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Contractor Mortgages

We specialise in Mortgage Advice for Subcontractors paid via the Construction Industry Scheme (CIS)

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Contractor Mortgages, Expert Mortgage Advice for CIS Subcontractors

Contractor Mortgage

David Sharpstone shares his expertise on mortgages for contractors.

Podcast above approved by The Openwork Partnership on 09/04/2024.

CIS Mortgage Advice is a trade name of Just Mortgages Direct Limited, which is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited, which is authorised and regulated by the Financial Conduct Authority.

Are there specific mortgages for contractors?

A misconception that comes up a lot is that all contractors are the same when it comes to mortgages. In fact there’s a big difference between a professional contractor and a construction subcontractor. Someone who loves working with construction subcontractors might not necessarily know a lot about contractors.

A construction subcontractor is somebody that is self-employed and works for a construction company. They normally don’t actually have a formal contract, but they’ll have an agreed day rate or will work to a price.

But contractors are very different. They could be an engineer, a project manager, a cable fitter or in the medical profession. They will have a contract with defined terms, including how many hours they have to work per week, how much they’re paid and how long their contract lasts.

Specific mortgages for contractors are rare. Most mortgage lenders will tailor their rules for contractors and one or two smaller building societies might have a specific product but generally there are no contractor mortgages. It’s all about how we interpret the lender’s rules and apply that knowledge to the advice we give, to place you with the most suitable lender.

Do all lenders lend mortgages to contractors?

No lender specifically excludes contractors, and in fact over the years I’ve seen lenders relax their criteria. Let’s imagine a self-employed contractor on £200 a day who works five days a week. A lot of contractors don’t like to miss out so they work 52 weeks a year. Ten years ago or so, mortgage lenders would consider you to be self-employed and wouldn’t care about your day rate. They would work out mortgageability based on your tax returns and your profit.

What’s happened now is that mortgage lenders have become more accommodating for contractors because the workforce has changed. People are becoming less reliant on an employed job and prefer to have more control of their own destiny.Mortgage lenders are picking up on that and now work out affordability from their day rates.

In short, most lenders will lend to contractors but some are more generous in their lending than others.

How much can contractors borrow on a mortgage?

Everybody’s circumstances are different. Somebody who has a football team of children and two Range Rovers on finance is clearly going to be borrowing a lot less than somebody with no children and no car finance.

I will always give you an early indication as to whether your plan is feasible. We’ll start by looking at how much you earn a day, and multiply that by five – assuming you work five days a week. Then I’ll take a cautious estimate that you work 46 weeks of the year. Some lenders will actually use up to 52 weeks per year, but that’s not always realistic because people do take holidays.

I’ll then apply a cautious multiplier of four to give you a ballpark mortgage figure. Most lenders these days would lend more than four times your income – some up to five or more, but it really depends what other financial commitments you have.

How do contractors get a mortgage?

There are essentially two options: you either go direct to a bank or you go through a mortgage intermediary like myself.

Unless you know exactly which bank meets your set of criteria, it could be very difficult to do it yourself. If you’re in a permanent, employed job with a basic salary and nothing particularly complicated, there is an argument that you might not need to go to a mortgage broker. Mortgage brokers do add value – it’s not to say mortgage brokers are not worth speaking to.

But if you’re a contractor a mortgage lender will have all sorts of questions, such as how long have you been contracting? Are you employed or self-employed? Do you work inside or outside of IR35? Are you self-employed but paid through an umbrella company? How many months are left on your contract? How many times has your contract been renewed? What’s your history?

And, you might be earning £100,000 a year, but if you’ve only just started that contract you actually have no history of earning that – which might be difficult for some lenders.

There are all these other considerations to factor in. You won’t be able to find a suitable deal just by going on to a comparison website and picking the lender at the top. You could phone potentially 70 to 80 mortgage lenders before you actually find the one that fits your unique circumstances if you are a contractor.

But a broker will cut through all of that. We’ll ask you the right questions and come up with a solution pretty quickly. Whenever I speak to clients, in the back of my head I’m already making note of the lenders that will be applicable to their situation.

What documents are needed to prove a contractor’s income?

There are certain documents that everybody needs – address ID, photo ID, evidence of deposit, three months’ bank statements and details of your commitments.

But specifically for contractors, I always ask for a copy of the current contract and I always ask for a copy of your CV because it will tell me how long you’ve been doing your job and who you have worked for before. These are all the questions that a mortgage lender is likely to ask. It’s better to have all that information up front.

How is a contractor’s income assessed?

If you’re a self-employed contractor, lenders might look at your profit after expenses, which is typically a lot lower than calculating it from your day rate, multiplied by five and then by 46 to 48 weeks of the year. Some lenders will even do 52 weeks.

Once we’ve got an annual income figure we put it into the lender’s calculator which will also allow for any other household incomes, dependents and financial commitments. Some lenders include a prediction of council tax and buildings insurance. It will then pump out a potential borrowing figure that could be applied for, subject to credit checks.

How do you strengthen your mortgage application as a contractor?

It’s really just being prepared. Get your ducks in a row before you speak to a mortgage broker or a bank. Make sure you’ve got evidence of your income and your contract, whether it’s been renewed, previous contracts, your CV, ID and bank statements.

Get the lot ready in a dossier ready to hand over. If you want a quick result from a bank or broker, have everything ready for them, nicely labelled. Then we’re not spending hours trawling through it trying to figure out what on earth is going on.

What about contractors buying with another person – how does this work?

In exactly the same way as any mortgage. When we talked about how mortgage lenders calculate affordability, they’ll simply add on that extra income and it goes into the calculator and pumps out a result. That’s it.

What else should we consider when getting a contractor mortgage?

Don’t be afraid. Don’t think you can’t get a mortgage – a decent mortgage broker will know exactly how to help you. You’re not going to be penalised in any way for being a contractor or being paid in a way that’s different to being employed. It shouldn’t be a barrier to buying a home or remortgaging. It’s not too difficult.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

CIS Mortgage Advice is a trade name of Just Mortgages Direct Limited, which is an appointed representative of The Openwork Partnership, a trading style of Openwork Limited, which is authorised and regulated by the Financial Conduct Authority.

Approved by The Openwork Partnership on 09/04/2024.

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