Contractor Mortgage Daily Rate

Podcast approved by The Openwork Partnership on 12.12.2024

What do we mean by a daily rate contractor? Can a contractor on a day rate get a mortgage? Is this difficult?

It’s something we see quite a lot of and we are able to help people in that position.

A contractor is generally anyone that’s not a permanent employee. There’s different ways they can be set up. You might be on an annual salary. You might be on a zero hours contract where you get an hourly rate.

Today we’re talking about a daily rate, where you are given a figure as part of your contract. It says for every day that you work, you will be paid a set amount. We see quite a lot of them.

Depending on how long you’ve been doing it and how you’ve set up, there are mortgage options available to you.

What are the different types of daily rate contractors?

Those we come across most frequently are people that work in IT services. They will often have their own limited company and contract out to another company. Their limited company invoices the client they’re working for. The company then pays their limited company and the contractor takes a salary and dividends out of that limited company.

That’s the most common form, but there are other ways of doing it. You might be contracted on a PAYE basis, and the firm you work for is responsible for paying your tax. Another popular approach is via an umbrella company. The umbrella company essentially employs you and you work for the client. The umbrella company pays income tax and such on your behalf.

If you’re a contractor, but you don’t have your own limited company, you would work for that company via the contract and invoice them direct. You’d receive your income gross of tax and then at the end of the tax year, it would be your responsibility to submit your tax return and pay any tax that’s due.

What criteria or proof does a daily rate contractor needs to provide when applying for a mortgage?

It depends how the lender treats that income. We discussed four different ways of being a contractor there. If we look at the limited company side and direct invoicing as a sole trader, some lenders will treat you as self-employed. They will therefore want tax calculations or company accounts for the last two years.

Generally speaking, with self-employed applicants, lenders want a bit of a track record. Make sure you know what you’ve been receiving in the last couple of years to make sure it’s consistent and likely to continue going forward.

You will need company accounts, if you’re a limited company, and your tax calculations and corresponding tax year overviews. You can download these from HMRC if you’re doing self-assessment – or if you’ve got an accountant, they’ll be able to access those for you.

If you are a day rate contractor, however, an increasing number of lenders will look at the day rate value of your current contract and just multiply that out to give an annual figure. You don’t necessarily need to provide two years’ tax calculations.

They will look at your current contract, any extensions you’ve had and potentially any previous contracts to show a track record. If you’re a contractor on a fixed-term PAYE basis, where they’re paying your tax for you, they might ask for payslips.

Again, if you have an umbrella company it would also be payslips because they look at you as employed, as your tax is being paid by the umbrella company. So it depends on your setup as to what documents they need, but that’s a rough overview.

What if I’ve only recently become a contractor? Can I still get a mortgage?

Potentially – it depends on the setup. For the most part, if you’re a contractor, most lenders will want you to have been employed that way for at least 12 months, with evidence.

They might then want additional periods beyond that. They might need you to have been contracting for 12 months and have three months remaining on your current contract. Not all of them have that requirement.

With others, if you don’t necessarily have the 12 months contracting experience it can still work. Let’s say you’ve been doing it for three months, but you’ve got nine months left on your contract. You will have 12 months by the end of the contract period, so they’ll accept that. It’s often 12 months total.

Some lenders will look at using your contract values straight away. If you’ve just become a contractor, but you were previously employed by the same company you’re contracting for, they’ll use that income straight away.

It happens a surprising amount. People could be permanent employees for a firm and then become a contractor. They’re still working for the same company, doing the same sort of role, but on a contractor basis. If you’re making that move, there’s no minimum period for certain lenders.

Perhaps you’ve not been a contractor for 12 months but you have been working in the same industry for the last two years. Again, some lenders will use your income as a contractor straight away.

Generally speaking, having a two year record fits most people, unless you’re coming straight into the working world. Most people generally stick in the same industries. And if you’re a contractor, you generally are more experienced, especially for a day rate contractor where there’s a value to your skills. It’s more than likely that you would have been working in the same industry for the last couple of years – so there’s usually at least one option there.

How do lenders calculate a daily rate contractor’s annual income?

It depends on the lender. Again, even if you do have a day rate, some will look at your annual figures and your tax returns of what you’ve received annually. However, as I said, an increasing number will look at the day rate value.

They’ll multiply that by five days a week, and then use a 46-week year. That is the figure that they will use for the mortgage application.

In my experience with day rate contractors, that is definitely the more favourable way to do it. Even though you might have the capacity to work five five days, 46 weeks a year, my experience is that people are more likely to do three or four days a week, and take days off here and there.

