Is getting a mortgage as a Contractor as difficult as it once was?

Is getting a mortgage as a Contractor as difficult as it once was?

For many years, it’s been notoriously difficult, expensive and time consuming obtaining a mortgage as a day rate contractor – or so it seemed!

Once upon a time Contractor Mortgages were very difficult to have approved. Initially, only certain brokers were able to assist with a small pool of lenders. However, in recent years, the market has evolved, and many more contractor-friendly lenders have become comfortable with the way a contractor is remunerated making Contractor Mortgages far more accessible.

Over the years we’ve worked with countless contractor clients and yes, there are some scenarios which may be challenging, however most of the time, it’s about the broker’s knowledge as opposed to your income being the challenge. It is true that going directly to a bank to obtain a mortgage as a Contractor will be difficult, simply because of a lack of understanding of the contractor lending policies that are in place.

Understanding Contractor Mortgages

Contractor mortgages are specifically designed to accommodate the unique financial situations of freelancers, self-employed individuals, and contract workers. Unlike traditional mortgages, which rely heavily on a steady, fixed income from a permanent employment contract, contractor mortgages offer more flexibility. Lenders who provide these mortgages understand that contractors may have irregular income streams and different types of financial documentation. They consider various factors such as the length of your current contract, your industry experience, and your overall credit history. This tailored approach makes contractor mortgages a viable option for those who don’t fit the traditional employment mould.

IR35 impact

Since the introduction of IR35, some may argue that Contractor Mortgages have got harder to place. We disagree! We only saw one lender exit the market who no longer lend based on the Contract rate and, this was more down to COVID than anything else!

Individuals on a fixed term contract still have the opportunity to secure a mortgage, with specific details such as the contract’s duration, income levels, and overall employment history playing crucial roles in the lending criteria set by mortgage providers.

We did see some lenders adjust their lending criteria when IR35 was implemented to account for the additional costs involved when working through an umbrella company however there are also many lenders who did not. When operating via an Umbrella Company, some lenders will apply a slight ‘haircut’ off the gross annual income to account for Umbrella Costs, Employers NI and Apprenticeship Levy commonly found on payslips. This may lead to a slightly smaller borrowing amount, but only because the income being proved is slightly lower and nothing to do with the client being a Contractor themselves. Similarly, to contractors still working outside of IR35, there are still lending options that will work with the gross annualised day rate too.

Are Contractors deemed ‘higher risk’ to a lender?

With most of the larger lenders, no. They are treated in the same risk category as a permanent member of staff, providing there is a track record of Contracting and the Contractor meets the lenders minimum criteria. Lenders assess a contractor’s average income as a key factor in determining borrowing capacity, taking into account various earnings and employment status. Of course, every lender has a different set of lending rules so what they ask for may vary. That’s where a reputable broker with the correct knowledge of the market comes in.

There are some occasions where it may be deemed slightly higher risk, such as significant gaps in contracts, limited contracting experience or a short length of time left on a contract – this does not make it impossible to obtain a mortgage.

Do I pay a higher interest rate as a Contractor?

This has been a question that’s been asked for many years and the simple answer is no. You will not pay a higher interest rate if you are a Contractor. The interest rates offered are the same as any other employment type (unless a lender has a specific set of products for different employments). The only drawback, not EVERY lender in the market offers mortgages based on a Contract rate, therefore the options may be slightly reduced. However, as we mentioned earlier on, they are more accessible now than ever before.

Some general high street lenders often lack the understanding and flexibility to cater to the unique financial situations of contractors, emphasising the need for specialised brokers.

Adam Connely of Connely Roberts commented: “Having worked in the contractor space for 7 years, I’ve definitely seen the market evolve over time and many more lenders understand that Contractors pose a very low risk of defaulting on mortgages, despite the short-term nature of their roles. It’s very fair to say that Contractor Mortgages are no longer as niche as they once were. That’s why here at Connely Roberts, we want to demonstrate that to any Contractor out there.”

Mortgage Lenders for Contractors

Several mortgage lenders have recognised the growing number of contractors and have developed products specifically for them. These lenders understand the unique challenges contractors face, such as irregular income and limited financial documentation. Some of the popular mortgage lenders for contractors include Halifax, NatWest, Nationwide, Barclays, Skipton, Virgin and Accord. These institutions offer competitive interest rates and flexible lending criteria, making it easier for contractors to secure a mortgage. By focusing on the contractor’s overall financial health and contract history, these lenders provide a more accessible path to homeownership.

The Role of a Mortgage Broker in Contractor Mortgages

Navigating the mortgage market as a contractor can be complex, which is why working with a mortgage broker like us at Connely Roberts Mortgages can be incredibly beneficial. A contractor mortgage expert has in-depth knowledge of the market and understands the specific needs and challenges contractors face. We can help you navigate the complex lending criteria and provide tailored advice and guidance based on your unique financial situation and goals. This expertise can be invaluable in securing a mortgage that fits your needs.

Preparing Your Contractor Mortgage Application

Preparation is key to a successful contractor mortgage application. Start by gathering all necessary financial documentation, including bank statements, tax returns, and details of your current contract. Ensuring you have a good credit score is also crucial, as it can significantly impact the interest rate and terms of your mortgage. Working with a specialist mortgage broker who understands the contractor mortgage market can provide you with the guidance and support needed throughout the application process. By being well-prepared and organised, you can increase your chances of securing a favourable mortgage.

Overcoming Common Contractor Mortgage Challenges

Contractors often face unique challenges when applying for a mortgage, such as irregular income and limited financial documentation. However, these challenges can be overcome with the right approach.  Additionally, choosing a mortgage lender that caters specifically to contractors, like those mentioned earlier, can make the process smoother. Improving your credit score and ensuring you have all necessary financial documentation can also strengthen your mortgage application. By taking these steps, you can navigate the contractor mortgage landscape more effectively and secure the home loan you need.

We have specialised in obtaining mortgages for Contractors for nearly 7 years and have extensive knowledge of that part of the market, each lenders criteria and what to look out for. For more information on mortgages for contractors, visit our contractor mortgage service page or alternatively, check out our in-depth guide on how to get a contractor friendly mortgage.

Contact us today to find out what your mortgage options are as a Contractor on 01252 214044 or info@crmortgages.co.uk

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