How to Get a Large Mortgage as a Contractor

Looking to get a mortgage as a self-employed contractor can seem like an uphill climb. High-street banks are notoriously inflexible, and gathering together the paperwork to prove you can comfortably make the mortgage repayments can seem frustratingly impossible.

However, despite all first impressions, there are a wide number of lenders who specialise in self-employed and contractor mortgages who are there to support those whose income is a little more complex than a monthly PAYE pay packet. At Clifton Private Finance, we have the experience you need to get a solid contractor mortgage and buy the home you deserve.

Table of Contents

The Challenges of a Self-Employed Mortgage
How to Reassure Lenders for a Contractor Mortgage
Special Day-Rate Considerations for a Contractor Mortgage
Contractor Mortgages with Clifton Private Finance

The Challenges of a Self-Employed Mortgage

By flipping the mortgage application process around and looking at the situation from the position of a lender, the problems with a contractor mortgage can become apparent. It’s also a great way to start finding solutions.

From a lender’s perspective, mortgages are all about risk. They don’t actually have any sort of bias or prejudice lending you the money if you are self-employed, but they want to feel confident that each month you can afford to make the payment. Failure to do so, even if it is just for one month, can lead to administrative issues, wasted time, and a dip in assurance.

Persistent problems can mean they have to take further legal action, and at its worst, repossess and sell your property to make back their money. No lender wants to have to go down that path - they’d far rather smoothly make their money each month and move on without incident.

Mortgage underwriting also has regulatory and legal frameworks surrounding it, barriers that are for your protection. These have only become stricter as the years go on, as the Bank of England Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) do what they can to maintain borrowing stability.

In short, lenders have to follow rules, and they need to feel safe.

The problem that they have with contractors, even more than with self-employed company directors (who are also somewhat complicated to evaluate), is that the income can fluctuate wildly from month to month. More than that, many self-employed contractors have little-to-no insurance to speak of, so when you are sick, the money simply stops coming in. Understandably, it makes lenders nervous.

How to Reassure Lenders for a Contractor Mortgage

The solution, therefore, is to do everything possible to convince the lender that you are a stable and reliable customer. You’re going to make that payment every month - there’s nothing to worry about. This is done through several different techniques.

A Larger Deposit

One solution is to invest more of your savings into the property so the portion of the capital you need to borrow is lowered. This is the relationship between the deposit and loan-to-value (LTV).

The greater a percentage your deposit represents, the lower the LTV - together they balance to 100%. A deposit of 10% means the lender needs to lend you 90% of the property value (90% LTV), a deposit of 25% is 75% LTV, and a 40% deposit leads to only 60% LTV.

The less the lender provides, the more comfortable they feel, for three reasons:

If you have invested and are risking more of your own money, then you’re more likely to ensure payments are made.

If the property does have to be sold, even quickly at auction, then they are more likely to get back the balance of the mortgage and their administration fees.

If you have managed to save a larger deposit, then your finances to this point have probably been managed well.

Leaning on Your Credit Report

All mortgage applications involve a considerable level of digging into your credit history. This provides a comprehensive overview of your financial responsibility over the past few years.

Underwriting (the term for risk evaluation) for a contractor mortgage may look deeper into your credit report, looking for stability. This is especially true if you have only been self-employed for a short period, where the underwriters will examine the changes that happened between your previously paid employment and your move to becoming a contractor.

Through a comprehensive evaluation of your credit history, the underwriters will be looking for consistency, on-time payments, and financial maturity.

Exploring Income History

One of the most important considerations for lenders is the stability of your income. This can be a very difficult thing for contractors and other self-employed individuals because peaks and troughs in your income are often inevitable - made even harder if you have only been a contractor for a short while.

For the majority of self-employed applicants, this means focusing on your SA302s, HMRC’s tax calculations based on your annual self-assessment. An SA302 informs the lender how much money you earned in a year, and is central to their income evaluation. When you have multiple SA302s, for three years (or even more), then a trend can be seen, helping underwriters even more.

At its most basic, most lenders will take the average of your last three SA302s (if available) to determine your effective ‘salary’ for mortgage calculations. As an example, if you earned £39,000 in year one, £48,000 in year two, and £52,000 in year three, your effective salary would be considered to be £46,333, and the mortgage size would be based on that figure.

One problem that many self-employed individuals have is when they try to minimise tax through efficient accounting. While this is good for lowering your tax obligation, it has the opposite effect on your mortgage viability as it lowers your on-paper earnings. The more you show you earn, the larger the mortgage you can obtain (and the more tax you will have to pay).

It’s important to note that not all contractor mortgage applications need to be based on SA302s alone. Some contractors may look to be evaluated based on a day rate, while limited company contractors will have dividends as well as company salary to consider. In all cases, though, the basic idea is clear: it’s important to clearly present income.

Including Additional Income Streams

Self-employed contractors often have multiple income streams, especially if you are structured as a limited company and take both dividends and salary. You may also have investments, a side income from property rentals, or residual income from a previous project.

Multiple income streams can be complicated for lenders to evaluate, but the right specialist lenders will be set up to take them into account.

