Are you struggling to get a mortgage because you’re a contractor?

The UK’s service sector relies on contractors. Banking, the NHS, anywhere there’s demand for IT infrastructure: contracting keeps the cogs turning. There’s also the critical oil and gas sector, likewise proliferated with contract workers.

If you don’t work in the mortgage industry, you might think lenders have neglected the UK’s flexible workforce altogether. If you’re looking for a mortgage as one such contractor, I imagine you’re convinced they have.

Let me assure you, a category loosely termed ‘contractor mortgages‘ most definitely exists. I say ‘loosely’ because the term has expanded to cover different types of contracting in recent years.

It has moved on from solely the purview of limited company contractors and umbrella workers. Today, the term has also come to cover so much more, including:

• CIS workers;
• locums;
• agency workers;
• zero-hour contractors.

In this guide, I want to give you an idea of how mortgage lenders approach each type of contractor. Also, what borrowing power their contract rate, payslips or accounts give each contracting subset.

A square peg in a round hole

The main reason contractors struggle to get competitive mortgage offers in-branch or via call centres is how they’re paid. From PSCs to zero-hour contracts, the pay methods and payment structures don’t work in lenders’ standard affordability calculations.

Most banks and building societies have robust PAYE employee mortgage lending criteria. They also have sound self-employed lending policies. Beyond that, they can struggle. Especially when it comes to seeing contractors’ true mortgage affordability.

But we have underwriting teams at over thirty lenders prepared to look beyond their generic affordability calculations. You won’t find them in-branch or on the phone. They tend to work from head office and rarely deal with the public. Some are categorically ‘intermediary only’, meaning they only deal through brokers, like us.

It’s our job to vet applicants from the contracting community. We drill down into each client’s work status and history, highlighting only the information an underwriter wants and needs to see.

As we have excellent working relationships with these lenders, we know their lending criteria inside out. In most cases, we can take a contractor’s details and instinctively know which lender would be best for them.

Why we know best (and really, we do)

It may seem a little conceited, us saying we know best. But there’s a reason for it.

Every lender has its own approach to risk. There’s no single overarching set of rules that dictate how a mortgage lender must appraise applicants. That’s no less true with contractors.

Of the thirty+ contractor-friendly lenders we use, no two have the same lending criteria. Some have strict guidelines, criteria that all contractor applicants must meet. Others use a wholly manual underwriting process, and assess each application on its merits.

That’s why it’s critical for contractors to use a broker who:

• understands the contracting landscape;
• can look at each application and immediately see what’s important;
• has relationships with lenders who can best accommodate the contractor’s unique situation.

We then package that application to give it the best possible chance of success. In case you were wondering, our success rate is about 90%. There’s a reason we’ve won so many awards, right?

Now, let’s look into each contracting type in a little more detail.

Limited company contractors

Contractor mortgages were originally built with limited company contractors in mind, specifically IT contractors. When Halifax first launched its first version of contract-based underwriting, it was only IT contractors who qualified.

Fast forward more than two decades, and the playing field has, through necessity, broadened.

The changing face of limited company contracting

Two major rule changes, off-payroll working rules, brought about a change in the way contracting worked. In April 2017, HMRC introduced new IR35 rules for the public sector. Then, three years later, the taxman introduced similar rules for the private sector.

As a result, many limited company contractors changed their modus operandi.

Today, if a contract states ‘outside IR35’, they’ll use a limited company. If it’s ‘inside IR35’, they’ll use a PAYE umbrella company.

You don’t have to work in our industry to see how that looks to a lender who already struggles with contractor payment structures.

That’s where we come in. Not only do we know why contractors work this way, but so do our contacts in specialist underwriting teams. Having this type of access — to underwriters who get it — is key to a contractor getting the mortgage their status deserves.

