Mortgages for IT contractors

Securing mortgages for IT contractors can be challenging. Traditional lenders may not fully understand the nature of contract work and the way IT contractors earn their income. However, the landscape is changing, and there are now more options than ever for IT contractors looking to get on the property ladder or invest in real estate.

From how to prove income and the types of mortgages available to understanding how much you can borrow and the impact of regulations like IR35, we’re diving deep into the world of mortgages for IT contractors in the UK. Whether you’re a seasoned IT contractor, just starting out in the field, or considering switching to contract work, this guide provides detailed information to navigate the mortgage process. Let’s explore the most common questions around the topic to give you the clarity you need.

What is an IT contractor mortgage?

An IT contractor mortgage is a type of home loan specifically designed for individuals working as IT contractors. It’s also important to note that IT contractor mortgages are not a specific product but rather a tailored approach to underwriting.

In the context of the UK, IT contractors are typically self-employed professionals or business owners who provide their services to clients on a contractual basis.

Many traditional lenders assess mortgage affordability based on annual income, but for IT contractors, this can be complicated due to the nature of their work. They might not have a fixed annual income but instead, earn a day rate and may have periods without work between contracts.

With an IT contractor mortgage, lenders look at the contractor’s daily contract rate rather than a fixed annual salary to assess their borrowing potential. Lenders multiply the daily rate by the number of working days in a week, then by the number of weeks in a year (usually considered to be 48 weeks to allow for holidays), and finally, a multiple is applied to reach a figure of annualised income.

This approach tends to provide a more accurate representation of the IT contractor’s earning potential and can often lead to a higher borrowing capacity compared to the traditional assessment method.

They are typically provided by specialist lenders or through mortgage brokers who have experience with the contracting market.

Can an IT contractor get a mortgage?

Yes, an IT contractor can indeed get a mortgage. In the UK, many lenders offer mortgage products specifically designed for contractors, including those working in IT. While the process may be slightly more complicated compared to a standard employee, it’s certainly possible for an IT contractor to secure a mortgage.

However, there are some important factors to consider:

Income assessment: Lenders will need to assess your income to determine how much they’re willing to lend you. For IT contractors, this often involves calculating your annualised income based on your daily or hourly contract rate rather than a fixed annual salary.

Contract history: Some lenders may want to see a track record of steady contract work, often requiring a minimum period of contracting history. However, there are also lenders that are willing to provide a mortgage to contractors who are relatively new to contracting.

Contract duration: The duration of your current contract and any history of contract renewals can affect your mortgage application. A longer contract duration or a history of renewals may be seen favourably by lenders as it demonstrates income stability.

IR35 legislation: IR35 is a piece of UK tax legislation that affects contractors. If you’re considered to be inside IR35, your tax status could be similar to that of an employee, which might affect your net income and, consequently your borrowing potential. Some lenders may have specific criteria for lending to contractors affected by IR35.

Credit history: As with any mortgage application, a good credit history can increase your chances of approval and help you secure a better interest rate.

How can an IT contractor apply for a mortgage?

Applying for a mortgage as an IT contractor in the UK involves several steps. While the exact process may vary depending on the lender, the following provides a general outline of what to expect:

Assess your finances: This is the starting point for any mortgage application. You need to understand your current financial situation, including your income (typically considered in terms of your daily contract rate), expenses, debts, and savings for a deposit. Remember that the larger your deposit, the better mortgage deal you might secure.

Check your credit report: Lenders will use your credit report to assess your creditworthiness. Before applying, it’s a good idea to obtain a copy of your credit report and check for any errors or areas that need improvement.

Gather required documents: As an IT contractor, you will typically need to provide several documents when applying for a mortgage. These may include copies of your contract(s), bank statements, tax returns, and identification. If you work through a limited company, you may also need to provide your company accounts. Each lender will have their own requirements, so be sure to clarify what you need to provide.

Seek professional advice: Navigating the mortgage market can be complex, especially for IT contractors. It can be beneficial to work with a mortgage broker who specialises in contractor mortgages. They can provide advice tailored to your situation and help you find a suitable mortgage product.

Apply for an agreement in Principle (AIP): An AIP, also known as a decision in principle, is a statement from a lender saying that they would, in principle, lend a certain amount to you based on the information you have provided. Having an AIP can make you a more attractive buyer.

