Contractor mortgages vs. traditional mortgages: Five key differences to consider

What's so different about mortgages designed for contractors than those for employees, sole traders or company directors? Well, for the loan and repayment parts of the mortgage themselves, very little, writes John Yerou, chief executive at Freelancer Financials.

But, it's the underwriting process that's a world apart.

That's where most contractors fall foul of (often well-intentioned) high-street lenders. Today, I'll run through the five key reasons why that is. And, more importantly, what contractors can do to get their mortgage application over the line.

1. The inherent risk of labelling yourself ‘high risk’

A lack of understanding on both sides will usually see a contractor's mortgage application marked 'high risk' at branch and call centre-level. This has ramifications when that application reaches the lender's standard underwriting team.

The underwriter will see the 'high risk' denomination and is thus predisposed to finding faults. Sure enough, they'll find them. Then, either a low mortgage offer based on the contractor's accounts or outright rejection ensues. Far from ideal.

This needn't be the outcome. The difference between contractor mortgages and traditional mortgages is all about the underwriting process.

But how do you access specialist underwriting teams when:

a) they operate out of head office, not at branch/call centre-level?

b) a generic adviser/agent, doesn't realise that you, the contractor, needs a specialist to understand your true mortgage affordability?

2. The wood, the trees: umbrella contractor/employee payslips

I'm certain many of you reading this will have recently switched from limited company to umbrella company employee. Given the off-payroll working rule changes in the public and private sectors, I'm not surprised.

One thing you may see as a silver lining is that you now get payslips. Wasn't one of the reasons you struggled to get a contractor mortgage before because you didn't get payslips like permies?

Before you go trundling off down your local high street, stop! Just look at your umbrella payslip a minute, before you present it to an in-branch adviser.

It's not the same as the payslips you (might have) had as a permie, is it? All those fees, deductions and both employees' and employers' National Insurance? What are they all about?

In practice, umbrella contractor payslips only serve to muddy the water more.

If an adviser tries to work out your contractor mortgage affordability on anything but your day rate, you're probably in the wrong place.

3. The minefield of SA302s and accounts (limited company contractors)

For contractors persevering with limited company payment structures, you probably already know how difficult it is to get mortgage advisers to take your income seriously!

You and I can easily see what you can truly afford. But 'retained profit' isn't a term untrained agents and in-branch advisers understand.

Like umbrella contractors, your strength is your day rate and the assignment schedule attached to your contract. But, unless an underwriter is trained to look for your potential, they'll not understand why your day rate is so high compared to what you register on your SA302 with HMRC.

I totally get why your accountant prepares your accounts as they do -- for tax efficiency. The downside is that mortgage lenders at branch-level rarely have a field for 'retained profit'.

Chances are; your adviser will treat you as a self-employed entity. And, today, most lenders have a standard and fair self-employed mortgage policy.

But the bad news for contractors is that such ‘self-employed’ policies use your accounts and SA302(s) to work out your self-employed income. They'll ignore the bulk of your income, purposefully left in your company as profit, from which you'll eventually deduct corporation tax, not income tax.

If that's not insult enough, there's a huge chance the lender will reject your application.

This is a red flag for the next lender you try, and soon becomes a spiral of rejection, stopping lenders who could have helped you with a contractor-friendly policy when you eventually find one.

4. The blinkered view of your short-term contract

Another stumbling block is the typical length of your contract.

Even if you're on a 12-month contract, compared to a permanent employee, you still represent a potential lack of continuity of employment.

Again, you and I know that by working through an agency, the chances are you'll be offered a contract extension. If not, they'll have other clients on their books that offer work in a similar industry once your current contract expires.

So, in reality, you're no different from a highly-skilled employee who gets head-hunted or chooses quick progressions up the career ladder every 6-12 months. People staying at one company for five, six, ten years isn't as common as once was. Lenders factor in that changing trend for permies, but seem blind to it when it comes to contractors' short-term contracts.

5. The type of work you do matters

If you're a permanent employee, the industry you work in when you apply for a mortgage rarely matters. The simple fact that you hold a job, and perhaps have done for years, is enough.

When you're a contractor, that changes.

The lender has already seen that your contract only covers up to ‘x’ date in the future. So, even for those lenders with contractor-friendly policies, they also critique the industry in which you're working, as well as that you have worked in!

If you're new to contracting, they'll want to see that you have a history in the industry you work at the time of application. That's why lenders insist on seeing your CV as part of their criteria.

But, because of the risk-factor they apportion you, they also want to see that your industry has ‘legs,’ moving forward. So, taking a role in IT, media streaming or AI, would seemingly have a degree of stability, given that these fields in 2024-25 are perceived as buoyant and not a flash in the pan.

As an example of a role at risk, imagine that you designed components for combustion engine cars. Right now, there's still demand. But, if we ever take our commitments to global warming seriously, you'd have to think roles like that would be considered as part of a trade which is on the way out. That's when a lender might look more closely at your application. If there's too high a risk, they'll flag it, and you're unlikely to get the mortgage you applied for.

6. Bonus tip: the risk of going it alone

If you approach any lender direct for a contractor mortgage, you're walking a tightrope.

At branch level, some lenders know how to deal with contractors. But they are few and far between.

Many lenders actually prefer contractors to approach them through a specialist mortgage broker. That's because a broker specialising in that line of work knows how to cut through the fluff and prepare the application in a way which the lender’s underwriters understand.

And these aren't your normal underwriters. Banks and building societies have specialist underwriting teams for a reason. It's these (not those accessed through the branch network), that can see your true affordability potential.

You may work as an independent entity, enjoying the autonomy it brings. But getting a mortgage as a contractor isn't something you should do on your own. Talk to a specialist broker. They offer a support network for independent professionals just like you. You'll be surprised at the difference their expertise will make.