How lenders assess limited company contractors’ mortgage affordability

Most lenders still use the contractor’s day rate as the basis of their mortgage affordability calculation. This is the essence of contract-based underwriting, and the ‘annualisation’ calculation looks something like:

• day rate (£) × 5 (days worked per week) × 46 (weeks worked per year).

On top of that, the lender will then apply their income multiplier. Depending on other factors (work history, credit rating, loan-to-value ratio, etc.), that multiplier is usually five.

That income multiplier can go up or down. Some lenders will use 48 weeks instead of 46. Yet other lenders will use approximately 80% of the annualised income figure.

Conversely, some lenders have gone the other way. Perhaps because of the perceived risk of IR35, they treat limited company contractors as self-employed. For contractors with a long history, this doesn’t present a problem. But those new to contracting, with scant accounts and tax returns, will struggle with these lenders.

What’s most important to the contractor will, in part, dictate who we approach on their behalf. It’s not always about borrowing the most you can to buy a home.

Day-one contractors

All lenders take into account a new contractor’s work in their chosen industry before they began contracting. Most look at the sustainability of that industry, too.

Because of this approach, they can offer ‘day one’ contractor mortgages. So, if all other criteria are satisfied, a contractor can get a mortgage based on their contract rate the first day they begin contracting.

Umbrella contractors/workers/employees

More lenders’ criteria now favour umbrella contractors than ever before. But it’s not straight cut.

Some lenders use the contract day rate as the basis of their affordability calculations. Others will use the amount on the umbrella contractor’s payslip, often after they deduct umbrella company fees.

Lenders that use the umbrella worker’s contract rate use a similar affordability calculation to the day rate formula for limited company contractors. That optimises the umbrella worker’s income.

A lender who uses the umbrella worker’s payslips will still use similar calculations to work out how much the applicant can borrow. But, with the starting point minus the umbrella company’s fees and perhaps employer’s NICs, the result of the calculation is smaller.

Where the umbrella contractor doesn’t need to go to the top of their borrowing ceiling, this shouldn’t cause a problem. Where they do need the most that their day rate can get them, they’ll have options, but with fewer lenders.

CIS contractors

Whilst the Construction Industry Scheme has been around for decades, mortgages tailored to CIS workers are relatively new. That said, many lenders still treat CIS contractors as straight self-employed.

But a select few are changing the way they assess CIS earnings. Across our lenders, they offer lending criteria that assess income by:

• manually underwriting the application, so on a case-by-case basis;
• using the latest 3 months’ consecutive payslips/invoices/statements, along with corresponding bank statements;
• using gross income, providing the CIS contractors can provide 12 corresponding months’ payslips;
• treating CIS workers similarly to day-rate contractors operating through an umbrella company.

In each case, there are other criteria the applicant must meet. But the fact that we have lenders willing to look beyond the SA302 trope is a cause for great optimism.

Zero-hours contractors

Mortgages for zero-hours contractors constitute perhaps the newest category of home loans for the flexible workforce. But not all lenders have embraced the concept.

Some of our lenders flat out refuse to consider this flexible type of worker. And whilst Labour pontificate about levelling up the ‘one-sided flexibility’ of zero hours contracts, perhaps few more will be moved to do so.

But, some lenders have set specific lending criteria, albeit with conditions. Others have been more forthcoming, and we’d even classify as ‘excellent’ with zero-hours contractors.

The affordability assessment criteria range from lender to lender. Each of the below assessment criteria is from one of those more flexible lenders:

• 100% manual underwriting, assessed on a case-by-case basis;
• eligible income is the average of the last two years’ income, evidenced by P60s;
• 12 months’ contracting history minimum; income deemed as the average based on the last three months’ payslips;
• 12 months of continuous employment in the same line of work, but only in specific industries;
• affordability uses gross income, evidenced by 12 months’ payslips;
• at least two years’ work history, evidenced by the last P60 and most recent three months’ payslips;
• one year’s history of work experience on a zero-hours contract, which can be with different employers, evidenced with the latest P60, three months’ payslips and three months’ bank statements.