Working with Clifton Private Finance to match your personal financial circumstances to an understanding specialist lender will help.

Assessing Affordability

Affordability checks and stress tests are another important part of the mortgage assessment. Here, the lender considers your monthly income against your regular outgoings to evaluate your level of disposable income. You will need to be able to prove that you have enough disposable income to comfortably cover the mortgage payments, even if the interest rate were to rise.

Bank statements are essential for your affordability tests, and you should expect to show a minimum of three months of statements to your lender (quite often, more).

To learn more about affordability testing, read our in-depth article How Mortgage Affordability Checks Work.

Reducing Debt Obligations

Another key factor is your other debt obligations. Credit cards, overdrafts, personal loans, and car finance are all potentially damaging to your risk assessment. While some of these may be unavoidable, it is worth working on them to bring them as low as possible.

One key metric is your credit utilisation, which represents the amount of your available credit you are using. For example, if you have £20,000 of credit card and overdraft credit available to you, with a current balance approximating £10,000, your credit utilisation is 50%. Mortgage lenders will want to see low credit utilisation, with figures under 30% improving your chance of a mortgage. Paying off credit cards can significantly increase your chances.

Having Comprehensive Insurance

When it comes to risk evaluation, insurance can add stability and reassurance. Depending on your industry and the nature of your work, there will be insurance available that supports your mortgage application. This may include life insurance, critical illness cover, and - crucially - income protection insurance. Other insurance products, such as professional indemnity, won’t have as much of a direct impact on a mortgage application, but help show your seriousness and professionalism.

In some cases, lenders may insist on some, if not all, of these levels of cover. Having them in advance can show a greater level of financial maturity.

Giving the Right Presentation

Perhaps one of the greatest ways to bring lenders on board is to present well to the right lenders. This is where Clifton Private Finance can help. As a specialist mortgage broker with years of expertise in self-employed and contractor mortgages, we know how to match you with a lender who will evaluate you as an individual and won’t simply reject your application based on pure numbers.

Consider how small details could swing a mortgage in your favour - if only they knew!:

You have a new customer who has just signed with guaranteed regular work for the next two years.

You have income from other streams that you’d like taken into account.

You’ve just increased your rates and will see a boost in income from now on.

New technology has come out that makes you more efficient and stable.

You’ve expanded your reach, bringing you a whole new area of potential customers in the next few years.

Special Day-Rate Considerations for a Contractor Mortgage

When you approach a specialist mortgage lender for a self-employed contractor mortgage, you can present your income in a way that better reflects your earning potential, giving you access to the mortgage you truly qualify for. Working with Clifton Private Finance means you’ll have access to lenders who understand how to assess contractor income properly.

Many contractors are able to achieve a larger mortgage if their income calculation is based on a day rate rather than the more traditional annual salary. This can provide extra buying power.

A day-rate mortgage annual income calculation is done by taking your day rate and multiplying it by the number of days you work in a year. This is then multiplied by the lender’s mortgage multiplier (typically 4.5x) to determine a final mortgage figure.

It offers additional flexibility when determining your actual mortgage sum and often better represents how much you can afford. For many contractors, an assessment based on day rate makes for a much higher mortgage than the equivalent SA302, especially as it avoids some of the false calculations that occur when expenses are considered.

Consider the following:

Example 1: Simon, the Heating Engineer

Simon is a plumbing and heating engineer who charges a day rate of £500. He has children and works around his family schedule, averaging four days’ work per week. He takes off three full weeks a year, resulting in 49 weeks per year to use in his mortgage evaluation. His three most recent SA302s, considering expenses and his business growth, show his income as £70,000, £76,500, and £82,000 respectively.

SA302 Calculation

Simon’s SA302s average at £76,167. This results in a final mortgage total of £342,750.

Day Rate Calculation

At £500 per day, four days per week, and 49 weeks in the year, Simon’s annual income is calculated at £98,000. With the 4.5x multiplier, his mortgage total is £441,000.

Example 2: Yasmin, the Graphic Designer

Yasmin has a small self-employed graphic design firm that has been operating for nine months. She charges herself out at £400 per day and has many clients, but has yet to file a self-assessment tax return. She is working six days a week, and plans not to take any holiday for the next two years as she builds her business.

The specialist lender is impressed with her commitment and recognises that though she has only been self-employed a short time, she has eight years of previous experience in the industry as an employee in a prestigious firm. However, they will only consider 48 weeks of work in the year, insisting that she will need to take holidays to avoid burnout, as well as potentially have periods without clients. Nonetheless, they accept a day-rate calculation of £2,400 per week for 48 weeks - a total annual income of £115,200. Her mortgage offer is £518,400.

Contractor Mortgages with Clifton Private Finance

Getting a mortgage as a self-employed contractor may initially seem to be difficult and quite restrictive, but with the right specialists by your side, you can get the mortgage that matches your true income.

At Clifton Private Finance, we have the experience and lender relationships you need to achieve a high-value mortgage as a contractor. We understand the lender’s requirements and can guide you to present your business and your finances in the right way to maximise your mortgage potential.

Take the next step in your home purchase with the same confidence you bring to your business - speak to one of our mortgage experts today.