I've contracted sporadically for many years, and for a long time I never considered that a mortgage would be possible. This was because, like most contractors, my income was set up to focus on dividends and retained earnings, which I assumed would confuse the banks.
Turns out, I was wrong. In 2018, I bought my first home. Halifax offered to lend me just under £500,000 at an interest rate of 1.59%, with a 10% deposit. I was charging £500 / day at the time, but drawing less than half of that out of my company as dividends.
It was only because of a fellow contractor that I realised this was possible. If you're a contractor and are interested in getting a mortgage, you may well have a lot of questions—just like I did. Below, I'll try to answer some of the most obvious ones, and share insights from my own experience.
Just before we start... a couple of caveats:
Obviously, a whole variety of factors can impact your ability to get a mortgage. I had no adverse history and a good credit score, which stands anyone in better stead for a mortgage, regardless of whether they’re a contractor or not.
And hopefully it goes without saying, but the information below does not constitute legal advice—I’m a contractor, not a mortgage advisor! So, if you have any specific questions regarding your own personal circumstances, it’s best to consult an expert on the best strategy for you.
Do banks offer contractor-specific mortgages?
Yes, many do! Halifax was one of the first banks to use daily rates to determine how much contractors could borrow—but a number of others have since followed suit, and contractor-specific mortgages are now much more common. This is great news, as rather than basing borrowing capability on salary, contractor-specific lenders will instead use your contract rate.
This is much more advantageous for us contractors, whose accounts and tax returns are often not a true reflection of what we can actually afford. After all, most contractors will endeavour to make their salary as tax-efficient as possible—which would traditionally reduce the amount you can borrow. But by using your day rate, you’ll (rightly) be able to borrow much more, in line with what you actually make, regardless of if you draw it out of your company.
How much can I borrow?
The amount that you can borrow is calculated using an estimation of your turnover over a number of years, usually 4 to 5 (this multiplier varies from bank to bank).
So generally, the formula looks something like this:
[Day rate] x [# of days you work per week] x 48 x [multiplier] = the amount you can borrow
So, if you charge £500 / day and work 5 days a week, and your bank’s multiplier is 5—you’d be able to borrow around £600,000.
In general, banks seem to offer quite generous multipliers, despite the fact that contractor day rates are higher than an equivalent permanent position—in the knowledge that, as contractors, we need to pay our own benefits and pension.
Of course, as always, borrowing ability will still depend on a number of factors, including:
- The size of your deposit
- Any existing financial commitments
- Your credit rating
In any case, given that your borrowing ability depends on your contract rate, it might be worth renegotiating your day rate if you’re looking to get a mortgage in the near future—as that will allow you to borrow more.
How big a deposit do I need?
Before Covid hit, the minimum deposit for a residential mortgage was around 10%, but this has increased to about 15% during the pandemic.
In my experience, mortgages for contractors don't seem to require larger deposits than those for PAYE employees.
How much interest will I pay? Are rates higher than normal for contractors?
Contractors aren't deemed to be higher risk than permanent employees.
As such, interest rates generally vary anywhere between 1.5 and 5%, though it’s worth mentioning that the pandemic has increased these. I personally get 1.79%.
Does the current stamp duty holiday apply to contractors?
Yep: contractors can make the most of the stamp duty holiday that was introduced on 8th July 2020 in the same way as permanent employees. This means that until 31st March 2021, you’ll only start to pay stamp duty on any amount over £500k.
You can find more info and guidance around the stamp duty holiday here.
Are overpayments possible on contractor mortgages?
Yes, over payments are also possible. In fact, there’s a useful article on how offset mortgages can specifically benefit contractors here.
How much contracting history do I need?
Amongst the banks and building societies who offer contractor mortgages, requirements can vary quite a lot—especially when it comes to how much contracting you need to have done prior to applying for the mortgage.
For instance, some require 6 months of continuous contracting up to the current point, with a 6-month contract going forwards. Some banks require one month either side. Meanwhile, some lenders are happy to give a mortgage to those who are brand new to contracting, instead asking for proof of work in the same industry for the two years before.
In general, most lenders don't like gaps between contracts, so keep that in mind when planning your upcoming jobs.
Is there a minimum income threshold?
This depends on the lender. Some, like Natwest, do have minimum day rate thresholds—at the time of me writing this, £326/day was the lowest income they’ll take from limited company applicants.
Freelancer Financials have a great guide listing the different banks who offer mortgages to contractors, as well as summaries of what each one will require.
Should I use a mortgage broker?
Whilst it’s definitely useful to have a good grounding of knowledge about how contractor mortgages work yourself, yes, I’d really recommend using a mortgage broker to handle the process on your behalf.
As well as taking a lot of the weight of your shoulders, by engaging a professional, your applications are more likely to be successful—and less likely to be rejected (don’t forget, rejections can negatively impact your credit score).
I really rate the firm I used, Freelancer Financials. They know their stuff, and are really easy to work with. Natasha in particular was fantastic—she found me deals that other brokers had previously failed to find, with quick responses and a personal touch.
Top tips if you’re looking to get a mortgage in the next 6-12 months:
Fortunately, there are many lenders out there happy to give mortgages to contractors, as I myself experienced a couple of years ago. But having been through the process once, there are definitely things I’ve learned for next time—mainly that thinking ahead pays off.
A mortgage broker will obviously be able to give you a full run-through of the legal and financial requirements you need to meet—but from an actual contracting point of view, there are a few key things I’d recommend doing in the months leading up to applying for a mortgage:
- Speak to a mortgage broker as soon as possible in the process
- Figure out how much you want to borrow, so you can plan your upcoming work accordingly
- Prioritise reliable, consistent contracts rather than unreliable ones, to avoid gaps
- Negotiate your day rate to exceed the minimum you need in order to borrow your target amount from the bank
In doing all of the above, you can ensure you’re in as strong a position as possible when the time comes.
Keen to learn from other contractors’ experiences, too?
Talking to fellow contractors was what made me realise I could get a mortgage in the first place, so I hope that sharing my experience here might help other contractors find at least some of the answers they’re looking for. If you’ve got any other questions, I’d be happy to share my thoughts—just drop me an email at email@example.com.
It’s also worth mentioning that at wellpaid.io, we have a contractor community which you can join and ask for advice / share experiences with fellow contractors—about everything from mortgages to IR35. Find out more and sign up here.
Other useful resources:
More info on offset contractor mortgages: https://www.contracteye.co.uk/contractor_offset_mortgage.shtml
An overview of the best contractor mortgage lenders: https://www.freelancerfinancials.co.uk/guides/contractor-mortgage-lenders/