Find a property: Once you have an AIP, you can start looking for a property within your budget. Once you’ve found a property and had an offer accepted, you can proceed with the full mortgage application.

Full application: At this stage, you will submit the complete application along with all the required documents to the lender for approval. The lender will conduct a valuation survey on the property and may ask for additional information.

Mortgage offer: If your application is successful, the lender will provide a mortgage offer outlining the terms of your mortgage.

Legal process: Once you have your mortgage offer, the legal process (conveyancing) starts. This involves a solicitor or conveyancer who will manage the legalities of the home purchase.

Completion: This is when the mortgage is finalised, the funds are transferred to the seller, and you get the keys to your new home.

How do I prove my IT Contractor income?

Proving your income as an IT contractor in the UK can be done through various documents. Depending on the nature of your contract and the requirements of the lender, you may need to provide one or more of the following:

Contracts: A copy of your current contract can serve as proof of your income. It should clearly state your daily or hourly rate, the duration of the contract, and the nature of the work.

Bank statements: Bank statements showing regular payments from contracts can provide evidence of your income. Typically, lenders may ask for statements from the past 3 to 6 months.

Company accounts: If you operate through a limited company, you may need to provide a copy of your company accounts. This should ideally be prepared by a certified or chartered accountant.

SA302 Forms: SA302s are a form of tax documentation from HMRC that show your annual income. If you’re operating as a sole trader or through a limited company, you can provide these documents for the past two or three years to prove your income.

Accountant’s reference: Some lenders may accept a reference from a certified or chartered accountant who can confirm your income.

Invoices and payslips: If you’re working through an umbrella company, payslips can be used to prove your income. If you’re self-employed, invoices for work completed can also serve as proof.

It’s important to note that each lender will have different requirements. Some lenders are more flexible and may require less proof of income, especially if they have a good understanding of the nature of IT contracting. It’s recommended to consult with a mortgage broker or advisor who specialises in contractor mortgages to help navigate the process and understand what specific documents you will need.

What documents are required for an IT contractor to secure a mortgage?

As an IT contractor applying for a mortgage in the UK, you’ll typically need to provide several key documents to verify your income, identity, and financial circumstances. The exact documents required can vary depending on the lender’s criteria, but generally, you may be asked to provide the following:

Proof of identity: This can be your passport, driving licence, or other government-issued identification.

Proof of address: This could be a recent utility bill, council tax bill, or bank statement showing your current address.

Contract details: Copies of your current contract and possibly previous contracts as well. This should include information about your daily or hourly rate, the duration of the contract, and the nature of the work.

Bank statements: You will typically need to provide bank statements for the past three to six months. These should show your income from your contracts.

Tax Returns/SA302s: If you’re a self-employed contractor, you may need to provide tax returns (known as SA302s) for the past two or three years. This document, issued by HMRC, shows your income for the tax year.

Company accounts: If you operate through a limited company, you might be asked to provide your company accounts, often for the last two to three years. These should be prepared by a certified or chartered accountant.

Proof of deposit: Evidence to show that you have the funds for the deposit. This could be a bank statement showing the money in your account.

Credit report: Although you won’t provide this directly, lenders will check your credit report as part of their assessment. It’s a good idea to check your own credit report beforehand to ensure there are no errors or issues.

Proof of continuity: Some lenders may require evidence of contract renewals or a track record of contracting in the same field.

Accountant’s certificate: In some cases, an accountant’s certificate may be accepted, stating your annualised income based on your daily or hourly contract rate.

How much can you borrow?

The amount you can borrow for a mortgage as an IT contractor in the UK will vary based on several factors. These include your income, your expenses, your credit score, and the specific lending criteria of the mortgage provider.

Generally, mortgage lenders calculate how much they’re willing to lend based on your income. For an IT contractor, this is typically your contract rate annualised. Here’s how it works:

They take your daily contract rate and multiply it by the number of days you work in a week.

They then multiply this weekly amount by the number of weeks you work in a year. Typically, they consider 46 to 48 weeks a year, allowing for periods without work.

This gives them an annualised income figure.

