Contractor mortgages: getting approved on a day rate

Some lenders will assess a day rate contractor on the contract itself rather than on company accounts. A common approach is to annualise the day rate by multiplying it by five days and then by somewhere between 46 and 48 weeks, and to lend an income multiple of that figure. Most want around 6 to 12 months of contracting history and a current contract with a reasonable amount of time left to run. It is a niche policy, not a universal one.

If you contract through your own limited company, the default self-employed treatment looks at salary plus dividends from your accounts. Many contractors pay themselves a small salary and modest dividends, leaving the rest in the company or in a pension. On paper that makes a well-paid contractor look like a low earner.

Contractor lending exists to fix that mismatch. Instead of reading the accounts, the underwriter reads the contract, works out an annual equivalent, and treats you much like an employee on that salary. It is the same product range as anyone else in many cases, just a different way of evidencing income.

The formula most commonly used is day rate multiplied by five, multiplied by the number of working weeks the lender assumes. Lenders that use 46 weeks are building in six weeks of unpaid time off. Those using 48 are more generous. A few will use 47.

Take a contractor on 450 a day. Five days gives 2,250 a week. At 46 weeks that is 103,500. At 48 weeks it is 108,000. Using an illustrative income multiple of 4.5 times, purely to show the mechanism, the 46 week figure supports around 465,750 and the 48 week figure around 486,000.

Now compare that to the accounts route for the same person. Suppose they took a 12,570 salary and 45,000 of dividends last year. That is 57,570 of income, and at the same illustrative 4.5 times multiple it supports around 259,065. The difference between the two approaches on identical earnings is roughly 200,000 of borrowing. This is why the choice of lender is the whole game for contractors.

If you work a four day week, say so up front. Lenders will normally annualise on the days you actually work rather than assuming five.

Expect most contractor lenders to want somewhere between 6 and 12 months of continuous contracting, though a minority will consider less where you have moved into contracting in the same field you were employed in. If you were a permanent software engineer on 70,000 and you are now contracting at 500 a day doing the same work, that continuity helps a great deal.

Lenders also look at the current contract. Many want at least three to six months left to run at the point of application, or a documented history of renewals with the same client. A contract that expires next month with no renewal in sight is a weak position, so time your application around your renewal cycle where you can.

Some lenders will also want to see that your day rate has been stable or rising. A rate that has fallen sharply between contracts invites the same questions a falling profit does for a sole trader.

Gaps are normal in contracting and lenders know it. What they care about is the pattern. A few weeks between engagements, once or twice a year, is usually fine and is precisely why the annualisation uses 46 to 48 weeks rather than 52.

Longer gaps need explaining. A three month break because you took time out, moved sector, or waited for a project to start is explainable in a short covering note. Several long gaps in a 12 month period is harder, and some lenders will average your actual earnings over the period instead of annualising the current rate, which usually produces a lower figure.

Keep your own record. A simple schedule listing each contract, the client, the dates and the day rate makes an underwriter's job easy and makes you look organised.

How you are paid changes which lending route is open to you.

• Own limited company, outside IR35. The classic contractor case. You can normally choose between contract based assessment and accounts based assessment, whichever gives the better result, though not every lender offers both.
• Umbrella company. You are technically employed by the umbrella, which issues payslips and deducts tax. Some lenders treat umbrella contractors as employed and will assess payslips, but the gross figure on an umbrella payslip is reduced by the umbrella's fees and employer costs, so the net position often looks worse than the headline day rate. Other lenders will still annualise the day rate from your contract, which usually gives a better answer.
• Inside IR35 through a client payroll or umbrella. Similar territory. You will have payslips, and some lenders will use them like an employee's. Others will use the contract. It is worth getting both assessments quoted.
• CIS subcontractors in construction. Often treated as self-employed, though some lenders have specific CIS policies that work from monthly payment statements rather than full accounts.

None of this is fixed and lenders change their contractor policies fairly often, so treat the above as the shape of the market rather than a rulebook.

• Your current signed contract, showing the day rate, start and end dates and the parties
• Previous contracts covering your contracting history, ideally back at least 12 months
• Any signed extension or renewal, or written confirmation one is coming
• Three to six months of personal bank statements
• Business bank statements if you contract through your own company
• Your CV, which lenders often ask for to evidence continuity of profession
• Company accounts and SA302s, which may still be requested even on contract based assessment
• Proof of deposit, identification and address documents

Make sure the contract names you or your company as the contracting party and states the rate clearly. Contracts that show a rate range, or that leave the rate to a separate schedule you do not have, cause delays.

The most common failure is applying to a lender with no contractor policy at all. That lender reads your accounts, sees 57,570, and offers half what you expected. Nothing is wrong with the application, it is simply in the wrong place.

The second is timing. Applying with six weeks left on a contract and no renewal, or immediately after switching from permanent work with no track record, both narrow your options.

The third is the day rate not matching the bank statements. If your contract says 450 a day but your company account shows income consistent with 350, expect the file to stall while the underwriter reconciles the two.

Because contractor policy varies so widely and changes often, this is one area where a broker who places contractor cases regularly is worth finding. The MortgageMatch directory lets you search FCA-authorised brokers so you can start with someone who knows which lenders will read your contract rather than your accounts.