Guide to applying for a mortgage as a contractor

Introduction

Applying for a mortgage can feel like you’re making one of your lifetime’s biggest-ever financial commitments as a contractor. And rightly so, because you are…

Nowadays, the steady hand of a dedicated and professional broker can shorten the actual mortgage application process to just FOUR WEEKS.

The paperwork mountain can still look daunting, however, and the house-buying process itself can take months.

Manage your expectations

Being clear about what to expect; what lenders expect from you and which mortgage type you need are all key. Doing your own research and formulating a plan are also must-dos.

During your mortgage application, try to remember help is at hand

Indeed, this seven-part guide outlines everything you need to know to get a mortgage:

1. How much can I borrow?
2. Income multipliers, your credit score, deposits and fees
3. Mortgage types: pros & cons
4. Working with brokers/lenders to get the best mortgage: the key documents you will need
5. Decision in Principle (DIP), mortgage illustration
6. How long does a mortgage application take?
7. Completion day

What you must consider first

Before you even start admiring properties, get a contractor mortgage broker on board.

The outset of the mortgage application process really is the optimum time to appoint one of our experienced team.

Just make sure your broker is TRULY independent, without allegiances to estate agents. Such brokers are often wrongfooted by complex, fluctuating incomes.

Positively, the figures that a broker provides you with keep your property search between the realistic and aspirational.

Dedicated to you, a broker can translate all the ‘agent-speak’ you’ll be hearing in the coming months.

1. How much can I borrow?

Borrowing is where our brokers come into their own because we’ve got access to ‘off-market’ deals.

But broadly with borrowing power, expect a 4.5 multiplier. This means that lenders will take your earnings and, as a minimum, usually multiply your total earnings figure by 4.5.

Use our mortgage calculator to work out how much you can borrow here.

2. Income multipliers, your credit score, deposits and fees

To reiterate – the standard income multiplier is 4.5 x your total income as an applicant (or applicants).

Income multiplier example (illustration only)

Your earnings are £42,000 and your spouse’s earnings are £33,000, the total mortgage applicants’ earnings = £75,000
Multiply by 4.5 to give you a typical mortgage borrowing limit of £337,500

Want a higher multiplier than 4.5?
Speaking to a broker (rather than bamboozling your local branch manager with your contractor income), is the first step to obtaining a multiplier HIGHER than 4.5.
(Just for context, we’ve secured a multiplier of 6x earnings in the past)

Credit score, credit history, credit reports…

What’s your credit score and history?

It’s a question that lenders will ask so FIND OUT before they do. When you check, be sure to correct any errors in your credit report by contacting the relevant agency.

Equifax and Experian tend to be the agencies of choice.

Regularly reviewing the information they hold on you is worthwhile, especially a good few times in the run-up to applying.

Be aware, a bigger deposit is required if there are black marks on your credit.

But fear not! Our brokers know which lenders are the most receptive to a low credit rating, and we can leverage longstanding relationships if a deposit of 15% of the property’s value simply isn’t affordable.

Deposit

At the other end of the deposit scale, 5% is the MINIMUM a lender requires.

Put another way, a 95% LTV mortgage (Loan-To-Value) is the most generous offering from lenders. A 10% deposit, i.e. a 90% LTV, is currently more typical.

And like all deposits on financial transactions, the amount is payable in advance,

Contractors we support often try to put down a larger deposit. And the more you have to put down, the better the deals are assuming a broker shepherds you through.

Fees

Don’t leave yourself short in trying to stump up a big deposit without factoring in fees.

You must pay HMRC, chiefly Stamp Duty Land Tax which is mandatory on all property values exceeding £125,000.

If it’s your first property, there is no SDLT on the first £300,001 for properties worth up to £500,000.

These SDLT rates are effective since April 1st 2025.

Further fees

Mortgage applicants must pay mandatory legal/conveyancing fees (including solicitor fees), which can range up to £1,600.

For us arranging the mortgage and providing you with a dedicated broker, our business levies a fee too, separate from the lender’s arrangement or booking fee.

Most of the time, your product will allow the lender’s fee to be added to your mortgage repayments. This can be helpful if your contractor circumstances lack financial flexibility, but it’s not an interest-free addition.

Feeling overwhelmed by fees? Your broker’s ‘illustration’ offers a handy breakdown, but remember it may not cover everything. Bar stools for the new veranda, anyone?

3. Mortgage types

Walking into a lender’s branch is risky as a contractor.

Not only will your complex income throw off their systems but branch staff will sell you their mortgage ‘special’ – a product released that week or month.

Refreshingly, a good mortgage broker does just the opposite, preferring that you consider the FULL range of mortgage products:

• Discounted
• Fixed rate
• Tracker
• Offset
• Interest-only
• Other mortgages

Mortgage types: pros & cons

‘Fixed’ and ‘variable’ rate deals are the main repayment conditions.

‘Fixed’ rate mortgages provide an unfluctuating, unmovable rate for an introductory period such as five years.

This introductory rate period, also known as a discounted period or initial rate period, is the percentage you’ll pay for a certain time.

By contrast, ‘variable’ rate mortgages see the rate fluctuate and move, based on factors like the economy.

Discounted rate mortgages

Flexible workers often like the sound of a DISCOUNTED rate mortgage, but it just provided provides a discount on a lender’s SVR (Standard Variable Rate).

While this reduction on the dreaded Standard Variable Rate is for a set period (two years perhaps), it’s ONLY the discount that the lender agrees to fix. Therefore, your rate will fluctuate with the SVR, meaning it’s only your agreed reduction (0.5% sub-SVR perhaps) that’s unmovable.

