Contractor mortgages

What is a contractor mortgage?

A contractor mortgage is a UK residential mortgage for borrowers who work on fixed-term contracts rather than in permanent employment. Many lenders with contractor criteria annualise the contractor's day rate into a notional yearly income, rather than relying only on payslips or company accounts.

Who qualifies as a contractor?

You are usually treated as a contractor if you:

• work on fixed-term contracts with a set end date rather than in a permanent role
• are paid through your own limited company, an umbrella company or agency PAYE
• work in a sector such as IT, engineering, construction, healthcare, finance or consulting

For a lender, the structure and continuity of your contracts matter more than the employment status label.

How contractor mortgage affordability is calculated

Many lenders with contractor criteria use a day-rate income model:

Day rate × days worked a week × the lender's number of weeks, commonly 46 or 48

For example, £500 × 5 × 46 = £115,000 of notional income (illustrative).

For limited company contractors this can give a higher borrowing figure than an assessment based on salary and dividends.

Day rate assessment vs company accounts

Lenders read a limited company contractor's income in one of two ways, and the lender's rules decide which applies.

Day rate assessment

• Uses the annualised day rate, with no reliance on salary or dividends
• Usually ignores retained profits
• Can give a higher figure, although some lenders' contractor routes set a minimum day rate or income
• Available from some high street and specialist lenders

An accounts-based assessment, by contrast:

• Uses salary, dividends or net profit
• Applies where a lender has no contractor route, or where the contractor does not meet its contractor rules
• Often gives a lower figure

Which method applies is set by the lender's rules, so correct lender selection decides it.

Contract requirements

Contractor-friendly lenders may ask for:

• A minimum time left on the current contract, commonly one to six months, or evidence of renewal
• A contracting history of 12 to 24 months, although some lenders accept less, or experience in the same line of work instead
• Gaps between contracts within the lender's limits: some set a maximum, such as 6 weeks, and others judge gaps case by case
• A CV showing continuity in the same industry
• Recent bank statements showing the income received

A renewal letter or a signed extension helps show the income is likely to continue.

Inside IR35 vs outside IR35

• Outside IR35: usually a day-rate assessment under the lender's contractor rules
• Inside IR35: some lenders say they accept contractors inside IR35, and where the pay runs through an umbrella company, the lender's umbrella rules apply

Why the lender pool can be narrower

Where inside-IR35 pay runs through an umbrella company, the lender pool can be narrower, because some lenders do not accept umbrella income and others deduct umbrella or employer costs before annualising. Where a lender deducts those costs, the income it uses is lower, which can reduce borrowing, so the pay route that follows from your IR35 status affects which lenders' rules fit as well as how much you can borrow.

Deposit requirements and loan-to-value (LTV)

• Residential contractor mortgages: LTV depends on the lender and product, and some lenders publish contractor maximum LTVs of 95%
• In Mortgage Lane's experience, contractor cases usually sit within the lender's standard residential loan-to-value bands
• First-time buyer contractors can be considered, although lenders differ on the contracting history they need
• Buy-to-let contractor mortgages: LTV depends on the lender and product

Credit profile considerations

• With clean credit, both high street and specialist lenders may be open to you
• Minor adverse credit may still be acceptable to some lenders
• Recent defaults or CCJs restrict the options but do not automatically rule out lending

FCA regulation and Consumer Duty

Contractor mortgages on a main residence are regulated by the FCA. This means:

• A full affordability assessment by the lender, and suitable advice
• Advice based on the evidence of your income and circumstances
• The Consumer Duty applies whatever your income structure

Non-standard income does not reduce your regulatory protection.

Common reasons contractor applications fail

• The lender uses salary and dividends instead of the day rate
• The contract has too little time left to run
• The IR35 position is misread
• The case relies too heavily on umbrella payslips
• The application goes to a lender without contractor criteria

A decline for one of these reasons reflects that lender's criteria, so another lender's rules may fit.

Why contractor mortgage expertise matters

Contractor lending is lender specific. The outcome depends on:

• The income method the lender uses
• How it reads the contract
• Continuity in your sector
• The lender's appetite at the time of application

Applying to a lender whose rules do not fit can mean a lower income figure or an avoidable decline.