From this annualised income, most lenders will lend up to 4.5 to 5 times this figure, though this can vary. For example, if your annualised income comes out to be £50,000, you could potentially borrow between £225,000 and £250,000.

However, lenders also take into account other financial commitments and outgoings you may have, such as loans, credit card debts, or school fees. This is to ensure that you can comfortably afford the mortgage repayments alongside these other commitments.

It’s important to note that each lender has their own way of assessing affordability, and some may be more generous than others. A mortgage broker who specialises in contractor mortgages can help you find lenders that are most likely to offer you the amount you need.

Please remember that this is a general guide, and the actual amount you can borrow may be higher or lower based on your individual circumstances and the specific lender’s criteria. It’s always recommended to seek professional advice before making any major financial decisions.

How a broker can help an IT contractor get a mortgage

A mortgage broker can be very helpful for IT contractors seeking a mortgage for a number of reasons:

Specialist knowledge: Many brokers specialise in contractor mortgages and understand the specific challenges contractors may face. They can provide valuable advice and guidance throughout the process.

Access to suitable lenders: Not all lenders are comfortable dealing with contractors, and some may not recognise contract-based income. A broker can direct you towards lenders who are familiar with and accommodating to contractors.

Better deals: A mortgage broker has access to a range of lenders and mortgage products, some of which may not be available directly to consumers. They can search the market for the best deal based on your specific needs and circumstances.

Time-saving: Applying for a mortgage can be a complex and time-consuming process. A broker can handle much of the legwork for you, such as filling in applications, gathering documentation, and liaising with lenders, solicitors, and valuers.

Affordability assessment: Brokers can help assess how much you can afford to borrow based on your contractor income, which might be calculated differently than a regular salary.

Application support: Mortgage brokers can help present your application in the best light, especially if there are any complexities due to your contractor status. This includes properly representing your income, contract history, and future contract potential to lenders.

Advice and support: A broker can offer personalised advice and support throughout the mortgage process, from the initial consultation to completion.

Future mortgage needs: Brokers can continue to be a useful resource for future mortgage needs, such as remortgaging or buying a second property.

Overall, the insight, expertise, and convenience offered by a mortgage broker can be especially beneficial for IT contractors navigating the mortgage process. As always, it’s recommended to choose a reputable broker, ideally one that specialises in contractor mortgages.

Which lenders offer the best mortgage deals for IT contractors?

The best lender for an IT contractor can depend on the individual’s specific circumstances, including their contract rate, contract history, credit score, deposit size, and personal financial situation. What’s best for one contractor might not be the best for another.

However, it’s worth noting that a number of lenders in the UK are known for being contractor-friendly and have policies in place to assess income based on contract rates. These lenders may include:

 

• • Halifax

• • Clydesdale Bank

• • Virgin Money

• • Kensington Mortgages

• • Metro Bank

There are also specialist lenders and building societies that cater to the needs of contractors. These lenders might not have high-street branches, but they offer their products through mortgage brokers.

A mortgage broker, particularly one who specialises in contractor mortgages, can help identify the most suitable lenders and mortgage products based on a contractor’s specific situation. They can also assist with the application process to improve the chances of approval.

How does IR35 affect your chances of getting a mortgage?

IR35 is a tax legislation in the UK designed to combat tax avoidance by workers supplying their services to clients via an intermediary, such as a limited company, but who would be an employee if the intermediary was not used. Such workers are called ‘disguised employees’ by Her Majesty’s Revenue and Customs (HMRC). If you’re considered to be inside IR35, your tax and National Insurance Contributions (NICs) could be similar to that of an employee.

As an IT contractor, if you fall under IR35, this might affect your chances of getting a mortgage, but it doesn’t necessarily prevent you from getting one. Here’s how it could impact you:

Reduced take-home Pay: If your contract is deemed to be inside IR35, you’ll have to pay tax and National Insurance at similar rates to employees. This could reduce your net income, which in turn could affect how much a lender is willing to lend you, as they typically base this on a multiple of your income.

More complex income assessment: If you’re inside IR35, assessing your income can be more complex, as you might receive a mix of salary and dividends, and your pay could be less predictable. Some lenders might be less familiar with this type of income and may be more conservative in their lending.