So by annualizing the day rate figure, you often get a much higher income figure than with the two year history of what you’ve actually done. You can improve your borrowing capacity using that day rate contractor multiplier.

More lenders are doing this. Some might have a minimum day rate or a minimum annual figure before they adopt this approach. Others are more cautious and look at the average contract value you’ve had over the last 12 months.

Perhaps you were on £750 a day at the start of the year for three months and then the current contract is £1,000 a day. They’ll take an average over the number of months you’ve worked on each and calculate from there.

What if my partner is on PAYE? How does that work?

Your incomes are treated separately. PAYE is straightforward – you have a basic salary and lenders will take that from as little as one pay slip. You want to focus on lenders that may be more favourable to you as the day rate contractor because they will all look at your partner’s PAYE income in a similar way.

There’s no issue with combining different forms of income for different people. Indeed, you might have two jobs. In some cases, someone has a day rate contract and they might have a second job.

As long as you’ve been doing the second job for six months, most lenders will include that. Combining income streams for a mortgage application and different forms of employment is not a problem.

What if I need to remortgage? Any differences here as a day rate contractor?

There’s no difference between remortgage and purchase application. The income treatment will depend on the lender rather than whether it’s a remortgage or purchase.

Everything we’ve discussed already around the form of the contract, the way you’re set up, the way you’re paid, the day rate and annual tax figures will all be exactly the same for remortgages as it would be for a purchase.

What if I have bad credit – can I still get a mortgage if I’m a day rate contractor?

Yes, it’s quite possible. Bad credit is fairly subjective, but generally, the further away we are from the incident, the better. Credit blips will stay on your file for up to six years, but the longer in the past they are, the more likely you are to get a mortgage.

If you do have some more recent adverse credit on your file, that will influence which lender we approach. Some lenders are better with adverse credit than others.

It’s like a Venn diagram, where we need to find a lender that will both accept the day rate contractor income and also the credit blips. It’s just another piece of the puzzle. As a broker we would work out which lenders we can potentially use based on that.

What if I have a small deposit? Can I get a mortgage as a contractor on a daily rate?

Generally speaking, lenders will have a minimum deposit requirement of 5% or 10%. It depends on the lender and the situation.

Some, for example, have larger deposit requirements if you’re buying a flat rather than a house, or on a new build property. It depends on the lender and their policy, but that’s not directly related to your form of income

They won’t require you to have a bigger deposit as a day rate contractor. Those assessments are done independently. How they work out what income they will use for the application is done independently of the deposit requirement.

Generally speaking, larger loans need bigger deposits. If you have a small deposit, there’s potentially a solution at kind of 5% or 10%, depending on what you’re buying, but the contractor side isn’t going to interfere with that at all.

What if I’m a First Time Buyer? Are there any differences here with the process if you are a day rate contractor?

No, it’s exactly the same. Again, you’re not penalised as a First Time Buyer for being a day rate contractor. That is looked at independently. They’re just working out of your income for the mortgage application. It’s exactly the same if you’re a home mover, buying your fifth property, or a First Time Buyer.

Can I get a Buy to Let mortgage as a daily rate contractor?

With Buy to Let mortgages, the lenders are generally more focused on the income that the property generates rather than the borrower’s.

Some Buy to Let lenders don’t have any minimum income, so you don’t necessarily need to be able to evidence your earnings at all. It’s more about what the property generates. For a broader range of lenders on your Buy to Let, obviously you want to make sure they accept day-rate income.

It’s perfectly possible. It just depends on the lender and their policy. A minimum income requirement is typically £25,000 or £30,000 a year. As long as you tick that box, they’re not too worried about it. It’s more about the property that you’re buying.

Do I need a specialist mortgage broker to help me get a mortgage as a daily rate contractor?

You don’t necessarily need one, but I think it’s probably sensible. You might get lucky – you might go to your own bank, they happen to accept contractors, they will use your contract value and you can buy what you need.

But it is quite a niche area where every lender treats the income slightly differently. There are so many different calculations and multipliers. Some use the current value, some have minimum periods, some limit the number of weeks you take off per year…

There are a lot of moving parts to day rate contractor mortgages. So I would always advise speaking to a specialist, because you’ll at least know what your options are. You might get lucky with the first bank you go to, but you will never know what the other choices were.
Perhaps you could have borrowed a bit more, at a better rate.

Also, you might just save yourself an awful headache by having someone do the work for you. A mortgage broker will take away all the admin and the hassle out of the process. So rather than spending your lunch break sitting on the phone to a bank’s call centre, you could do something more enjoyable.

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

MOST BUY TO LET MORTGAGES ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.

Approved by The Openwork Partnership on 12.12.2024