As you can see, that’s a wide and varied approach to funding zero-hours contractors’ mortgage borrowing. Hopefully, one of them resonates with you and reflects your experience.

Locums

When locums wanted a mortgage, they often had to go the self-employed route. In a sense, that was good. Most lenders had sensible, if not exactly competitive, self-employed mortgages.

There are still lenders whose default setting for locums is to suggest one of their off-the-shelf self-employed mortgage loans. But nowadays, locums have more options. Certain lenders, but not all, will assess them using their day rate, or at least their gross income.

This list highlights some of the different ways our lenders assess locum income:

• 100% manual underwriting;
• a minimum 12 months’ contracting history, income averaged over the last three months’ payslips;
• a minimum income of £20k per annum, either employed directly or via an agency;
• specific industries only, and with 12 months’ continuous employment in the same line of work;
• an average of the last six months’ income, with corroborating evidence over this period;
• a minimum 12 months’ contracting history, assessed as self-employed;
• a minimum of 12 months’ invoices, but can consider 6 months’ if the applicant has been in the industry for over 12 months;
• a minimum two-year work history, evidenced by P60s and the last three months’ payslips.

That list comprises many different underwriting and affordability methods for locums. Some lenders also add extra flexibility for locums contracting with the NHS.

If any of those methods appeal to the way you work, talk to one of our experienced brokers today.

Agency workers and seafarers

Workers employed by recruitment agencies often face the same (unintentional) bias that professional contractors have faced for years. Their lack of consistent work history and future employment guarantees often throw generic mortgage advisors.

The same can be said of seafarers working short-term contracts. However, their situation can get complicated because of how much time they spend away from the UK.

The good news is that a handful of lenders has looked at these situations and found ways to mitigate risk. Or, at least look upon workers employed in these ways to formulate solid mortgage lending criteria. Here are some of the ways these forward-looking lenders can accommodate agency workers and seafarers:

Agency workers’ criteria

If you’re looking for a mortgage as an agency worker, it will help if:

• you have a history of two years’ agency work;
• you can provide at least one P60;
• you can demonstrate consistent levels of income over your most recent payslips;
• the industry in which you work is sustainable;
• your agency can vouch for you.

Whilst some of those criteria are mandatory, there are lenders who’ll assess your application on its merit.

Seafarers’ criteria

Seafarers suffer much the same prejudice as agency workers. Their varied roles, differing contract lengths and time outside the UK make their situations difficult to underwrite.

But we do have lenders who’ll consider their applications. As with agency workers, work history and job security play a role. But underwriters will assess each applicant on merit.

The main stipulation is that they reside in the UK for more than six months a year. If you’re away more than you’re at home, the chances are you’ll have to take an expat mortgage, instead.

Foreign nationals

We hear from many foreign nationals and immigrant contractors who tell us they’ve been rejected because of their visa status. That’s not always the case.

Contractors working in the UK on immigrant or HSMP visas don’t realise that it might be their contractor status that’s the problem. It’s such a persistent problem that we’ve created our own guide to mortgages for foreign nationals. That will tell you everything about the barriers immigrants face and how to overcome them.

Bad credit

Lenders are doing more to accommodate contractors with credit blips than ever before. Several of our lenders are real specialists in that area.

The main thing to consider, if you have adverse credit, is that you can:

• justify why you ran into trouble;
• show that you’re making reparations, and getting onto an even keel.

We even have a couple of lenders who’ll consider applications from contractors who’ve missed mortgage repayments in the past. At one time, that was unheard of.

Again, this is a subject on its own, so we’ve prepared a guide to answer your questions about mortgages with a bad credit history.

Talk to us

The term contractor mortgages no longer just means independent contractors working through a limited company. Through necessity, contract-based underwriting has evolved to underpin mortgages for the whole flexible workforce.

If you work on a short-term contract of any kind, call our brokers today. The journey to homeownership is much shorter than you probably believe.