Fixed-rate mortgages

With a fixed rate, whether it’s 12 months or 10 years, your mortgage interest rate won’t budge for that period. Little wonder such fixes are popular with first-timers!

Contractors like fixed-rate products, particularly during times of volatility. But if there’s an economic uptick and base rate drops, you won’t gain, as you would on a ‘discounted’ rate or a tracker mortgage.

There are two additional disadvantages of fixed-rate mortgages you need to know about:

1. Early Repayment Charges (ERC) – these are standard on fixed rate. So if you settle or exit your mortgage within the discounted period, charges apply.
2. Standard Variable Rate (SVR)– should both your broker and you take no action ahead of your discounted period ending, you’ll fall onto your lender’s SVR. Avoid.

Tracker rate mortgages

Popular when interest rates are low, tracker mortgages track or ‘mirror’ the rate set by the Bank of England (BoE). There’s also a margin added on by your lender.

Traditionally cheaper to take out than their fixed, trackers can be flexible. Well-established brokers  – those with such close relationships with lenders that they are in weekly or daily contact with – excel at flexing those terms in your favour.

There may be comparatively less wiggle room with a Lifetime Tracker. This is a home loan tracking the BoE base rate for the mortgage’s entire lifetime.

Offset mortgages

Another home loan some contractors take out is the ‘offset mortgage.’

An offset mortgage is linked to your savings account, with charges by the lender to your account reducing the balance that you pay interest on per month.

Offset mortgage example

• Mortgage amount outstanding: £250,000
• Savings:  £25,000
• £25,000 (in savings) subtracted from the £250,000 (the amount left on mortgage) = £225,000 to be repaid.

In this example, interest would be calculated by the lender on the £225k, to arrive at your monthly repayment sum.

A broker is worth consulting on whether your circumstances suit either lower monthly repayments, or retaining the total owed per month as part of a strategy to pay off the loan more quickly.

Contractors like offsets because there’s another choice — you can opt for fixed or variable. And it’s tax-efficient too, insofar as the mortgage is linked to savings which, unlike earnings, is hands-off to HMRC!

Interest-only mortgages

If lower repayments are desirable, ask your broker to shortlist the most competitive ‘interest-only’ mortgages. With these, all you pay is the interest.

The full mortgage at the end of the term still needs paying, with lenders requiring proof as to HOW you’ll settle up.

Due to it being risky to the lender, deposits tend to be greater.

Interest-only mortgages appeal to contractors who want to get into buy-to-let or have an existing investment portfolio.

4. Working with brokers/lenders to get the best mortgage: the key documents you will need

High street lenders don’t grasp how freelancers and other flexible professionals work, let alone earn!

That’s ok. It’s where we come in because we state your case in the lender’s language. But to do it EFFECTIVELY, we need to know your financial particulars and circumstances.

Lenders will want further documents for themselves, but we can usually act as your conduit — supplying them on your behalf with proof of:

• Identification including home address
• Earnings, ranging from the latest signed contract and payslips to P60 and SA302 tax forms
• Outgoings, typically the last full quarter of bank statements

Remember, the lender needs to assess WHO you are and then assess if the mortgage is going to be AFFORDABLE.

By this stage, we’ll have already triple-checked that you can afford the capital and interest repayments. Nonetheless, the lender needs to back you as well.

5. Decision in Principle (DiP)

One of the best emails you’ll receive during your application is your lender’s Decision in Principle also referred to as an Agreement in Principle (AiP).

The ‘DiP’ is a preliminary ‘yes’ to offering you the mortgage according to the details you’ve provided.

It takes only a day or so to obtain a DiP. But keep the champagne on ice – it is not a formal mortgage offer. It’s more like a statement of intent.

The value of a Decision in Principle mainly lies in the confidence it instils in your vendor, especially if there’s another interested party but they lack such a preliminary ‘yes’ from their lender.

A DiP will put a spring in your step too, as it lets you view properties in a more serious and targeted way.

Once you find ‘the one,’ insist and wait on confirmation that the property has been delisted as soon as your offer is accepted.

At this stage, we recommend you do three things:

1. Telephone your broker to confirm your offer has been accepted so they can finalise your home loan
2. Ask us for a recommendation of a solicitor/conveyancer to handle the imminent purchase (if you haven’t found and appointed a solicitor already)
3. Arrange a call with one of our protection insurance advisers to ensure suitable cover is in place to protect you, your family and home in the event of illness or death

Mortgage Illustration
The next welcome ‘ping’ from your inbox is our broker sending you your mortgage illustration.
It spells out the loan which your broker is recommending with its particulars that are very much worth you checking.

6. Timeline: how long does it take to apply for a mortgage take?

We stand by the timeframe of MONTHS to buy a home but it actually only takes:

• 4-12 weeks…to be in a position to exchange (N.B. you or the vendor can still pull out during this pre-exchange period)
• 2-4 weeks… between us submitting your application form and the lender’s offer (not just its DiP)
• Between a few more weeks and a month… for the last phase of your conveyancer’s work (searches/surveys, fixing exchange date, deposit transfer etc)

7. Completion day: legally, it’s now your home

Confirmation that the big amount you’ve put down has finally been received by the lender might be jubilantly conveyed to you by telephone because, pretty much, THAT’S IT! It’s now time you collected the keys to your new front door.

We’ll be back in touch six months away from the SVR so you NEVER end up with a more costly mortgage than necessary. But for now, HAPPY COMPLETION DAY, your home is legally yours.