Lender’s perception of risk: Some lenders might perceive contractors inside IR35 as higher risk because of the potential for future changes in income if HMRC reviews your contract.

That said, there are mortgage lenders that understand IR35 and are willing to lend to contractors who fall under this legislation. They can take a nuanced approach to assessing your income and affordability.

Can an IT contractor use a Limited Company to apply for a mortgage?

Yes, many IT contractors in the UK operate through their own limited companies and apply for a mortgage in this way. Operating through a limited company often provides tax efficiencies and is, therefore a popular option among contractors.

However, it’s important to note that when applying for a mortgage, the lender will typically look at the income you draw from the company, which usually consists of a combination of salary and dividends. Some lenders may also consider retained profits within the company.

Here’s how it generally works:

Salary and dividends: Most IT contractors operating through a limited company pay themselves a small salary and then extract further income as dividends to be tax efficient. Some lenders will base the mortgage offer on this combined income.

Retained profits: Some lenders understand that IT contractors often leave money in their company (retained profits), so they’ll consider this when calculating your income for a mortgage. However, not all lenders take this approach, so it’s beneficial to work with a mortgage broker who can direct you to lenders who will.

Contract rate: Certain lenders will use the daily or hourly contract rate, rather than the salary and dividends, to assess the contractor’s income. This can often result in a more favourable lending amount.

How can a new IT contractor get a mortgage?

Obtaining a mortgage as a new IT contractor can be challenging, as many lenders prefer borrowers to have a track record of contracting for at least a year or two. However, it’s not impossible, and there are lenders who are willing to consider applications from new contractors. Here are some tips to help you improve your chances:

Use a specialist broker: A mortgage broker who specialises in contractor mortgages will have experience dealing with new contractors and can guide you to lenders who are more likely to consider your application.

Contract details: Make sure you have a clear, well-written contract with a good rate. Some lenders will consider your mortgage application based on the daily rate stipulated in your contract, which can be helpful if you don’t have a history of contractor income.

Good credit score: Maintain a good credit history. Lenders will check your credit report, so it’s important to ensure that you have no missed payments, excessive debt, or other negative factors on your report.

Proof of past employment: If you have moved into contracting from a similar full-time job, showing proof of this past employment can be beneficial. This shows that you have a stable work history and relevant experience in your field.

Savings: Having a healthy amount of savings can also be beneficial, as it shows the lender that you have a buffer to fall back on if you have periods without work. This may also enable you to put down a larger deposit, which could increase your chances of approval.

Professional certifications and qualifications: If you have relevant professional certifications or qualifications, providing these can be helpful to demonstrate your employability and potential for contract renewal or finding new contracts.

Strong demand in your field: If there’s strong demand in your field of IT contracting, some lenders may be more willing to lend to you as a new contractor.

Can an IT contractor with bad credit get a mortgage?

Obtaining a mortgage as an IT contractor with bad credit can be more challenging, but it’s not impossible. There are several lenders who offer mortgages to individuals with a range of credit issues, although the terms may not be as favourable as for someone with a clean credit history.

Here are some considerations and steps you can take:

Understand your credit report: First, get a copy of your credit report from a reputable source to understand exactly what the issues are. This could include missed payments, defaults, CCJs (County Court Judgments), IVAs (Individual Voluntary Arrangements), or bankruptcy.

Time since issues occurred: Lenders often care about the recency of credit issues. If the problems occurred a long time ago and your financial behaviour has been good since you may find more lenders willing to consider your application.

Reasons for bad credit: If there were extenuating circumstances that led to your bad credit, such as illness or redundancy, some lenders might be more sympathetic. Be prepared to explain the circumstances and demonstrate how you have improved your financial situation since.

Deposit size: If you’re able to save a larger deposit, this could increase your chances of being approved for a mortgage. It reduces the lender’s risk, as the loan-to-value ratio is lower.

Use a specialist broker: A mortgage broker who specialises in bad credit mortgages can help guide you to lenders who are more likely to consider your application. They can also provide advice on improving your credit score before applying.

Improve your credit score: Taking steps to improve your credit score can help improve your chances of getting a mortgage. This could include paying all your bills on time, paying down debt, not applying for new credit, and making sure you’re registered on the electoral roll.

