady income over time.
3. Strong Credit Score
While income is an important factor, your credit score is equally crucial. A good credit score can improve your chances of approval and may even help you secure better rates. You can check your credit score for free and take steps to improve it if needed by paying down debt and ensuring timely payments on all bills.
Common Challenges Contractors Face When Applying for Mortgages
Contractors often encounter unique challenges when applying for a mortgage. Here are a few common issues and tips on how to address them:
Challenge #1: Income Variability
Your income may vary from month to month or project to project. Lenders want to ensure you can make consistent payments, so they may require additional documentation. A solution to this is to work with a lender who specializes in contractor mortgages, as they’ll be more familiar with the income patterns of contractors.
Challenge #2: Limited Deposit Options
Some contractors may find it difficult to save a large deposit, especially if their income fluctuates. However, certain lenders offer higher loan-to-value (LTV) mortgages for contractors, which may allow you to borrow up to 90% of the property’s value.
Challenge #3: Lack of Lender Understanding
Many mainstream lenders simply don’t understand contractor income structures, leading to misunderstandings or unfavorable terms. By working with a mortgage broker who specializes in contractor mortgages, you can connect with lenders who understand the nuances of your situation and can offer more competitive terms.
How a Contractor Mortgage Can Work for You
Securing a contractor mortgage can offer financial stability and even serve as a step towards wealth-building, particularly if you’re interested in buy-to-let investments. With access to flexible terms, competitive rates, and specialist lenders, contractor mortgages can give you the freedom to live in the home you want while aligning with your unique financial goals.
Imagine being able to purchase your dream home or build a property portfolio that generates additional income, all while continuing to enjoy the flexibility of contract work. With a contractor mortgage, these goals are achievable—and more accessible than you might think.
Tips for Securing the Best Contractor Mortgage Rates
Save for a Larger Deposit: A bigger deposit can lead to better rates and improve your chances of approval.
Work with a Specialist Mortgage Broker: Brokers who specialize in contractor mortgages have access to lenders who understand contract-based income and can help you find the best deals.
Maintain a Good Credit History: Keeping your credit score high can open up more favorable mortgage terms. Review your credit regularly and pay down any outstanding debts.
Prepare Your Documentation: Having all your documents ready—from contracts to tax returns—will streamline the application process and show lenders you’re well-prepared.
Ready to Get Started? Book a Free Consultation Today
If you’re ready to explore your contractor mortgage options or have questions about the process, we’re here to help. Book a free consultation with one of our specialist mortgage advisers who understands the unique needs of contractors.
During your consultation, we’ll:
- Review your financial situation and contract history.
- Discuss the mortgage options available to you.
- Answer any questions you may have about securing a mortgage as a contractor.
Don’t let traditional mortgage requirements hold you back from your property goals. Contact us today and take the first step toward finding the perfect mortgage that fits your lifestyle and financial ambitions.