Proof of contract income: As an IT contractor, you’ll also need to prove your contract income. This could be through your contract details, bank statements, and possibly your company accounts or tax returns if you operate through a limited company.

What types of mortgages are available to IT contractors?

IT contractors in the UK have access to the same range of mortgage products as salaried employees, though the application and assessment process may be slightly different due to the nature of their income. Here are some common types of mortgages available:

Fixed-rate mortgages: With a fixed-rate mortgage, the interest rate is fixed for a set period of time, typically 2, 3, or 5 years, but sometimes as long as 10 years. This means your monthly payments stay the same for that period, making it easier to budget.

Variable rate mortgages: With a variable rate mortgage, the interest rate can change. This could be a standard variable rate (SVR) set by the lender, or it could be a tracker mortgage that follows the Bank of England base rate. Your payments could go up or down.

Discount mortgages: These mortgages offer a discount off the lender’s SVR for a set period of time. The rate can still go up or down, but you’ll always pay a set amount below the SVR.

What is the minimum income required for an IT contractor to get a mortgage?

The minimum income required for an IT contractor to get a mortgage in the UK varies greatly depending on the lender, the type of mortgage, and the applicant’s overall financial situation.

There isn’t a fixed minimum income that applies universally across all lenders and all mortgage products.

When assessing an application, lenders will consider a range of factors, including:

Income: This will be assessed based on your contract rate and may also take into account any income you draw from your company as salary and dividends. Some lenders will also consider retained profits within your limited company.

Credit score: Your credit history is another important factor. Having a good credit score can improve your chances of approval and potentially allow you to access better mortgage deals.

Debt-to-Income ratio: This is the percentage of your income that goes towards paying debts. Lenders prefer this to be lower as it indicates you have more disposable income to cover your mortgage payments.

Loan-to-Value (LTV) ratio: This is the percentage of the property’s value that you’re looking to borrow. A lower LTV (which would mean a larger deposit) reduces the lender’s risk and can increase your chances of approval.

Affordability: Lenders will look at your overall financial situation to determine whether you can afford the mortgage payments, taking into account your income, outgoings, and any potential interest rate increases.

It’s important to understand what you might be able to borrow, and you should consider what you can comfortably afford to repay each month without over stretching your budget.

How long does it typically take for an IT contractor to get mortgage approval?

The timeline for mortgage approval varies greatly depending on the individual’s circumstances, the lender, and the complexity of the application. On average, it can take anywhere from a few days to several weeks to get a mortgage approved.

Here is a general timeline to give you an idea:

Mortgage application: Once you have chosen a mortgage product and lender (either directly or through a broker), you will need to complete a full mortgage application. This will involve providing detailed information about your income, outgoings, and personal circumstances. If you’re an IT contractor, you’ll typically need to provide copies of your contracts, accounts or tax returns, and possibly bank statements. This stage can take anywhere from a few hours to a few days, depending on how readily available your documents are.

Mortgage underwriting: After your application is submitted, it will go to an underwriter who will assess the risk of lending to you. They will verify the information you’ve provided, check your credit history, and assess your income and outgoings. If you’re an IT contractor, they may also need to assess your contract income. This can take anywhere from a few days to a couple of weeks, depending on the lender’s workload and the complexity of your situation.

Valuation: The lender will also conduct a valuation of the property to ensure it’s worth the amount you want to borrow. This can usually be arranged within a week, but it can take longer if the property is unusual or if there are issues with accessing the property.

Mortgage offer: Once the underwriting and valuation are complete, and assuming everything is satisfactory, the lender will issue a mortgage offer. This is the formal agreement to lend, and it details the terms of the mortgage. This typically arrives a few days to a week after the valuation.

Legal process: Alongside the mortgage application process, there’s also the legal process of buying a home, which includes conveyancing, searches, and exchanging contracts. This usually takes several weeks to a few months, and the overall timeline for buying a home will usually be dictated by this process rather than the mortgage approval process.

Working with a mortgage broker can help streamline this process. They can guide you on what documents you’ll need and help you present your application in the best possible light. They can also chase the lender and other parties to try and expedite the process. If you’re an IT contractor, using a broker who specialises in contractor mortgages can be particularly beneficial.